CRA Carrying Charges: What’s Not Deductible?

In Part 3 of this series on deductible investment expenses, we discuss costs that are not deductible – a mystery and a surprise to some taxpayers during a tax audit. Here’s more essential information to keep you out of hot water.

What’s not deductible? Previously we covered the cost of interest expenses paid to the CRA – that are generally not deductible, except in the case of objections or appeals. What else do you need to know?

Carrying Charges that Aren’t Deductible:

• Loans taken to earn capital gains in non-registered investment accounts. Much to the surprise of many investors, these are specifically excluded from the list of investments for which interest costs incurred will be deductible. Interest will not deductible unless you acquire an income-producing asset with the potential to earn income from property – interest, dividends, rents or royalties. That’s right: potential. That means it doesn’t have to produce income every year.
• Borrowing to invest in registered accounts. Interest on loans used for the purposes of investing in a registered asset - an RRSP, TFSA, RESP or RDSP - is also not deductible. Nor is interest paid on a tax-exempt property, like your principal residence, unless there is an expectation rental income will be earned. This means that you’ll have to divide up the costs, if one loan covers all your investing activities.

Should you leverage your assets to invest more? Many investors wonder if they should leverage existing capital assets in order to invest more into the marketplace. Often, they are approached to consider different leveraged loan arrangements, particularly if they believe they have not saved enough for retirement.

Be sure to crunch the numbers over the life of the loan. The potential for investment income must be present, and you will need to make arrangements to pay off your interest (before tax) and pay back the principle.

This requires cash flow – so where do you find the money? You can turn to your income tax refund for some of it. However, it’s essential to keep in mind that the investment must also be able to pay real dollars on a guaranteed basis before your risk can be properly assessed. Otherwise you will have to dip into other funds to pay off your loans. Make sure that you assess these possibilities with your financial advisor, so that you can sleep at night.

A keen focus on financial planning now will help you ensure that you incorporate tax-efficient strategies for both borrowing and investing in 2018 and avoid the trap of expensive overdue balances to both CRA and your bankers. You don’t want recent interest rate increases to have a negative impact on your financial plans in 2018 and beyond.

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