Is the interest paid on an investment loan tax-deductible?

Jamie Golombek, vice-president of taxation and estate planning at AIM Trimark Investments, has the answer.

Jamie Golombek 7 April, 2003 | 1:00PM
Dear Expert:

I know that, under certain conditions, the interest paid on borrowed money used to invest in Canadian or foreign investment instruments is tax-deductible. However, I have received conflicting opinions regarding the specific type of investments that qualify for this reduction. Can you provide specific information on this topic, and perhaps some examples?

Expert Answer:

The general rule is that interest paid on money borrowed for investment purposes is tax deductible. This applies as long as the investment has the "potential" to earn "income" (as opposed to merely capital gains).

The Canada Customs and Revenue Agency (CCRA) has recently commented on this issue with respect to common shares that do not pay dividends and thus do not produce a source of income. The CCRA has stated that as long as there is no stated policy by the company's directors that the corporation will never pay dividends, since there is always the potential to pay dividends, interest on money borrowed to purchase common shares would generally be tax-deductible.

The same rule also applies to mutual funds. As long as the mutual fund has the potential to distribute income at the end of the year (as most mutual funds generally do), then the interest paid on money borrowed to purchase mutual funds should also be tax-deductible.

Do you have a question?

All Ask the Expert questions are read and considered. Unfortunately we can't provide individual responses or respond to every question. Please note that questions about specific securities cannot be considered. Click here to Ask the Expert.

No statement in this article should be construed as a recommendation to buy or sell securities or to provide investment advice or individual financial planning. Morningstar Canada does not provide specific portfolio advice and recommends the use of a qualified financial planner when appropriate.

About Author

Jamie Golombek

Jamie Golombek