Interest is one of the few expenses the Canadian tax system will sometimes let you deduct against investment income — and one of the most commonly claimed incorrectly. The rule is not about what kind of loan you took out. It is about what you did with the money.

This guide walks through the test the CRA applies, then goes loan type by loan type: investment loans, lines of credit, margin, RRSP loans, mortgages and investment fees.

The one rule that decides everything

Interest is generally deductible when the borrowed money is used for the purpose of earning income from a business or property. That is the whole test, and every question below is an application of it.

Three things follow from it, and they surprise people:

  • The lender does not matter. A bank loan, a line of credit and a margin account are treated the same way. What matters is the use of the funds.
  • The security does not matter. Borrowing against your home to buy income-producing investments is judged on what the money bought, not on what secured the loan.
  • You have to be able to trace it. The connection between the borrowed money and the income-earning use is something you may be asked to demonstrate.

Is investment loan interest tax deductible in Canada?

Generally yes, where the loan was used to buy investments held outside a registered account that have a reasonable expectation of producing income — dividends from shares, interest from bonds, distributions from a non-registered fund.

What the CRA is looking for is an income-earning purpose. An investment that pays nothing at all, and was never expected to, is a weaker position than one that produces or is capable of producing income.

Is line of credit interest tax deductible in Canada?

A line of credit is deductible on exactly the same test — but it is the hardest case in practice, because a line of credit is usually mixed use. The same account pays for an investment purchase in March, a kitchen renovation in June and a holiday in August.

When that happens, only the portion traceable to the income-earning use supports a deduction, and the interest has to be apportioned. Paying the balance down does not automatically pay down the "personal" half first.

The practical answer is to keep borrowing for investments in a separate account used for nothing else. That single habit removes almost all of the difficulty, and it is far easier than reconstructing a mixed account years later.

Is margin interest tax deductible in Canada?

Margin interest follows the same rule: it is the use of the borrowed funds that decides it, not the fact that the borrowing happened inside a brokerage account. Margin used to buy income-producing securities in a non-registered account is treated like any other investment loan.

Is interest on an RRSP or TFSA loan deductible?

No. This is the clearest "no" in the whole area, and it catches people every year — often because an RRSP loan is offered at exactly the moment the contribution is being made.

The reason is consistent with the main rule rather than an exception to it. Income inside these accounts is sheltered or tax-free, so the borrowed money is not being used to earn taxable income. The same applies to a loan used to contribute to a TFSA, an RESP or an FHSA.

Is interest on a home loan or mortgage deductible?

Two very different answers, depending on the property:

  • Your own home: no. Unlike in the United States, mortgage interest on a personal residence is not deductible in Canada. This is the single most common misunderstanding in this area, usually picked up from American articles and videos.
  • A rental property: generally yes. A mortgage on a property held to earn rental income is being used for an income-earning purpose, so the interest is generally deductible against that rental income.

Borrowing against your home to invest is a third case again — see below.

Are investment fees tax deductible in Canada?

Fees and interest are different things and are treated differently, which is worth separating carefully:

  • Investment management fees on a non-registered account are generally deductible as a carrying charge.
  • Commissions to buy or sell a security are generally not deducted. They adjust the cost base of the investment instead, which affects the capital gain rather than the current year's income.
  • Fees charged inside a registered account (RRSP, TFSA) are not deductible, for the same reason the loan interest is not.

Borrowing to invest: what actually has to be true

Leveraged investing strategies — including the arrangement often called the Smith Manoeuvre — depend entirely on the interest being deductible. That deduction is not a feature of the strategy; it is a consequence of meeting the same test as everything else on this page.

What that means in practice is that the paperwork is the strategy. If the borrowing and the investment cannot be traced to each other, the position is weak no matter how the arrangement was described when it was sold to you.

These arrangements also carry investment risk that has nothing to do with tax: borrowed money magnifies losses as readily as gains. The tax treatment should never be the reason to enter one.

What can break a deduction you already have

  • Selling the investment. When the income-earning source is gone, the basis for deducting the interest can go with it. There are continuity rules for what happens next, and they depend on what you do with the proceeds.
  • Refinancing or consolidating. Rolling an investment loan into a general-purpose loan can break the trace that supported the deduction.
  • Using the account for something else. One personal purchase from a dedicated investment line of credit turns a simple position into an apportionment exercise.

How to claim it, and what to keep

Deductible interest and investment fees are claimed as carrying charges on your personal return. What matters more than the mechanics is being able to show the connection if you are asked:

  • The loan agreement or line of credit statement
  • Statements showing the borrowed funds going into the investment
  • Annual interest statements from the lender
  • Records of what happened to the investment, especially if it was sold

The CRA does review these claims, and the request is usually for the trace rather than the arithmetic. Someone who kept a separate account and the statements that go with it answers in an afternoon; someone reconstructing a mixed line of credit across four years does not.

Where this gets complicated

The rule is short, but its application is not. Mixed-use accounts, refinancing, investments that stop paying, property that changes use, and money moved between accounts all raise questions the general rule does not answer on its own.

If you are carrying investment debt and are not certain the interest is being claimed correctly — or you are about to borrow to invest and want the structure right from the start — that is a conversation worth having before the return is filed rather than after.

This article is general information about Canadian tax rules, not advice for your situation. Rules change and the details of a case matter. For your own circumstances, book a free 30-minute consultation.