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What you need to know about deducting interest on your taxes for investment loans

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Under the Income Tax Act, interest is deductible if “paid on borrowed money that is used for the purpose of gaining or producing income.”Illustration by Chloe Cushman/National Post files

The interest expense when you borrow money, either through your margin account, an investment loan or a line of credit, and use it for the purpose of earning investment income is generally tax deductible.

This tax deduction is important since it can dramatically reduce your true, effective after-tax cost of borrowing. For example, if you live in Nova Scotia, and you pay tax at the top combined federal/provincial marginal tax rate of 54 per cent, your tax cost of borrowing $100,000 for investment purposes, using a secured line of credit at bank prime rate (currently around 3.45 per cent), is only $1,587 annually, assuming the interest is fully tax deductible.

But if you invest the loan proceeds in mutual funds, your tax calculations may become a bit more complicated depending on the type of distributions you receive and whether those distributions are reinvested.

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