Borrowing for the business has a cost, and the interest part of that cost is deductible. On Form T2125, it goes on line 8710, Interest and bank charges.
The word doing the work is interest. A loan payment is two things at once, and only one of them belongs here.
What belongs here
- interest on money you borrowed for business purposes, or to acquire property for business purposes
- the fee you pay to reduce the interest rate on your loan, and any penalty or bonus a financial institution charges you to pay the loan off before it is due
- fees you incur when you get a loan to buy or improve business property: application, appraisal, processing and insurance fees, loan guarantee fees, loan brokerage and finder's fees, and legal fees related to financing
- standby charges, guarantee fees, service fees, and similar fees, when they relate only to the year you incur them
What does not belong here
The principal. You can deduct the interest, but not the principal part of loan or mortgage payments. What you need is the statement that separates the two, not the payments leaving your account.
Interest on a personal loan, or on overdue income taxes. Do not deduct interest on money you borrowed for personal purposes or to pay overdue income taxes. It isn't a business expense, so it stays off the form.
Interest on a loan to buy a passenger vehicle. There is a limit on what you can deduct for a passenger vehicle or a zero-emission passenger vehicle, and the deduction is worked out with the rest of your vehicle costs on line 9281.
Interest on a workspace in your home. That part has to be claimed as business-use-of-home expenses instead.
Fees that are spread over time
Some of what a lender charges you is not deducted in the year you pay it.
A rate-reduction fee, penalty, or bonus is treated as prepaid interest and deducted over the remaining original term of the loan. If your loan runs five years and you pay a fee in the third year to reduce the rate, it is spread over what is left of the term.
Loan fees — application, appraisal, processing, insurance, guarantee, brokerage, finder's, and financing legal fees — are deducted over a period of five years, whatever the term of the loan: a fifth in the current tax year and a fifth in each of the next four years. That yearly limit is reduced proportionally for a fiscal period shorter than a full year. If you repay the loan early, you can deduct the remaining financing fees then.
Both of these need the loan's original term, which is on the loan agreement rather than on any statement. Keep the agreement with the year's records so the spread can be worked out when you file.
Two more situations the CRA's page covers
Vacant land. Usually you can only deduct interest up to the income the land produces after all your other expenses. Interest above that cannot create or increase a loss, and you cannot deduct it from other sources of income.
Capitalizing interest instead. You can choose to add the interest to the cost of depreciable property you borrowed to buy, rather than deducting it as an expense. That is a choice made on the return, not something the statement decides.
Where bank charges go. The CRA names them in two places: in this line's own title, and on the line 8871 page, which says management and administration fees include bank charges, including those for processing payments. The guide doesn't say which line to prefer, so either destination is defensible.
What to keep
Keep a record of all your income and expenses, with the documents behind them. For this line, the documents that matter are:
- the annual loan or mortgage statement, which splits interest from principal
- the loan agreement, which gives the original term
- the paperwork for a rate-reduction fee, a prepayment penalty, or any of the financing fees above
- bank statements showing account charges
Don't send them in with your return. Keep them in case the Canada Revenue Agency (CRA) asks to see them. Business records follow the same six-year retention rule as your personal documents.
Official CRA sources
Source: Canada Revenue Agency (canada.ca). Not tax advice.