How Investment Loans Work & How They Help Reduce Taxes (Without the Marketing Hype)
If you’ve been on YouTube recently, you may have seen ads promoting “Investment Loans”—often presented as an easy way to grow your wealth. The concept itself is legitimate, but advertisements rarely explain how this strategy actually works, when it’s appropriate, and what risks are involved.
This article gives a clear, practical, and non-promotional overview of Investment Loans in Canada and how they can help reduce taxes through interest deductibility.
What Is an Investment Loan?
An Investment Loan is a type of borrowing used specifically to invest in income-producing assets such as:
- stocks
- ETFs
- mutual funds
- income trusts
- non-registered investment portfolios
The key feature is leverage—using borrowed money with the goal of enhancing long-term investment returns.
In Canada, Investment Loans appeal especially to:
- long-term investors (minimum 7–10 years)
- individuals with non-registered investment accounts
- investors comfortable with risk
- high-income earners looking for tax deductions
Why Use an Investment Loan?
1. Increase your investment capital
Instead of saving slowly over time, you can invest a large amount immediately and potentially accelerate growth.
2. Enhance long-term returns
If your investment return exceeds your loan interest rate over time, leverage boosts your net gain.
3. Maintain liquidity
You can keep your cash free for other purposes (buying a home, business, emergency fund) while still investing.
4. Potential tax deduction
This is the primary attraction for many Canadians:
➡ Interest paid on money borrowed to invest in income-producing assets is tax deductible.
This can significantly reduce taxable income for high-income earners.
What Types of Investment Loans Exist?
✔ 1. 100% Financing (No Down Payment)
The lender provides the full investment amount; you contribute nothing upfront.
Higher risk and stricter qualification requirements.
✔ 2. 1:1 Loan (Matching Investment)
You invest $1 of your own money, and the lender matches with a $1 loan.
Lower risk for the lender; often comes with better terms.
✔ 3. Interest-Only Loans
You pay only the interest each month; the principal is repaid at maturity or gradually.
This option maximizes both cash flow and tax deductions.
✔ 4. Principal + Interest Loans
More conservative option with regular amortization.
Banks in Canada that commonly offer Investment Loans include:
- B2B Bank
- Manulife Bank
- iA Financial
- National Bank (select programs)
- Desjardins
Each institution has its own acceptable investment list, borrowing limits, and rates.
How Investment Loans Reduce Taxes in Canada
This is the most important part—and the part ads usually don’t explain well.
✔ The CRA allows interest deductibility when borrowed money is used to earn investment income.
Under CRA Income Tax Act, Section 20(1)(c):
Interest on money borrowed for the purpose of earning business or investment income is tax deductible.
This deduction applies when:
- The borrowed money is invested in assets that can generate income (dividends, interest).
- You are using the funds in a non-registered account (NOT RRSP/TFSA).
- You maintain proper documentation showing the loan was used for investment purposes.
⚠ Not deductible if:
- You invest in a TFSA (tax-free → not eligible)
- You invest in an RRSP or RESP (tax-deferred → not eligible)
- The investment produces only capital gains with no income potential
Example of Tax Savings
Suppose:
- You borrow $100,000 at 7% interest
- Annual interest paid = $7,000
- You are in a 40% tax bracket
Tax deduction:
$7,000 × 40% = $2,800 tax savings each year
Your net interest cost becomes:
$7,000 – $2,800 = $4,200
If your investment returns 6–8% annually over 10+ years, the compounding effect + tax deduction can create meaningful long-term gains.
When Is an Investment Loan Suitable?
✔ Good for:
- High-income earners seeking tax deductions
- Long-term investors (minimum 7–10 years)
- People already maxing out RRSP/TFSA
- Individuals with stable income and risk tolerance
✘ Not good for:
- Investors needing short-term liquidity
- Aggressive stock pickers with unstable returns
- Anyone uncomfortable with market downturns
- Families without emergency savings
- Anyone nearing retirement with high volatility exposure
Because leverage magnifies both gains and losses, suitability is critical.
Risks You Must Understand
Investment Loans can be powerful, but they come with real risk.
1. Market downturn risk
If the market drops 20%, your investment might fall in value but the loan remains the same.
2. Rising interest rates
Interest-only payments can become much more expensive.
3. Forced liquidation risk
Some lenders require minimum portfolio value and can sell assets to protect the loan.
4. Long-term commitment
This strategy typically requires 10+ years to smooth out volatility.
5. Psychological risk
Watching a leveraged portfolio decline during a recession can be stressful.
How to Use Investment Loans Properly in Canada
✔ 1. Only invest in diversified, lower-volatility portfolios
Most lenders require approved mutual funds or portfolios purposely built for leveraging.
✔ 2. Always keep a cash buffer
Maintain 6–12 months of interest payments in cash or GIC.
✔ 3. Work with a licensed financial advisor
They ensure the loan structure meets CRA requirements and matches your risk tolerance.
✔ 4. Track interest payments carefully
Keep full documentation for CRA audit purposes.
✔ 5. Review annually
Adjust for market changes, interest rates, and personal financial goals.
Conclusion: Is an Investment Loan Right for You?
Investment Loans can be:
- a powerful tax-reduction tool
- a long-term wealth-building strategy
- a way to magnify returns through leverage
But they are not a one-size-fits-all solution and definitely not as simple as advertisements suggest.
If used correctly—with proper diversification, tax planning, and long-term discipline—an Investment Loan can meaningfully enhance your financial growth while reducing your annual tax burden in Canada.