Can I Claim Interest and Financing Costs as a Business Expense in Canada?
Yes, interest on money borrowed to earn business income is fully deductible under Section 20(1)(c) of the Income Tax Act. Bank charges, loan origination fees, and financing costs are also deductible. The interest must be paid or payable in the year. Thin-capitalisation rules (1.5:1 debt-to-equity) may restrict interest deductions for non-arm's length foreign lenders.
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What Canada Revenue Agency (CRA) says
Section 20(1)(c) of the Income Tax Act allows deduction of interest on borrowed money used to earn income from business or property. Principal repayments are not deductible. CRA's guide says loan financing fees such as application, appraisal and legal fees are generally deducted at 20% per year over five years. Prepayment penalties and rate-reduction fees are treated as prepaid interest over the remaining loan term. Interest on money borrowed for a passenger vehicle is limited to CAD 350 a month for 2026. Section 18(4) (thin-cap rules) limits interest deductions to non-resident non-arm's length lenders where the debt-to-equity ratio exceeds 1.5:1.
When you can claim
- Interest on a business line of credit or business loan used for operational purposes
- Interest on funds borrowed to purchase business equipment or assets
- Bank service charges and account fees on business accounts
- Financing fees (including standby fees and loan origination costs) amortised over the loan term
- Interest on amounts borrowed to acquire shares in an active business
When you cannot claim
- Principal repayments on loans (capital, not deductible)
- Interest on personal loans or borrowings not used for business
- Interest disallowed under thin-cap rules for excessive non-arm's length non-resident debt
- Interest on money borrowed to earn exempt income
Good to know
Pro tip: Maintain a clear paper trail linking borrowed funds to their business purpose. If a loan is used for mixed personal and business purposes, only the business proportion is deductible. Keeping business and personal finances completely separate makes the interest deduction simpler to support.
Important: Interest on vacant land is limited to income from that land. Vehicle interest above the monthly limit is not deductible, so separate it from other business interest in the books.
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