Financing expenses and the CRA: what founders can deduct

The general rule on interest

Under the Income Tax Act, interest on money borrowed for the purpose of earning business income is generally deductible — a term loan for equipment, a line of credit financing working capital, a credit card used strictly for business. The deduction reduces net income for tax purposes, which softens the true cost of debt financing: part of the interest comes back as a reduced tax bill.

Fees: mostly deductible, with exceptions

Most fees to arrange or maintain business financing are deductible when incurred — loan arrangement fees, standby fees on credit lines, guarantee fees. The notable exceptions are costs of raising equity rather than debt: commissions and finder's fees paid to issue shares are generally not deductible, and neither are penalties or fines. Where a fee covers several years of a facility's life, treatment can vary, so record the invoice and what it was for.

• Deductible: interest on business borrowing, standby fees, most loan arrangement fees
• Generally not deductible: share issuance commissions, penalties, interest on borrowing for personal or portfolio purposes
• GST/HST charged on fees is claimed separately as an input tax credit — it is not part of the deductible fee

Accounting treatment is not tax treatment

Your financial statements may capitalize and amortize financing costs under ASPE or IFRS, while the tax treatment deducts them on its own schedule — the two do not have to match. What matters at tax time is the CRA's rules and your documentation; what matters at diligence time is clean books. Keep both, starting with a cash flow statement that separates financing activities.

Do not double-claim with SR&ED

Financing expenses are not eligible SR&ED expenditures, and overhead — including financing costs — is covered by the proxy. Claiming interest as both a business deduction and inside a SR&ED claim is a common review trigger. Deduct the interest; let the proxy cover the overhead; never both.

Keep the paper trail

If the CRA asks, you will need to show what was borrowed, for what business purpose and what it cost. That means keeping loan agreements, fee invoices and a bookkeeping record that connects borrowings to business use. When in doubt, a chartered professional accountant who works with growing companies will repay the fee many times over.