Can You Deduct Interest on Money Borrowed to Invest in Canada?
Understanding investment loan interest, CRA tracing rules, and the records you should keep.
Is Investment Loan Interest Tax Deductible?
Borrowing money to invest can be a useful tax-planning strategy, but interest is not automatically deductible. In Canada, the CRA generally considers how the borrowed money was used.
Interest may be deductible when borrowed funds are used to earn income from a business, property, or certain investments. For example, money borrowed to purchase dividend-paying shares or an income-producing rental property may qualify.
However, an investment expected to generate only capital gains may not qualify, as the tax rules generally focus on a reasonable expectation of income.
To support an interest deduction, you should be able to demonstrate that:
The borrowing was genuine and interest is legally payable.
The borrowed funds were used for an eligible income-earning purpose.
The interest rate is reasonable.
The borrowed money can be clearly traced to the investment.
CRA guidance on interest deductibility
Why CRA Tracing Rules Matter
The CRA focuses on the current use of borrowed funds, not simply what secures the loan.
For example, if you borrow $60,000 and transfer it directly into an investment account to purchase dividend-paying shares, maintaining the loan statement, bank transfer, and investment records helps establish the connection.
Using a separate investment account or line of credit can make tracking easier and strengthen your documentation.
What If You Use a Line of Credit for Personal and Investment Purposes?
If a line of credit is used for both personal and investment expenses, generally only the portion of interest related to eligible investments may be deductible.
For example, if 60% of a $100,000 line of credit was used for investments and 40% for personal expenses, the initial deductible portion may be 60%.
Additional borrowing, repayments, investment sales, and reinvestments can change the calculation. Regular reviews are important.
Refinancing or replacing investments does not automatically eliminate deductibility, provided the borrowed funds remain connected to an eligible income-earning purpose. However, using investment proceeds for personal spending may break that connection.
The fact that a loan is secured by your home does not determine whether the interest is deductible. The use of the borrowed money is what matters.
Records You Should Keep
The CRA may request documentation supporting your interest deduction. To stay prepared, keep:
Loan or line of credit statements.
Bank transfers showing where borrowed funds went.
Investment statements and trade confirmations.
Records of dividends, interest, or rental income.
Details of repayments, sales, and reinvestments.
An annual schedule showing how deductible interest was calculated.
The CRA generally recommends keeping tax records and supporting documents for at least six years.
Frequently Asked Questions
Can I deduct interest if my investment only earns capital gains?
Generally, a reasonable expectation of income is important. If the investment is intended to produce only capital gains, the interest may not qualify.
Can I use my home equity line of credit to invest?
Potentially, yes. The borrowed funds must be used for an eligible income-earning purpose, and the use of the funds must be clearly traceable.
What happens if the CRA reviews my claim?
If you cannot provide sufficient documentation, the CRA may deny or adjust the deduction.
Need Help Reviewing Your Investment Interest Deduction?
Interest deductibility depends on how borrowed funds are used and documented. If you have borrowed money to invest or use a line of credit for both personal and investment purposes, we can help review the tracing, documentation, and tax treatment before you file.
This article is for general information purposes only and should not be considered tax, legal, or professional advice. We do not own the source information referenced in this article.