Tax-deductible interest when borrowing to invest in your canadian corporation
Many businesses (this one included) are funded on a loan that the owner(s) and founder(s) of the company take out personally, perhaps a second mortgage or a secured line of credit.
In Canada, the interest paid on loans and mortgages is tax deductible if that loan money is used for investment. This isn’t just for mutual funds - it applies to investing in your own business as well!
As an owner of a Canadian corporation, there are two ways for you to provide this loan money to your business which make your interest tax-deductible:
- Buying shares of the business (investing in it)
- For corporations, lending money to the business as a shareholder loan plus the interest you pay on that part of the loan
In the first case, the interest is deducted on your personal tax return. In the second case the interest is deducted on the business’ tax return because the interest payments you receive as income cancel out the tax deduction from the interest you pay, whereas the business reports this as an interest expense.
In our business, developing online accounting software, most of our loan goes to paying our own living expenses, which are not an “investment” by the Canada Revenue Agency’s definition. For that reason we have to track the amount of our shareholder loan and periodically charge the business interest if the loan balance is positive in order to make that interest tax deductible.
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Tags: borrow to invest, canada tax tips, shareholder loans, start-up accounting, tax deduction, tax tips, taxes
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