How interest deductibility works

In Canada, interest on money borrowed for the purpose of earning investment income is generally tax-deductible. This principle comes from the Income Tax Act and is detailed in CRA's Income Tax Folio S3-F6-C1. The concept is straightforward — but applying it over time is where it gets complicated.

The core rule

Borrow money. Use it to invest. The interest you pay on that borrowed money is deductible — as long as the borrowed funds can be traced to an eligible investment purpose.

This is the tracing principle: interest deductibility follows the current use of the borrowed money, not the original intent. If you borrow $50,000 and invest it all, the interest on the full $50,000 is deductible. But if you later withdraw $10,000 for personal use, only the interest on $40,000 remains deductible.

Why it's not static

A clean initial setup — borrow, transfer, buy — is simple. But over the life of your investment, many events can change the deductible proportion:

• Selling holdings moves invested principal to non-deductible principal — the debt remains, but it's no longer funding an investment. If you reinvest the proceeds, the principal becomes deductible again. See Selling holdings.
• Return of Capital distributions reduce the amount that can be traced to investments — retroactively. See Return of Capital.
• Mixed borrowing — using the same credit line for personal expenses — creates a blend of deductible and non-deductible debt. See Mixed HELOC use.
• Interest capitalization (paying interest by borrowing more) inherits the deductible/non-deductible character of the underlying debt. See Interest capitalization.

Each of these events changes the composition of your debt. And since interest deductibility depends on that composition, the proportion of deductible interest shifts with every transaction. See how balances are tracked for exactly what the app monitors at each step.

The tracing principle in practice

The CRA requires that you trace borrowed money to its use. This means you need a clear record showing:

1. When money was borrowed
2. Where it went (investment account, personal use, etc.)
3. What it purchased
4. What happened when investments were sold or returned capital
5. How payments were applied to the debt

For a single year with a clean setup, this might be manageable in a spreadsheet. Over multiple years with partial sales, distributions, and mixed use, it becomes a record-keeping challenge that compounds over time.

How the tracker helps

The Deductible Interest Tracker applies these tracing rules automatically. You record financial events — borrows, purchases, sales, distributions, payments — and the app maintains the complete trace from each borrowed dollar through every transaction.

When your lender charges interest, the app calculates exactly how much is deductible based on the time-weighted composition of your debt during that period.