Client re-mortgaged his home to buy investments in 2022. He purchased stocks and had capital losses only in 2022, so no interest deducted on his personal taxes.
In 2023, he sold and bought new investments, (from the same money he invested last year) and earned capital gain and interest income in 2023. Is that reasonable to deduct interests on the mortgage that is almost $20K in 2023? The actual income earned is less then a $1K. Any experience seeing this? It seems way too much to claim, but they are legit expenses.
He should have deducted the interest expense in 2022. As long as the full amount continues to be invested, he can continue to write off the interest expense.
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While the interest portion of the mortgage could have been deducted on the 2022 taxes, it is one of the key factors, which CRA uses to differentiate between Capital Gain and Business Income (stock trading). Extra thought needs to be given using that interest. You don’t want the client to lose qualification for the Capital Gain in the long term.
Interest deductibility is addressed in subparagraph 20(1)(c)(i)
Interest
(c) an amount paid in the year or payable in respect of the year (depending on the method regularly followed by the taxpayer in computing the taxpayer’s income), pursuant to a legal obligation to pay interest on
(i) borrowed money used for the purpose of earning income from a business or property (other than borrowed money used to acquire property the income from which would be exempt or to acquire a life insurance policy),
Essentially speaking; provided there was an expectation the investments in which the borrowed money was invested would pay interest or dividends (regardless of the amount) then interest is deductible. If money was invested in stocks or shares that do not have a dividend yield then it would be difficult to deduct interest on the amount that was used to purchase those securities.
The Ludco Enterprises case is a decent read on interest deductibility.
https://www.canlii.org/en/ca/scc/doc/2001/2001scc62/2001scc62.html
In the Ludco case the taxpayer deducted $6 million in interest against $600k of dividend income.
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Thank you for your comments. As far as I know, interest isn’t deductible if the taxpayer has only capital gains/losses. In 2022, he only had capital losses, no dividends, that is why the interest was not deducted.
Thank you! I am trying to be cautious, but go by the rules, that is why I put this out here.
Yes interest borrowed to earn investment income is deductible. Typically if it’s only on account of capital interest is not deductible but CRA has taken the position that it is reasonable to assume that stocks can pay dividends at any time and therefore allows the interest expense. Just make sure that there is a clear paper trail that differentiates the capital borrowed to invest vs that attributed to mortgage of the home.
See section 1.70 of the folio:
Income Tax Folio S3-F6-C1, Interest Deductibility - Canada.ca
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