--- title: "Is Business Loan Interest Deductible in Canada? The Use Test" url: https://www.everstonecpa.com/blog/interest-deductibility-canada-business description: "Interest deductibility for a Canadian business: it depends on what the borrowed money is used for now, not on the security. Check how yours is used." type: guide updated: 2026-10-08 summary: "Interest is generally deductible where borrowed money is used for the purpose of earning income from a business or property. What matters is the current use of the money, not the asset securing the loan. Refinancing, shareholder loans and repayments can all change that use, so the tracing needs care." faq_count: 6 publisher: EverStone CPA Inc., a Chartered Professional Accountant firm registered with CPA British Columbia and CPA Alberta service_area: British Columbia, Alberta, Ontario and Manitoba language: en-CA contact: info@everstonecpa.com · https://www.everstonecpa.com/book-online --- [Home](https://www.everstonecpa.com/) [Blog](https://www.everstonecpa.com/blog) Interest Deductibility for Canadian Business Owners Tax # Interest deductibility: *what the borrowed money is used for* By EverStone CPA · Updated September 2026 · 8 min read **Quick answer:** Interest is generally deductible where borrowed money is used for the purpose of earning income from a business or property. What matters is the current use of the money, not the asset securing the loan. Refinancing, shareholder loans and repayments can all change that use, so the tracing needs care. Current use decides it — not the asset securing the loan. **Rather have a CPA handle this?** A CPA at EverStone replies with a straight answer and a fixed fee for your situation. [Get My Fixed Quote →](https://www.everstonecpa.com/book-online?service=monthly#enquiry-form) ## Key takeaways - Interest is deductible where borrowed money is used for the purpose of earning income — the direct use test. - The CRA looks at the current use of the borrowed money, not the first use and not the security given. - Interest on money borrowed for personal purposes, or to pay overdue income taxes, is not deductible. - Fees to reduce a rate or prepay a loan are treated as prepaid interest and spread over the remaining original term. - Commingling borrowed and personal money in one account makes tracing difficult and weakens the claim. The same interest can be deductible for one owner and not another on identical loan terms. What decides it is not the lender, rate or security, but what the borrowed money was used for. ## Interest deductibility, the rule in one sentence The CRA’s guidance on [business expenses](https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/sole-proprietorships-partnerships/business-expenses.html) is plain: you can deduct interest on money borrowed for business purposes or to acquire business property, but not on money borrowed for personal purposes or to pay overdue income taxes. The detail is in [Income Tax Folio S3-F6-C1](https://www.canada.ca/en/revenue-agency/services/tax/technical-information/income-tax/income-tax-folios-index/series-3-property-investments-savings-plans/series-3-property-investments-savings-plan-folio-6-interest/income-tax-folio-s3-f6-c1-interest-deductibility.html). Among other requirements, the interest must be paid in the year or payable for it under a legal obligation, and be reasonable. The use of borrowed money must be established, and its purpose must be to earn income. **Borrowing for the business or an investment?** We trace each loan to its use so the interest stays deductible, and claim it on the T2 or T2125, at a fee quoted in writing. See [our tax services](https://www.everstonecpa.com/tax-services), or [get a quote](https://www.everstonecpa.com/book-online?service=monthly#enquiry-form). [Get My Fixed Quote](https://www.everstonecpa.com/book-online?service=monthly#enquiry-form) ## The direct use test “Establish the use” is the whole exercise. The folio explains that the term *use* refers to the **current** use of the borrowed money, and in certain situations may include indirect use. Two consequences follow, and they surprise people: - **The security does not decide it.** A loan secured by your home that funds business equipment is not automatically non-deductible, and a loan secured by business assets that funds a personal purchase is not deductible because of the security. - **First use is not final.** If borrowed money is used to buy an income-earning property and that property is later sold with the proceeds put into another income-earning property, the current use of the borrowing follows the new property. **Tracing is the practical problem.** Where borrowed money is commingled with other cash in one account, the folio notes tracing becomes problematic because cash is fungible. Borrowing into a dedicated account, and spending from it only on the intended use, is what keeps a claim supportable. ## Refinancing and repayment Refinancing does not reset the analysis; the current use of the money still governs. The reverse error is common: a partial repayment generally reduces the borrowing, and if part of it was non-deductible, the order in which the balance is treated as repaid matters. The folio also describes the **disappearing source rules**, which can preserve deductibility when property bought with borrowed money is disposed of and the money can no longer be traced to an income-earning use. Several specific conditions apply. The CRA treats a fee paid to lower a loan rate, or a penalty or bonus for repaying early, as prepaid interest deducted over the remaining original term. ## Corporations, shareholders and the exceptions For incorporated owners, two areas come up repeatedly. The first is borrowing by a corporation to redeem shares, return capital or pay dividends — the folio deals with this as an exception to the direct use test rather than as ordinary business borrowing, and the treatment depends on the circumstances. The second is loans between the company and its owner. The folio says interest on money borrowed to make interest-free loans to employees, as employees, would generally be