Interest expenses can represent a significant financial burden, especially for students paying off education loans or investors leveraging borrowed funds to generate income. In Canada, certain types of loan interest are eligible for tax deductions, offering a valuable opportunity to reduce your taxable income. This blog explores whether and how you can deduct interest on student loans and investment loans, the applicable rules, eligibility criteria, and important tax tips to make the most of your deductions.
1. Overview of Deductible Interest in Canada
The Income Tax Act (ITA) of Canada allows certain interest expenses to be deducted from taxable income under specific conditions. However, not all types of interest qualify. The two most common and relevant categories for individuals are:
- Interest paid on eligible student loans
- Interest paid on money borrowed to earn investment income
Each type of deduction has distinct rules and conditions, which we’ll explore in detail below.
2. Deducting Interest on Student Loans
In Canada, interest paid on eligible student loans may be claimed as a non-refundable tax credit. While this doesn’t directly reduce your taxable income, it does reduce the amount of tax you owe, which can lead to a refund if you have other refundable credits or low tax owing.
Eligibility Requirements
- The loan must be a government-sponsored student loan issued under the Canada Student Loans Act, Canada Student Financial Assistance Act, or a similar provincial/territorial program (e.g., Ontario Student Assistance Program – OSAP).
- Private loans (such as lines of credit from a bank or credit card debt) do not qualify, even if used to pay for education.
- Only the person responsible for repaying the loan can claim the interest paid.
Claiming the Credit
Interest paid on student loans is claimed on Line 31900 of the federal income tax return (T1). You can claim the interest in the year it was paid or carry it forward for up to five years if you don’t need the credit immediately.
Example: If you paid $300 in interest on your government student loan in 2024, and your federal tax owing is low, you can carry forward the credit to use in a future year when your tax liability is higher.
Important Considerations
- You cannot claim interest paid during a period when the loan was in default.
- Consolidated loans that mix eligible and non-eligible debts may render the interest ineligible.
- Keep documentation from your student loan provider showing the amount of interest paid during the year.
3. Deducting Interest on Investment Loans
Unlike student loans, interest on investment-related loans is considered a deductible expense—but only if the borrowed money is used to earn income from a business or property.
Eligibility Conditions
To qualify for an interest deduction on investment loans:
- The borrowed funds must be used to earn taxable investment income (such as interest, dividends, or rental income).
- The expectation must be to earn income—capital gains alone do not qualify.
- The investment must be a legitimate income-generating asset (e.g., stocks, bonds, mutual funds, rental property).
This deduction is generally claimed on Line 22100 of your tax return as “Carrying Charges and Interest Expenses.”
What Qualifies as Deductible Investment Interest?
- Interest on a loan taken to buy dividend-paying stocks
- Interest on funds borrowed to purchase a rental property
- Interest on money used to contribute to a non-registered investment account
What Does Not Qualify?
- Interest on loans used to buy tax-sheltered assets like RRSPs or TFSAs
- Interest on loans that produce only capital gains with no reasonable expectation of income
- Interest on personal loans not tied to investment income
Proving the Purpose of the Loan
The CRA may require documentation proving that borrowed funds were used for income-generating investments. Keep a paper trail that links your loan to specific purchases or transactions.
For example, if you borrowed $25,000 to invest in dividend-paying stocks, retain your loan agreement, brokerage account transaction confirmations, and any relevant receipts.
4. Mixed-Use Loans and Partial Deductions
When a loan is used partly for eligible investment purposes and partly for personal reasons, only the interest attributable to the investment portion is deductible.
You must be able to clearly separate the investment and non-investment components of the loan. This requires meticulous record-keeping and may involve calculating the proportion of the loan used for eligible investment versus personal expenses.
5. Carrying Charges vs. Interest
In addition to interest expenses, you may be able to deduct other investment-related costs such as:
- Investment account management fees (if not for registered accounts)
- Safety deposit box fees (no longer deductible after 2013)
- Fees paid to financial advisors for income-generating investments
These are also claimed under Line 22100 and can be combined with interest deductions, as long as they relate to the same income-generating purpose.
6. Tax Planning Strategies and Tips
- Consolidate student loan payments through government programs to preserve deductibility.
- Avoid using RRSP or TFSA contributions for loans intended to earn income, as interest is not deductible.
- Consider using a separate loan exclusively for investment to simplify documentation and compliance.
- Carry forward unused student loan interest credits if your tax liability is currently low.
- Track the performance of your investments to ensure a reasonable expectation of income.
7. What to Expect from the CRA
The CRA closely scrutinizes interest deductions, especially when it comes to investment loans. Be prepared to provide documentation such as:
- Loan agreements
- Bank statements showing fund transfers
- Investment statements or rental income reports
- Income generated from the borrowed money
If you’re unsure about the eligibility of your interest deductions, consider consulting a certified tax professional or accountant to reduce the risk of audits or reassessments.
8. Conclusion
In Canada, you can deduct interest on student loans and investment loans—provided specific criteria are met. Student loan interest can offer valuable non-refundable credits, while investment loan interest can reduce your taxable income if used to generate business or property income.
However, the rules surrounding these deductions are complex and require clear documentation and intent. By understanding the conditions, maintaining proper records, and applying tax planning strategies, you can take full advantage of the CRA’s provisions and reduce your overall tax burden.
Always consult the latest CRA guidelines or speak with a qualified tax advisor to ensure you’re compliant and maximizing your eligible deductions.
