Tax Tips and Pits – Claiming interest as an expense

"As tax season draws to a close, what better time than right now to do some tax planning for next tax season."

As tax season draws to a close, what better time than right now to do some tax planning for next tax season.

At the risk of entering the world of investment advice, and please do not take anything within as such advice, from a tax perspective there are better methods of acquiring investments than others.

Here is the basic premise:  interest expense associated with loans used for personal purposes is not tax deductible while interest expense associated with loans used for income producing purposes, is.  This interest is classified as a carrying cost.

This is a straight up fact but, as always with Canada Revenue Agency (CRA), there are exceptions like interest from loans used to invest in an RRSP is not a deductible expense.

This aside, there is credence in the premise noted.

If you find yourself in a position of having personal loans and also possessing income producing investments (an oxymoron?) then the following course of action may be of interest to you for tax purposes.

Cash out investments, pay capital gains tax if applicable, pay off personal debt, take out a loan, acquire investments, and claim investment interest expense as a carrying cost.

Thus the phrase, “interest expense shuffle”.

Of course if the investment involves large capital gains, serious consideration has to be given to the tax consequence upon divesture. There may clearly be no tax advantage in going this route.

And if there is a capital loss involved, CRA will not allow this loss to be claimed if the same investments are re-purchased within 30 days of divesture.  This is referred to as a “superficial loss” and special CRA tax rules apply.

Then again, is a losing investment something to re-invest in?  Likely better to take the capital loss, use the freed up cash to pay down personal debt, and then take out a new loan to invest in something else and write off the new investment loan’s interest?

Before undertaking any investment maneuver like this one, do your research and seek professional advice.

Ron Clarke has his MBA and is a business owner in Trail, providing accounting and tax services. Email him at ron.clarke@JBSbiz.ca. To read previous Tax Tips & Pits columns visit www.JBSbiz.net.

Just Posted

High hazard in downtown Trail

Roofing work began early Monday morning at the Trail Memorial Centre

More burning prohibitions rescinded in southeast B.C.

Category 2 and 3 fires will be permitted in Southeast Fire Centre as of 1p.m. on Wednesday.

Second hospital road part of plan, says Trail mayor

Martin was in Whistler last week for the UBCM; city delegation met with health ministry

Participation by women in West Kootenay/Boundary elections up slightly

More running than in 2014, but about same number as 2011

Syringa Creek fire ‘being held’

The fire has burned 3193 hectares; Deer Creek fire is also “being held” at 3849 hectares

B.C. RCMP turn to Const. Scarecrow to shock speeders into slowing down

New addition will watch over drivers from a Coquitlam median for first-of-its-kind pilot in Canada

B.C. home to 1/3 of Canada’s overdose deaths in first 3 months of the year

There were 1,036 overdose deaths in the first three months of the year, with 94 per cent accidental

B.C. candidate moves from hospice care to council race

He beat terminal cancer twice and entered hospice when he decided to run for council.

Canadian tobacco exec pushes back against vaping health concerns

A warning from Interior Health about the unknown health risks of vaping is getting a partial rebuke

Ministry of Agriculture commits $300,000 to help B.C. farmers obtain land

B.C. Land Matching Program supports access to affordable farmland for young farmers

Canadian air force short 275 pilots

Attrition outpaces recruitment and training claims Air Force

Teacher suspended after physically shushing, saying ‘shut up’ to student

Grade 5 student reported feeling ‘confused and a little scared’

A B.C. society helps to reforest Crown land after wildfires

Forest Enhancement Society of BC focuses on wildfire mitigation and the reforestation

Most Read