You can deduct interest incurred to earn investment income (dividends and interest) from investments such as bonds and stocks. However, interest incurred on non-investment loans or investments that generate only capital gains are not deductible.
It makes sense to pay off loans giving rise to non-deductible interest (i.e. mortgage on your principal residence) first and take out a separate loan to make an investment. Consider selling assets (i.e. common shares that don’t have inherent capital gains) to pay off non-deductible debt and re-borrow the funds to acquire income-producing assets, possibly using the home as collateral.
You must be able to trace borrowed money directly to the purchase of the income-producing investments. So it is important to keep a clear paper trail of the use of borrowed money.
The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.