When Investment Loan Interest Is Tax Deductible in Canada
Borrow $50,000 against your house at today’s prime plus one point and you will pay $2,725 in interest over a year. Whether roughly $808 of that comes back to you at tax time has nothing to do with the loan, the lender, or the rate. It depends entirely on what you did with the money.
That is the part most people get backwards. There is no such thing as a deductible loan in Canadian tax law. There is only borrowed money put to a deductible use, and the Income Tax Act is specific about which use qualifies: paragraph 20(1)(c) allows a deduction for interest on “borrowed money used for the purpose of earning income from a business or property,” with an explicit carve-out for money used to acquire property “the income from which would be exempt.” Everything below follows from that one sentence in section 20 of the Income Tax Act.
Our explainer on how a HELOC works in Canada covers the borrowing caps and the carrying cost and deliberately leaves the tax question alone. This is that question.
What the deduction is actually worth
Take the loan above and put concrete numbers on it. The Bank of Canada published a prime rate of 4.45% on September 9, 2026. At the prime-plus-one-percent structure the Financial Consumer Agency of Canada uses in its own illustrations, that is 5.45%, and on $50,000 it costs $2,725 a year.
Now assume an Ontario filer with taxable income in the $58,523 to $107,785 range. The federal bracket rate there is 20.5% and the Ontario bracket rate is 9.15%, for a combined statutory marginal rate of 29.65% before Ontario’s surtax.
| Interest deductible | Interest not deductible | |
|---|---|---|
| Interest paid, one year | $2,725.00 | $2,725.00 |
| Tax reduced | $807.96 | $0.00 |
| Actual cost, one year | $1,917.04 | $2,725.00 |
| Effective after-tax rate | 3.834% | 5.45% |
| Cost over ten years | $19,170.38 | $27,250.00 |
Same house, same lender, same rate, same $50,000. The gap is $8,079.62 over a decade, and it is decided by a handful of choices made at the moment the money leaves the account.
It also moves the bar the investment has to clear. Deductible, the portfolio needs to return 3.834% before tax just to cover its own carrying cost. Not deductible, it needs 5.45%. That is a meaningful difference in what you have to reach for.
The four mistakes
Borrowing to fill a registered account
This is the most common and the most expensive, because it feels like the smartest move in the room. You have TFSA room, you have a line of credit, the arithmetic looks obvious.
The CRA’s guidance for line 22100, carrying charges and interest expenses is blunt about it. You cannot deduct “interest you paid on money that you borrowed to contribute to an RRSP, a deferred profit-sharing plan (DPSP), a PRPP, a registered pension plan (RPP), a retirement compensation arrangement (RCA), a net income stabilization account, an SPP, a registered education savings plan (RESP), a registered disability savings plan (RDSP), a TFSA or an FHSA.”
The logic traces straight back to the statute. Income inside a TFSA is not taxed, so there is no income being earned for tax purposes and nothing for the interest to be deducted against. The account’s greatest strength is exactly what disqualifies the loan. An RRSP contribution generates its own deduction, which is the trade the system already gave you.
None of this makes an RRSP loan a bad idea. It makes an RRSP loan a thing whose real cost is the full 5.45%, not 3.834%, and the decision should be made on that number.
Buying something that can only produce a capital gain
The CRA states this one in a single line: “If the only earnings your investment can produce are capital gains, you cannot claim the interest you paid.”
The purpose test in the Act is income from property, and a capital gain is not income from property. A holding that pays nothing and is bought purely for appreciation sits outside the test. A dividend-paying position, by contrast, is squarely inside it, which is why dividend payers and leverage get discussed in the same breath so often. The gain can still be the reason you bought it. There simply has to be an income purpose as well.
Letting the loan do two jobs
A line of credit that paid for a kitchen renovation in March and a portfolio in September is not a deductible loan and it is not a non-deductible one. It is two uses sharing one balance, and the Act attaches the deduction to the money that was “used for the purpose of earning income,” not to the account it flowed through.
Every payment against a blended balance raises the question of which portion it paid down, and that question does not have a comfortable answer years later when the statements have been archived. The practical fix costs nothing at the outset: a separate line or sub-account for the investment borrowing, funds moving directly to the brokerage without stopping in a chequing account, and nothing else ever charged to it.
Deducting the things that ride alongside
Carrying charges are a narrower category than most people assume. The CRA’s line 22100 guidance rules out safety deposit box charges, subscription fees for financial newspapers, magazines or newsletters, and interest on student loans, which instead gets a credit at line 31900.
Brokerage commissions are the one worth understanding rather than memorising. They are not deductible, but they are not lost either. Commissions paid to buy and sell securities go into the capital gain or loss calculation instead, which means the purchase commission raises your cost base and the sale commission reduces your proceeds. That is a real tax benefit arriving through a different door, and it only works if the cost base is tracked properly from the first purchase. Our adjusted cost base calculator exists for that.
What the CRA does allow at line 22100 includes fees to manage or take care of your investments, fees for certain investment advice, and “most interest you paid on money you borrowed and used to try to earn investment income, such as interest and dividends.”
What to keep
The deduction is claimed on one line of a return and defended with paperwork you either created at the time or did not. Worth keeping, indefinitely: the loan agreement and statements showing the interest actually paid, the brokerage confirmation for what the money bought, and something that ties the two together by date and amount. A transfer from the line of credit to the brokerage on the same day, in the same amount, is the cleanest record there is.
Note the wording on the CRA’s own page: money borrowed and used to try to earn investment income. An investment that disappoints does not retroactively become non-deductible. The purpose is tested by what you were reasonably doing, not by how it turned out.
The honest summary
Leverage amplifies a portfolio in both directions, and a tax deduction does not change that. Borrowing against a house to invest puts the house behind the trade, which is a materially different risk from investing money you already have, and the 5.45% in this example is a variable rate that a lender can move.
What the deduction does change is the hurdle. If you have already decided to borrow, the difference between a deductible structure and a non-deductible one is $807.96 a year on $50,000 and nothing else about your life changes to get it. That is worth twenty minutes of setting the account up correctly before the money moves.
Rates and figures are as of the dates given. Prime rate as published by the Bank of Canada on September 9, 2026. Tax rates are 2026 federal and Ontario bracket rates. Quebec administers its own income tax and its filers should check Revenu Quebec’s rules, which differ.
Tax treatment depends on your own circumstances and is worth confirming with a qualified tax professional before you act on it.
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