deductible, but not where the loans go to individuals as *shareholders*. If money moves between you and your company, the mechanics of [shareholder loans](https://www.everstonecpa.com/blog/shareholder-loans-canada-taking-money-out-of-corporation) matter as much as the interest. ## Other limits worth knowing The CRA also restricts interest on money borrowed for a passenger vehicle or zero-emission passenger vehicle, and on vacant land, where it is generally deductible only up to net income from the land. Capitalizing interest into property cost interacts with [capital cost allowance](https://www.everstonecpa.com/blog/capital-cost-allowance-cca-classes-canada), and a [holding company](https://www.everstonecpa.com/blog/holding-company-canada-when-it-makes-sense) adds a layer, since the borrower and income earner may differ. ## The bottom line Because deductibility follows the current use of borrowed money, how you borrow matters as much as what for. Keep business and personal borrowing separate, avoid commingling in one account, and document the purpose at the time. Refinancings, corporate distributions and owner-company loans are technical enough to review with a CPA on your facts before the transaction, not after claiming the interest. Sources - [Canada Revenue Agency — Income Tax Folio S3-F6-C1, Interest Deductibility](https://www.canada.ca/en/revenue-agency/services/tax/technical-information/income-tax/income-tax-folios-index/series-3-property-investments-savings-plans/series-3-property-investments-savings-plan-folio-6-interest/income-tax-folio-s3-f6-c1-interest-deductibility.html) - [Canada Revenue Agency — Business expenses](https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/sole-proprietorships-partnerships/business-expenses.html) - [Canada Revenue Agency — Guide T4002, Self-employed Business, Professional, Commission, Farming, and Fishing Income](https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4002.html) This article is general information, current as of July 2026, not tax, legal or accounting advice, and creates no client relationship. Rules change and situations differ, so [speak with a CPA](https://www.everstonecpa.com/book-online?service=monthly#enquiry-form) before acting. About this article **EverStone CPA** Prepared and reviewed by a CPA at EverStone CPA, serving businesses in BC, Alberta, Ontario and Manitoba. [About the firm →](https://www.everstonecpa.com/about) · [Send an enquiry →](https://www.everstonecpa.com/book-online?service=monthly#enquiry-form) Whether interest stays deductible usually depends on how the borrowing is traced to its use, which is decided when the loan is drawn; [tax planning before you borrow](https://www.everstonecpa.com/tax-planning-services-canada) keeps it that way. ### Keep reading [Shareholder loans explained →](https://www.everstonecpa.com/blog/shareholder-loans-canada-taking-money-out-of-corporation) [When a holding company makes sense →](https://www.everstonecpa.com/blog/holding-company-canada-when-it-makes-sense) [Capital cost allowance classes →](https://www.everstonecpa.com/blog/capital-cost-allowance-cca-classes-canada) FAQ ## Frequently asked questions **When is business interest deductible in Canada?** Generally when borrowed money is used to earn income from a business or property. The amount must also be paid in the year or payable for it under a legal obligation, and be reasonable. **Does it matter what asset secured the loan?** No. Deductibility turns on how the money was used, not on the security. A home-secured loan that funded business assets is judged on that use; a business-secured loan that funded a personal purchase is not deductible. **What is the direct use test?** It requires you to establish the use of borrowed money and show that use is to earn income. The CRA’s folio says use means current use, and in some situations indirect use. **What happens to my interest deduction when I refinance?** Refinancing does not reset the analysis. The current use of the borrowed money continues to govern deductibility. Where borrowed money ceases to be used for an income-earning purpose, the disappearing source rules can preserve deductibility if several specific conditions are met. **Can I deduct interest on money borrowed to lend to my corporation?** It depends. The CRA’s folio says interest on money borrowed for interest-free loans to shareholders, as shareholders, would generally not qualify, while loans to employees as employees may be treated differently. **What if my borrowed money is mixed with personal money?** Tracing becomes difficult. The CRA’s folio notes that where borrowed money is commingled with other cash in one account, tracing is problematic because cash is fungible. Borrowing into a dedicated account and spending only on the intended use keeps the claim supportable. ## Borrowing for your business this year? Send us what you borrowed and what the money paid for. A CPA replies by email within one business day with whether the interest is deductible and a fixed fee. [Get My Fixed Quote](https://www.everstonecpa.com/book-online?service=monthly#enquiry-form)[Book a Paid Advice Call](https://www.everstonecpa.com/advice-call) ## Have a question about this? Ask it free through [the quick-question form](https://www.everstonecpa.com/quick-question) and a CPA replies by email within one business day. For something that needs a proper look, a one-off **Advice Call** is a paid 45-minute session with a Chartered Professional Accountant: $225 plus GST, booked by email with a secure payment link. It is credited against your first invoice if you become a client within 60 days. Looking for an accountant to take this on rather than an answer? [Send an enquiry](https://www.everstonecpa.com/book-online?service=monthly#enquiry-form). [Ask a Free Question](https://www.everstonecpa.com/quick-question) [Book a Paid Advice Call](https://www.everstonecpa.com/advice-call) Email info@everstonecpa.com ★★★★★ “…have been completing my bookkeeping, taxes and financials for the last 2 years and they have been amazing. Thank you!” R. 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