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Deducting Interest Expense

Under the Income Tax Act, interest expense can be deducted from business income or property income if certain conditions are satisfied:

There have been many decisions from the Courts on interest deductibility, on a wide range of fact situations. For example, even if the property acquired goes down in value, the interest deduction can continue: Tennant (Supreme Court of Canada, 1996 CanLII 218). However, a taxpayer borrowing money to lend at no interest to his own company may not qualify (Scragg, 2009 FCA 180; Keybrand Foods, 2019 TCC 161), or may qualify if the borrowing is linked to future income earnings (Canadian Helicopters, 2002 FCA 30). In Penn Ventilator (2002 CanLII 871), the Tax Court allowed a company to deduct interest paid on a note it issued to repurchase its own stock; and in Trans-Prairie Pipelines (1970), interest borrowed to redeem preferred shares was deductible. On the other hand, in the A.P Toldo Holding Corp. case (2013 TCC 416), interest on borrowed money used to redeem common shares to resolve a shareholder dispute was not deductible, as the company was a holding company and did not have a “financing and banking” business. So the Penn Ventilator rule may be quite restricted. In Black (2019 TCC 135), Conrad Black’s payment of a damage award was held to be an interest-bearing loan to his company that was jointly liable with him for the damages, so interest was deductible — even though the loan was not recorded in writing until much later.

Special rules in the Income Tax Act prohibit deduction of interest on loans taken out for certain purposes, such as to make RRSP, RESP or TFSA contributions. As well, special anti-avoidance rules prevent interest from being deducted on a “leveraged annuity” or a “10/8” life insurance policy. (These were structures that were used before 2013 to take advantage of the interest-deductibility rules.)

For corporations, especially large corporations that are part of a multinational group there are also other restrictions on interest deductibility introduced very recently. These rules, such as the “excessive interest and financing expenses limitation” and the “hybrid mismatch rules”, do not normally affect individual taxpayers.

As you can see, while the rules may sound straightforward, they can be hard to apply in practice. The above just touches briefly on the complexity of the interest deduction. If you are seeking to deduct interest, make sure that the funds you borrow are used directly to earn income that is reported on your tax return, and your deduction will normally be allowed.

This article has been published for general information. You should always contact your trusted advisor for specific guidance pertaining to your individual tax needs. This publication is not a substitute for obtaining personalized advice.

The information contained herein is general in nature and is based on proposals that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice or an opinion provided by Geib & Company to the reader. This material may not be applicable to, or suitable for, specific circumstances or needs and may require consideration of other factors not described herein.

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