Section 7 – Investments
Interest and Financial Expenses
Taxpayers should plan personal transactions properly so that the proceeds of a loan are used to earn income from a business or property. Interest will not be deductible if the loan proceeds are used to earn income from employment, realize a capital gain or for personal purposes.
If you plan to invest in shares, consider borrowing for this purpose and, if possible, using funds already available to pay back personal loans which give rise to non-deductible interest such as the mortgage on a personal residence.
Eligible expenses include interest paid on a loan for the acquisition of:
- Shares that may pay dividends;6
- Preferred shares of a cooperative (Cooperative Investment Plan);
- An interest in a partnership.
Remember that interest paid on loans taken out solely to create capital gains, and not to generate income, is not deductible.
The following financial expenses incurred to earn business or property income are also deductible:
- Investment administration or management fees;
- Safekeeping fees;
- Annual loan fees (obtaining a line of credit, access fees, guarantee fees, etc.).
Particular Measures – Quebec
Deductibility of investment expenses is limited to investment income including taxable capital gains and grossed-up taxable dividends (described under point 5 of this section) earned during a taxation year. Investment expenses not deducted in a taxation year may be carried over against investment income in one of the three preceding taxation years or in any subsequent taxation year. They can only be deducted from investment income.
If you carry a capital loss back to a preceding year, check the impact on the deductibility of your investment expenses.
This measure does not apply to investment expenses incurred to earn active business income or income from the rental of an asset and on certain flow-through shares. Rental losses are not considered investment expenses for this purpose.
6 If a corporation’s official documents indicate it does not plan to pay dividends, the interest on the borrowed funds is not deductible. On the other hand, if the corporation does not have an established dividend policy, or a policy of only paying dividends when its operations allow it, the interest is generally deductible.
A taxpayer may deduct fees, other than commissions, paid to an investment advisor. The fees must be reasonable and paid to a person whose principal business is advising others whether to buy or sell shares or securities or whose principal business includes the administration or management of shares or securities.
Fees paid for other types of advice, such as general financial counselling or planning, are not deductible. Fees paid to an advisor relating to investments held in an RRSP are not deductible (see Section VIII).
If an income source to which interest relates is lost and the borrowed funds cannot be related to another income source, the interest is generally no longer deductible, subject to certain exceptions, e.g. corporation goes bankrupt or shares are sold at a loss and there is insufficient cash to repay the loan.
Example: Ms. Wood borrowed $50,000 in 2017 to purchase common shares of 123 Inc. On January 5, 2018, she sold those shares, but instead of repaying her loan, she used the funds to buy a recreational vehicle. As she no longer owns her shares and the funds were not invested in a new income source, she cannot deduct the interest paid on the loan after January 5, 2018.
Example: In 2015, Mr. Green borrowed $10,000 to purchase common shares of ABC Inc. On March 12, 2018, the company went bankrupt. Even though Mr. Green no longer owns shares after the bankruptcy, he could continue to deduct the interest payable on the balance of his loan.
This document has been updated on August 31st, 2018 and reflects the state of the Law, including draft amendments, at that date.