Comments on: Investment interest at tax time

Question: Investment interest at tax time

TheFeatheredMullet — Wed, 28 Dec 2005 14:37:23 -0800

Canadian Investment Loan Income Tax question. I get so sick of people telling me "You can write off the interest...." and then when I ask them what that means exactly... Silence.

I know that if I take out a loan to invest (Say in a rental property) that the interest is tax deductable. What exactly does that mean? I mean if my marginal tax rate is about 30%, for every $100 that I pay in Interest Charges, what do I get back $30 or $100 or some other amount? Is the interest amount (100) deducted from my gross income instead? Is there an easy formula for figuring this out? I am so confused. I hate maths almost as much as tax.

By: raedyn

raedyn — Wed, 28 Dec 2005 14:46:31 -0800

The interest you pay is deducted from your gross income, lowering your net taxable income. So if your marginal tax rate is 30%, for every $100 of interest you pay, your taxes payable are $30 less than they would have been if you spent that money on something else (like say.. pancakes).

By: duck

duck — Wed, 28 Dec 2005 14:47:22 -0800

If it's a deduction, it's deducted from your income, so that's money you don't have to pay tax on. So it's like your income was $100 less.

If it's a tax credit, that's different. It means the government acts like you paid that money towards your taxes. So it's taken directly from the amount you're supposed to pay in taxes. Note that tax credits aren't 100%, you get some percentage of the total (I think it's either 18 0r 21 for charitable donations, for example) credited as though you had paid it in taxes. So if you donated $100 towards charity, the taxes you owed would be $18 or $31 less.

By: raedyn

raedyn — Wed, 28 Dec 2005 14:50:59 -0800

Investment loan interest in Canada (currently) is a tax deduction, not a tax credit.

By: rolypolyman

rolypolyman — Wed, 28 Dec 2005 14:56:37 -0800

This may be tangential to your question (and it's U.S.), but I asked about that uber-cool catch-all phrase "writeoff" here on MoFi a year ago.

By: raedyn

raedyn — Wed, 28 Dec 2005 15:09:40 -0800

A qualified investment advisor (or tax accountant) should be able to walk you through these sorts of questions and to make it easy to understand. If they aren't taking the time to answer your questions, take your business somewhere else.

By: TheFeatheredMullet

TheFeatheredMullet — Wed, 28 Dec 2005 19:49:46 -0800

Thanks raedyn. Just what I needed to know.
Honorable mention to duck for teaching me something new about Tax Credits as well.
I have filled my quota for learning new things for a couple of days now : )