- How do you know if carrying charges and interest fees are tax deductible?
- Which carrying charges and interest fees are tax deductible?
How do I know if carrying charges and interest fees are tax deductible?
Let’s face it, not all interest and financial expenses are tax deductible. You should get the advice of a tax expert or accountant before including some of these expenses on your tax return.
You have taken out a loan and you are one of the following:
- A rental property owner
- An investor
You may be able to deduct certain expenses related to your loan. However, certain conditions must be met for the expenses to be eligible.
In short, interest and financial expenses on a loan may be tax deductible when they result in taxable income. Examples include rental income or dividends on investments.
If you borrowed money to invest in registered funds on a tax-sheltered basis, you will not be eligible for deductions. Therefore, expenses related to borrowing to invest in registered plans, such as a Retirement Savings Plan (RRSP), Education Savings Plan (RESP), Disability Savings Plan (RDSP), Tax-Free Savings Account (TFSA), Voluntary Retirement Saving Plan (VRSP) or Pooled Registered Pension Plan (PRPP) are not tax deductible.
Which carrying charges and interest fees are tax deductible?
Here are the main interest and financial expenses that may be deductible under certain conditions.
Interest on a loan for investment purposes
You can deduct interest paid on a loan you took out to invest if the investment(s) you choose to acquire generate income.
Note that for this interest deduction, a capital gain is not considered income for tax purposes. A capital gain is not 100% taxable.
You may be able to deduct your interest if you own the following:
- Dividend-paying stocks
- Preferred shares in a co-operative
- An investment in a partnership
To learn more about these types of investments and many others, check out our guide.
Remember: Your investments made with this loan must be made in non-registered accounts.
Interest on a mortgage for a rental property or for a self-employed worker
Interest paid on a mortgage is generally not deductible, unless your mortgage is used to acquire a property that generates property income or business income. In this case, an interest deduction may be available in one of the following situations:
- Your mortgaged or remortgaged property earns rental income. It is therefore a rental property. The loan, for example in the case of a refinancing, can also be used to renovate your rental property.
- You are self-employed and use your personal residence for business purposes.
In both of these cases, the portion of interest you can deduct depends on how much of the property is used for rental purposes or for your business (home office).
Pro tip: If your loan is used for both eligible purposes, such as a rental property, and non-eligible purposes, such as the private portion of a rental property, it is recommended that you discuss this with a tax professional to ensure that the calculation of the deductible portion is clear. If you are in this situation, the cash damming strategy is an attractive tax strategy.
If you own rental property or are self-employed and want to save taxes, check out our article on the cash damming tax strategy.
Financial investment advisory fees
Not only is interest deductible, but the fees of a financial investment advisor may also be deductible. This deductible expense must be in the form of fees paid to a person whose primary business is to provide the following services:
- Advice or counsel on the purchase or sale of investments
- Administration or management of investments
Note also that commission fees are not deductible.
Custodial and other annual financial expenses
You can also deduct your custodial fees for securities that are investments as well as certain other annual fees related to a loan used for investment expenses. For example, you may be able to deduct expenses related to credit opening fees, access fees and guarantee fees.
Again, eligible expenses do not include fees related to investments in registered plans, such as RRSPs, RESPs or PRPPs.
Special measure in Quebec: Fees are only deductible from investment income earned in the year. They cannot be deducted from other income. In this case, investment income includes, among other things, the taxable portion of a capital gain such as on the resale of a share and dividends. However, this measure does not apply to interest or other expenses incurred to earn business or rental income. These expenses are deductible from your overall income.
In short, whether you are a rental property owner, an investor or a self-employed worker, the important thing is to be well informed. Don’t hesitate to discuss your interest and financial expenses with your tax specialist or accountant. These tax tips could potentially save you some money and increase your tax refund. You can then save and invest this money for future projects.
If you are self-employed, check out our article on how to do your taxes as a self-employed worker.
If you want more tips on investing, check out our article on investment strategies.
Would you like to discuss this with us? Contact your National Bank advisor or your wealth advisor at National Bank Financial. Don't have an advisor?