# Interest Income vs. Interest Paid



## realist (Apr 8, 2011)

If I have a non-registered savings account that earns enough to get a T5, but I have paid interest on other accounts (e.g. LOC, or credit card) can I use the interest paid to offset the T5 interest? 

If yes, how?
If not, why not? I would not have earned the interest on the savings account for example, if I had used it to pay of the LOC for example, and therefore the interest is a "cost" of that investment.

I wouldn't be doing this on purpose but if "hypothetically" my wife paid the credit card late for example, it would be nice to find a silver lining!


----------



## OhGreatGuru (May 24, 2009)

Put another way, why should the rest of taxpayers subsidize your inability to manage a budget? You want us to allow you to deduct the interest on your personal debts, in the meantime you have income-earning assets that could have paid off that debt.

(The whole interest-deductiblity thing for investment loans is such a can of worms and so open to abuse it coudl be another thread.)


----------



## Square Root (Jan 30, 2010)

We have been through this many times. To be deductible the loan 
proceeds must have been used to earn income or at least create the possibility of earning income or taxable capital gain. If used for personal expenditures not deductible. Your case sounds like not deductible.


----------



## andrewf (Mar 1, 2010)

^I thought taxable capital gains were not enough. You have to have the possibility of earning income (ie, 'ordinary income' or dividends), no?


----------



## Charlie (May 20, 2011)

You need a direct trail of the money from the debt to the investment. Cap gains potential is fine (sooo many stocks dont pay and dont intend to pay divs)...but simply having debt and an offsetting investment doesn't cut it. You need to show that the money from the debt was used to buy the investment before you can deduct the interest.


----------



## Eclectic12 (Oct 20, 2010)

andrewf said:


> ^I thought taxable capital gains were not enough. You have to have the possibility of earning income (ie, 'ordinary income' or dividends), no?


CRA and other sites indicate if the company states they will *never* pay dividends or distributions, then you are correct - the interest is not tax deductible.

However, where "the taxpayer had a reasonable expectation of income at the time the investment is made", CRA will generally allow the deduction of interest.

http://www.taxtips.ca/personaltax/investing/interestexpense.htm
http://www.cra-arc.gc.ca/E/pub/tp/it533/it533-e.pdf


Likely this amounts to whether it's worth CRA's while. It is a grey area as there does not seem to be a definition of "reasonable expection".


Bottom line is to be safe, stick to investments that have both dividend/income *and* capital gains.


Cheers


----------



## Fain (Oct 11, 2009)

OhGreatGuru said:


> Put another way, why should the rest of taxpayers subsidize your inability to manage a budget? You want us to allow you to deduct the interest on your personal debts, in the meantime you have income-earning assets that could have paid off that debt.
> 
> (The whole interest-deductiblity thing for investment loans is such a can of worms and so open to abuse it coudl be another thread.)


Taxpayers aren't subsidizing anything. It would just be allowing him to keep more of what is his already. 

Credits card Interest is tax deductable if it's used for investment purposes. (I.E. Credit Card Arbitrage)


----------



## CanadianCapitalist (Mar 31, 2009)

andrewf said:


> ^I thought taxable capital gains were not enough. You have to have the possibility of earning income (ie, 'ordinary income' or dividends), no?


Even if a stock doesn't pay a dividend now, it may pay one in the future. Eg. Microsoft and Cisco. Therefore, one could argue (successfully IMO) that investors in common stocks have the possibility to earn income in the future even if they don't currently receive a dividend. So, interest on borrowings made to invest in common stocks should be deductible.


----------



## Eclectic12 (Oct 20, 2010)

CanadianCapitalist said:


> Even if a stock doesn't pay a dividend now, it may pay one in the future. Eg. Microsoft and Cisco. Therefore, one could argue (successfully IMO) that investors in common stocks have the possibility to earn income in the future even if they don't currently receive a dividend. So, interest on borrowings made to invest in common stocks should be deductible.


CRA agrees but does reserve the right to review specifics.

IT533 - Interest Deductibility and Related Issues, in the section on Borrowing for Investments including common shares lists that:


> Where an investment does not carry a stated interest or dividend rate such as some common shares, the determination of the reasonable expectation of income at the time the investment is made is less clear. Normally, however, the CCRA considers interest costs in respect of funds borrowed to purchase common shares to be deductible on the basis that there is a reasonable expectation, at the time the shares are acquired, that the common shareholder will receive dividends. Nonetheless, each situation must be dealt with on the basis of the particular facts involved.
> 
> These comments are also generally applicable to investments in mutual fund trusts and mutual fund corporations.


http://www.cra-arc.gc.ca/E/pub/tp/it533/it533-e.html


So the basic assumption is that dividends *could* be paid in future - unless something like company policy or a prospectus says otherwise.


Cheers


----------

