How interest is time-weighted

Your debt composition can change multiple times within a single billing period. A sale, a new borrow, a personal draw — each shifts the deductible proportion. Rather than using a single snapshot, the app calculates a time-weighted average across the entire period using the average daily balance method — the same approach banks use to calculate interest on deposit accounts and credit lines. (For how the app maintains these balances, see how balances are tracked.)

The average daily balance method

The calculation divides each billing period into intervals — one for each time the balance composition changes. For each interval, the eligible (deductible) and ineligible (non-deductible) balances are weighted by the number of days they were in effect. The total interest charge is then allocated proportionally to each interval's contribution.

This ensures that a balance change on the 28th of the month only affects 3 days of the calculation, not the entire month.

Step by step

Define the period: from the day after the previous interest charge through the date of the current charge
Identify balance changes: every event that changed debt composition during the period creates a new interval with constant balances
Weight each interval: for each interval, multiply the eligible balance by the number of days, and do the same for the ineligible balance
Sum the weights: add up weighted eligible across all intervals, and weighted ineligible across all intervals
Calculate the eligible share: weighted eligible ÷ (weighted eligible + weighted ineligible)
Allocate: eligible share × total interest charge = deductible interest

Worked example

January billing period, $300 total interest charged. Three events changed the composition during the month:

Jan 1–14 (14 days): $20,000 deductible, $5,000 non-deductible ($25,000 total)

Jan 15–21 (7 days): After a $5,000 personal draw — $20,000 deductible, $10,000 non-deductible ($30,000 total)

Jan 22–31 (10 days): After investing $8,000 — $28,000 deductible, $10,000 non-deductible ($38,000 total)

Weighted eligible balances: (14 × 20,000) + (7 × 20,000) + (10 × 28,000) = 700,000

Weighted ineligible balances: (14 × 5,000) + (7 × 10,000) + (10 × 10,000) = 240,000

Eligible share: 700,000 / (700,000 + 240,000) = 74.5%

Of the $300 interest charge: $223.40 is deductible, $76.60 is not.

Why time-weighting matters

Without time-weighting, a personal draw on January 30 would affect the entire month's calculation — even though the composition was clean for 29 of 31 days. The average daily balance method ensures that each day's actual balance contributes proportionally to the result.

What creates new intervals

Any event that changes the deductible/non-deductible balance composition creates a new interval:

Borrowing (new debt increases non-deductible principal)
Investing (non-deductible principal becomes deductible invested principal)
Selling (deductible invested principal returns to non-deductible)
Distributions with RoC (shifts invested principal to non-deductible)
Credit payments (reduce both deductible and non-deductible proportionally)
Interest capitalization (converts outstanding interest to principal)

If no events occur during the period, there's only one interval and the calculation simplifies to a straight percentage split.

CRA basis

Income Tax Folio S3-F6-C1 doesn't prescribe a specific formula for splitting interest on mixed-use debt. The average daily balance method is a standard financial technique that accurately reflects the actual balance composition throughout each period — the same approach lenders themselves use when calculating interest charges.