Loan interest is still deductible on your tax return, even if your investment or business goes belly up
There is a little known rule in Canadian Law that allows one to deduct loan interest even if the entity that received the loan money goes bankrupt or doesn’t exist anymore. This could be either an investment or a business. This rule has been part of the Income Tax Act since 1994. The rule essentially allows one to continue to write off interest payments well after the underlying business has ceased to exist. In a recent case, a judge referred to the loss of source rule, which stated that the deductible interest expenses from outstanding borrowed money when a business ceases operating “shall be deemed to be used by the taxpayer at any subsequent time for the purpose of earning income from the business.”
“Little-known ‘loss of source’ rule permits you to keep writing off previously deductible interest expenses after the source is gone.”