Investment interest at tax time

December 28, 2005 2:37 PM

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.

posted by TheFeatheredMullet to Work & Money (6 answers total)

Best answer: 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).
posted by raedyn at 2:46 PM on December 28, 2005

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.
posted by duck at 2:47 PM on December 28, 2005

Investment loan interest in Canada (currently) is a tax deduction, not a tax credit.
posted by raedyn at 2:50 PM on December 28, 2005

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.
posted by rolypolyman at 2:56 PM on December 28, 2005

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.
posted by raedyn at 3:09 PM on December 28, 2005

Response by poster: 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 : )
posted by TheFeatheredMullet at 7:49 PM on December 28, 2005