From a tax perspective, borrowing money to make investments can be beneficial due to the deduction available for interest paid in the year. As long as the interest expense was incurred for the purpose of earning business or property income, the amount will be deductible for tax purposes. Interest income and dividends are two common types of investment (property) income that will allow for the interest expense deduction. Furthermore, if the investment is in common shares of public companies that are currently not paying dividends, the Canada Revenue Agency (CRA) will still allow the deduction because there is a reasonable expectation of future payout.
For the interest expense to be deductible, the borrowed funds must be directly traceable to the acquisition of the investments. Therefore, it is essential for the taxpayer to maintain all of the supporting documents in the event that the CRA challenges the eligibility of the deduction in the future. Finally, from a student perspective, the interest expense deduction can make borrowing money to invest attractive. However, it is important that students first consider their ability to make regular payments for the investment loan, as well as any student loans. This is to avoid any penalties or additional interest charges for late and/or missed payments.
- Jessie, Young Tax Professional