For interest expense to be deductible, it must relate to debt incurred to earn business or investment income. Interest on personal debts, such as mortgages or car loans and interest incurred to make RRSP contributions is generally not deductible. Another point to keep in mind is that investment income doesn't include capital gains. The Canada Revenue Agency (CRA) takes the position that interest on funds borrowed to invest in assets producing only capital gains isn't deductible.
Review your outstanding loans and your overall cash position at year-end. Where possible, pay off non-deductible debt as quickly as possible. If you will have to make large personal expenditures in the near future avoid using excess funds to pay off business or investment loans. Where you have a choice, always borrow for investment or business purposes over personal uses.
When you've sold an investment at a loss and continue to carry debt incurred to purchase the investment, you should leave these loans outstanding as long as you have other non-deductible debt that could be paid off first. Interest from debts relating to the loss on an investment (other than real estate or depreciable property) continues to be deductible as long as those debts remain outstanding and all of the proceeds from the loss asset are reinvested. Your BDO tax advisor would be pleased to provide further details.
This tax tip is a publication of BDO Canada LLP on developments in the area of taxation. This material is general in nature and should not be relied upon to replace the requirement for specific professional advice. The information in this tax tip is current as of October 1, 2018.