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Can I deduct the interest on a business loan in Canada?
Generally yes. Interest on money borrowed to earn business income is usually deductible as a business expense, while repayments of the principal are not. Some financing fees can be deducted too, often spread over several years. Personal use of the funds is not deductible, and individual situations vary, so confirm with an accountant.
This is general information, not tax advice, and rules can change. Confirm anything that affects your return with your accountant or the Canada Revenue Agency (CRA). With that said, the basic principles are simple enough to understand before you sit down with them.
The basic rule
Interest you pay on money borrowed for the purpose of earning income from your business is generally deductible. That includes interest on term loans, lines of credit and credit cards when the borrowed money was used for the business. The loan itself is not income when you receive it, and repaying the principal is not an expense. Only the cost of borrowing counts.
What usually qualifies
- Interest on a term loan used to buy inventory, pay wages or expand
- Interest on a business line of credit for the amount actually drawn
- Interest on a business credit card, for business purchases
- Interest on equipment financing when the equipment is used in the business
What usually does not
- The principal part of each payment
- Interest on money used for personal purposes, even if borrowed through a business account
- Interest on borrowing that was not used to earn business income
- Penalties and fines, which are generally not deductible
Mixed-use loans
If you borrow and use part of the money for the business and part for personal spending, only the business part of the interest is generally deductible. Keeping business and personal money in separate accounts makes this much easier to show. It is the best habit you can adopt.
Fees and other financing costs
Certain costs of arranging a loan, such as some legal, appraisal or brokerage fees, can often be deducted too, but they are typically spread over several years rather than claimed all at once. Ask your accountant how to treat the fees on your particular loan.
Equipment: interest and depreciation
When you finance equipment, two different deductions can apply: the interest on the financing, and capital cost allowance (CCA) on the equipment itself. They are separate. Read our guides to the CCA equipment deduction and to equipment financing vs. leasing, since lease payments are usually treated differently from loan interest.
Sole proprietors, partners and corporations
The same general principle applies whether you are incorporated or not, but how the deduction is reported differs. A sole proprietor claims interest as a business expense on the statement of business activities; a corporation claims it on its own return. If you borrow personally and lend to your company, or the other way round, the treatment can get more complicated.
Questions for your accountant
- How should I treat the fees on this loan?
- Is this borrowing used entirely for the business?
- How will the equipment I am financing be depreciated?
- Would a lease or a loan produce a better result for me?
