Working Through Tax Season
1. Is Your Loan Interest Actually Deductible?
In most cases, no — personal loan interest isn't tax-deductible in Canada unless the funds went toward an investment or business purpose. If you used the loan to invest in something income-producing, the interest may qualify under CRA rules. Worth a conversation with a tax professional for your specific case.
Keep records of exactly how you used the loan proceeds — the CRA may ask for proof if you're claiming a deduction.
2. Put Your Refund to Work
The average Canadian refund runs around $2,000. Send it straight to your highest-interest debt — even a partial lump sum meaningfully cuts the total interest you'll pay.
A $2,000 lump payment on a $5,000 loan at 25% APR can save over $500 in interest.
3. If You Owe the CRA More Than You Can Pay
A CRA payment arrangement (interest at the prescribed rate), a personal loan (potentially cheaper than CRA interest), or an RRSP refund applied to the bill are all options. The CRA compounds interest daily on unpaid balances, so moving fast matters.
The CRA's prescribed rate changes quarterly — compare it against personal loan rates before deciding how to handle the bill.
4. The RRSP Contribution Play
An RRSP contribution lowers your taxable income and can generate a refund — the deadline is 60 days after year-end. Some people use a short-term loan to make the contribution, then repay it once the refund lands.
This only works if you repay quickly and the tax savings genuinely exceed what the loan costs in interest.
A Few More Things to Keep in Mind
- Loan interest is only deductible if the funds went to investment or business use
- Send tax refunds to your highest-interest debt first
- Compare CRA's prescribed rate to personal loan rates before borrowing to cover a bill
- Keep records of how every borrowed dollar was actually used