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.

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