Is The Interest Deductible
Summary :Is The Interest Deductible
- Borrow to earn income
- business income
- Investment income
- Income from rental properties
- Keep books of accounts
Some of the interest paid on your mortgage, loans or credit cards may be deductible on your tax return. It depends on how you use the borrowed money. Interest you pay on money used to generate income may be deductible if it meets Canada Revenue Agency (CRA) criteria. You must track your expenses so that you can deduct eligible interest amounts.
Borrow To Earn money
Interest you pay on money borrowed to earn investment income that earns interest and dividends can be deducted on line 22100 of your income tax and benefit return. If you pay interest on money borrowed to generate business income, you can deduct it as a business expense on line 8760 of your Form T2125 (Statement of Business or a liberal profession).
Interest paid on a mortgage loan cannot be deducted, unless the mortgage loan is paid on a property used for doing business. You can then deduct the portion used by the business only.
Business Income
When running a business , you may need to borrow money to buy equipment, support your operations, or finance an expansion. You can then apply for a line of credit, obtain a loan or charge your expenses to your credit cards. You must deduct the interest charges paid on these funds from your business income and, if the business has a loss, from any other income. Any interest paid by your business to finance its activities is usually deductible.
Investment Income
If you borrow money to buy investments , the interest may be deductible. As long as your investments are generating income such as dividends and interest, or if you reasonably expect them to generate income, you can deduct the interest on your loan from your total income. Capital gains are not income for the purposes of this deduction. If you borrow money to invest in stocks that do not pay dividends and rely on capital gains to make the money, the interest is not deductible.
Income From Rental properties
Interest accrued on a mortgage used to purchase property is deductible if you generate rental income from that property. Even if it is your place of residence, a portion of the interest is deductible if you rent part of it. If you sell this property and use the proceeds to repay a loan, you no longer have to deduct interest, but if you sell the property at a loss and cannot repay your loan, the remaining interest remains deductible even if you do not no longer own the good.
Keep Books Of Accounts
The most important part of deducting interest is keeping books to show that you used the borrowed money to earn income. You should keep your receipts and paid checks to show that you used the borrowed money for your business activities or to buy bonds or stocks. When it comes to credit cards, reserving a credit card for your business expenses is a good idea. Account statements can be used to deduct any interest accrued on this card.
Maximize deductible interest
You can reduce your taxes by making sure you use your money for personal expenses and loans to produce income. For example, if you have money and want to invest some of it, a good idea might be to use your money to pay off your credit cards or personal loans, then borrow an equivalent amount to invest in investments. You reduce the amount of interest payable on your credit cards and personal loans and replace it with interest payable on investment loans. You can then deduct the interest on money borrowed to invest in your investments and reduce your total tax amount
