Are you curious about whether loans are taxable in Canada? If so, you’ll be happy to know that they’re generally not. However, while loans themselves aren’t taxable, the interest paid on investment loans may be taxable, which could affect your overall tax situation.
Let’s go into more detail about how different types of investment vehicles may affect how borrowed funds used to make such investments may be treated for tax purposes.
Are Loans Taxable In Canada?
No, loans themselves are not considered taxable income in Canada. That means you won’t have to report your loan as income on your tax return.
However, the interest you pay on the loan and certain income generated from the loan may be subject to taxation.
Learn more: Borrowing Money To Invest: Is It Worth It?
Income Earned From Investing Your Loan: Tax Implications
Loans can be a lucrative way to generate income when used for investing, but there are some important tax implications that you should be aware of. Income earned in the form of interest, dividends, or capital gains may have tax implications depending on the type of investment account used.
How Loans May Be Taxed When Used To Invest In A Non-Registered Account
Common types of non-registered accounts include cash and margin accounts. With these types of accounts, you can invest in stocks, bonds, mutual funds, exchange-traded funds (ETFs), and other investment products.
If you borrow money to invest in a non-registered account, the loan principal is not taxable. However, all income earned is taxable. This includes interest, dividends, and capital gains.
Interest Income
Interest income from investments like stocks, bonds, or savings accounts is fully taxable as income at your marginal tax rate. However, if you used the loan to buy income-generating investments, you may be able to deduct the loan interest against this income. This would effectively reduce the amount of tax payable.
Dividends
Eligible dividends from Canadian corporations are taxable, but they are taxed at a lower rate due to the dividend tax credit. This credit reduces the tax rate on dividend income.
Learn more: What Is The Dividend Tax Rate In Canada?
Capital Gains
Capital gains refer to income earned when you sell an investment for more than what you paid for it. If you borrowed money to buy an investment that increased in value, the capital gain on the sale of that investment will be taxed.
Currently, in Canada, only 50% of capital gains are taxable. So, only half of the income you generate from your investment is taxed. Keep in mind that the interest paid on the loan may be deducted from the capital gain, which can potentially reduce the taxes owed.
Learn more: How to Avoid The Capital Gains Tax
How Loans May Be Taxed When Used To Invest In A Registered Account
Common types of registered accounts in Canada include:
- Registered Retirement Savings Plans (RRSPs)
- Tax-Free Savings Accounts (TFSAs)
- First Home Savings Account (FHSAs)
Investing in accounts like these offers significant tax perks, including a tax deferral or exemption on income earned within them.
However, there are specific rules and tax considerations that come with using borrowed money to invest in a registered account.
RRSPs
An RRSP is a registered tax-advantaged account designed to help individuals save for retirement. If you borrow money to contribute to an RRSP, there are two benefits:
- The principal amount borrowed is not considered taxable income. In other words, you won’t have to pay income taxes on the borrowed funds used to make an RRSP contribution.
- The loan used to contribute to your RRSP is tax-deductible (which can reduce your taxable income).
However, the interest paid on the loan used to invest in this registered account is not tax-deductible. Your RRSP contributions are made with pre-tax dollars, so any interest paid on a loan to make these contributions can’t be deducted when you file your taxes.
Further, withdrawals from an RRSP are taxed at your marginal tax rate. Once you start drawing from your RRSP, any amount withdrawn including the loan portion will be subject to tax.
Learn more: RRSP Loan: The Good And The Bad
TFSAs
A TFSA is an investment account in Canada in which contributions, income, and withdrawals are tax-free. If you borrow money to invest in a TFSA, both the loan and interest earned are not taxable.
Note, that the interest paid on the loan is not tax-deductible.
FHSAs
An FHSA is a registered plan that helps first-time homebuyers save for their first home tax-free. If you borrow money to invest in an FHSA, you’ll benefit from tax-free growth and lower taxes as any money contributed is tax-deductible. As such, if you get a loan and invest in a FHSA, you’ll get two major benefits:
- The loan is not considered taxable income and can be used to reduce your overall income like an RRSP contribution.
- Any interest earned on the loan while invested is free from tax.
That said, the interest paid on the loan is not tax-deductible.
At What Rate Can A Loan Be Taxed In Canada?
Depending on the account you choose to invest in, your loan can be taxed in various ways.
Non-Registered Accounts
| Dividend Income | – Eligible dividend gross-up tax rate: 38% – Non-eligible dividend gross-up tax rate: 15% |
| Capital Gains | – 50% of gains are taxable (as of January 1, 2026, this will change to 50% of gains up to $250,000 will be taxable, and 66.7% of amounts over $250,000 will be taxable) |
| Interest Income | 100% taxable at your marginal tax rate |
Dividend Income
Dividends received from investments in a non-registered account are taxable. However, a dividend tax credit may be applied to eligible Canadian dividends, which can reduce the tax amount owed on dividend income.
Capital Gains
Currently, only 50% of capital gains in Canada is taxable. In other words, only half of your gains is included in your taxable income and taxed at your marginal tax rate. For instance, if you earn a gain of $5,000 on an asset, you’ll only include $2,500 (50% of $5,000) in your taxable income.
However, as noted earlier, this is set to change as of January 1, 2026. At that time, the inclusion rate will change to 50% of gains up to $250,000, and 66.7% of gains for amounts over $250,000.
Interest Income
All interest income earned on investments in a non-registered account is taxable at your marginal tax rate.
Registered Accounts
| Account Type | Dividend Income | Capital Gains | Interest Income |
| TFSA | Tax-free | Tax-free | Tax-free |
| RRSP | Tax-deferred (taxed on withdrawal at marginal tax rate) | Tax-deferred (taxed on withdrawal at marginal tax rate) | Tax-deferred (taxed on withdrawal at marginal tax rate) |
| FHSA | Tax-free | Tax-free | Tax-free |
Dividend Income
Dividend income earned within a TFSA, RRSP, or FHSA is not taxed. With a TFSA, dividend income withdrawn is not taxed, either. However, dividend income earned within an RRSP or FHSA is taxed when withdrawn as regular income.
Capital Gains
Capital gains earned within a TFSA are not taxed, nor are they taxed when withdrawn. Capital gains earned within an RRSP or FHSA are not taxed either while they’re in these accounts. However, you’ll need to pay taxes on withdrawals from an RRSP or FHSA, which are taxed as regular income.
Interest Income
Interest income earned within a TFSA is not taxed. It’s also tax-free when you withdraw it. For RRSPs and FHSAs, income interest earned is also not taxed. However, withdrawals from an RRSP or FHSA are taxed as regular income.
When Is Interest On Loans Tax Deductible?
Whether you can deduct interest on your loan depends on the type of loan and whether the money borrowed is used to earn an income.
- Loans For Personal Use: Interest payments on personal loans used to cover personal expenses are not tax-deductible. So, if you take out a personal loan to pay for car repairs or medical expenses, for example, the interest you pay is not tax-deductible.
- Loans To Buy Income-Generating Investments: If you take a loan to buy an investment that earns income, such as dividends or interest, the interest on that loan is typically tax-deductible. However, you can only deduct the interest on the amount of income earned on the investment. Note, in order for interest to be deductible, interest must be paid for the purpose of generating an income. Further, the lender must have the right to require payment of principal plus interest on a loan.
Bottom Line
Loans in Canada are not considered taxable income, since they have to be paid back and are not generally used to earn a profit. However, if you borrow money for the specific purpose of investing to generate an income through interest, dividends, or capital gains, there may be tax implications involved. Be sure to consult with a tax specialist to determine how your loans and income earned through investments are to be handled come tax time.
