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Interest Expense

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Personal Tax
Stocks, Bonds etc.

Interest expense on money borrowed to purchase investments - can I write it off?

ITA S. 20(1)(c)

You can deduct interest and carrying charges incurred to earn income from securities, bonds and other investments, if they are earning investment income.  The requirement of earning income generally means that the investments should be paying interest or dividends.  If an investment will never earn anything except capital gains, then the interest expense is not deductible.  If an investment such as common shares is not currently paying dividends, Canada Revenue Agency (CRA) will still normally allow the deduction of interest expense, if the shareholder has a reasonable expectation of receiving dividends at some time in the future.  However, if a corporation has a stated policy that it will not pay dividends, then interest on money borrowed to purchase these shares will not be tax deductible.  Some corporations may not pay dividends because they prefer to reinvest earnings in the company, or repurchase their own shares, which would theoretically raise the market value of the shares.  Therefore, the shareholders would have capital gains instead of dividends.

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In a 2013 Tax Court Case, Swirsky v. The Queen, Ms. Swirsky was denied an interest deduction because there was no evidence that, at the time the shares were purchased, she believed or expected that dividends would be paid on the shares in the future.  At the time, there was no history of the company paying any dividends.  This case was about a purchase of privately held shares, so is different from a purchase of publicly traded shares, but the same logic could certainly be applied to interest expense on a purchase of publicly traded shares.  If the company has no history of paying dividends, do you have a reasonable expectation that dividends will be paid in the future?  It is probably best to avoid using borrowed money to purchase these shares.

Deductible interest expense could include mortgage, loan or line of credit interest, margin interest charged on your brokerage account, or interest paid on Canada Savings Bonds (CSB) payroll savings programs, as long as the interest was incurred to earn investment income.

If the interest is paid to a non-resident, it will still be tax deductible (but, see interest expense paid to non-residents).

Where the interest expense exceeds the income from the investment, the interest expense will normally still be tax deductible.

You must be able to trace borrowed money directly to the purchase of the income-producing investments.  It is important to keep a clear paper trail of the use of borrowed money.

Borrowing money to purchase securities such as stocks and bonds is one of the factors that is considered by Canada Revenue Agency in determining whether the taxpayer's gains and losses from the sale of securities are to be treated as income or capital.  See our article on the tax treatment of investments for more information on this.

Interest expense is entered in “Carrying charges and interest expenses” on Schedule 4, which then goes to line 221 of the personal income tax return.  In the Canadian Tax Calculator, interest expense would be entered in "Other expenses".

If the interest expense exceeds income for the year, this becomes a non-capital loss, which can be carried back to previous tax years, or forward to future tax years.

Interest may still be deductible when the securities purchased with the borrowed money are no longer owned.  Let's use an example of a taxpayer who uses $10,000 of borrowed money to purchase shares in a corporation.  The shares are subsequently sold at a loss, with the entire debt still outstanding.

bullet the shares are sold for $6,000, and the proceeds are used to buy another income-producing property
bullet the interest on the entire $10,000 will still be deductible until the loan is repaid
bullet the shares are sold for $6,000, and the proceeds are used to buy personal property
bullet the interest on $6,000 is no longer deductible, but the interest on $4,000 is still deductible until the loan is repaid
bullet the shares are sold for $6,000, and the proceeds are used to pay down the debt
bullet the interest on the remaining $4,000 of debt is still deductible until the loan is repaid
bullet the shares have become worthless due to the bankruptcy of the corporation
bullet the interest on the entire $10,000 of debt is still deductible until the loan is repaid

Tax Tip:  Keep good records of all transactions!

Deductible carrying charges or investment expenses include the following as well as interest, if the cost has been incurred in order to earn income from your investments:

bullet safety deposit box fees incurred for the safe-keeping of your investments - this is no longer an allowable deduction for tax years beginning on or after March 21, 2013.
bullet fees paid for the management of your investments
bullet fees paid to investment counsel (other than commissions) for advice regarding the purchase or sale of a particular share or security, or for the management and administration of your investments.  The fees must be paid to a person whose principal business:
bullet is advising others on whether to buy or sell specific shares, or
bullet includes the administration or management of shares or securities
bullet the cost of having your tax return prepared, only if
bullet you had income from business or property (includes income from securities),
bullet you did not already use the cost to reduce your business or property income, and
bullet keeping accounting records was a usual part of your business or property operations

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Non-deductible interest, carrying charges and investment expenses include

bullet fees paid for general financial planning
bullet administration fees paid for registered accounts such as RRSPs
bullet interest on money borrowed to contribute to RRSPs, TFSAs or DPSPs.  However, if investments are purchased with borrowed money in a non-registered account, and transferred to the RRSP after the loan is repaid, the interest is tax deductible.  If part of the loan is still outstanding when the investments are transferred to an RRSP, the interest is no longer deductible.
bullet brokerage fees or commissions paid when buying or selling securities.  These costs either reduce the proceeds from securities sold, or increase the cost of securities purchased.
bullet interest on money borrowed to purchase a life insurance policy
bullet subscription fees paid for financial magazines, newspapers or newsletters

For more information see the CRA documents

bullet  IT-533 Interest deductibility and related issues, and
bullet Line 221 carrying charges and interest expense

 

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Revised: March 30, 2014

 

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