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Can I reduce my income tax by deducting interest paid on money borrowed to buy investments?

Yes, as a general rule. The interest expense is deductible as long as you had a legal obligation to pay the interest and the purpose for borrowing the funds was to earn income. The income produced from those investments bought with the borrowed money is not tax exempt.

If you borrowed money to buy a company's stock, to buy mutual funds or to invest in a business, the interest is generally deductible.

In the case of debt instruments, like bonds, interest payments are deductible only up to the rate yielded by the security you bought. So if you borrowed funds at seven per cent to buy a bond that pays five per cent interest, you can only deduct five per cent as interest costs. Interest costs incurred to buy preferred shares are deductible at 1.25 times the rate of the preferred dividend. So if the preferred dividend was four per cent, you could deduct an interest expense of as much as four times 1.25 which equals five per cent.

Interest paid on money that you borrow to buy common shares is generally deductible whether or not any dividends are actually received, if the common shares you bought with those funds have the potential to produce investment income some time in the future. Interest isn't deductible if the loan was for some purpose other than to earn income subject to tax.

Interest on a loan used to contribute to your Registered Retirement Savings Plan isn't deductible as an interest expense.