Is your loan tax deductible?

Determining whether your loan is tax deductible is actually pretty straightforward.

Under Canadian tax rules interest on borrowed money used for the purpose of earning income is generally deductible. Interest on a personal loan, like a mortgage, for example, is not tax deductible.

The test to determine whether you have an “income-earning purpose” for taking a loan is if there is a reasonable expectation of income at the time the investment was made. It refers to gross income, not net income or profit. Here are some examples of investments that will pass the test:

• Assets used in running a business
• A rental property
• Interest-bearing instruments (such as GICs, bonds, or treasury bills) that carry a stated rate of interest return
• Shares of a corporation, where there’s a reasonable expectation they’ll pay dividends (even if the dividend expectations are low)
• Units/shares of a mutual fund, where there’s a reasonable expectation of distributions of income (as opposed to distributions of capital, which do not qualify as income)

Paul Gibney and Brent Pidborochynski are tax lawyers at Thorsteinssons LLP.