Can You Deduct Business Credit Card and Loan Interest in Canada?

Can You Deduct Business Credit Card and Loan Interest in Canada?

A recurring question from Canadian freelancers is whether interest charged on a credit card, line of credit, or loan can go on Form T2125. Interest may be deductible when the borrowed money was used to earn business income or acquire business property. The card's name matters less than what the borrowed funds actually paid for.

That makes this an easy deduction to miss and an easy one to overstate. A personal card can contain legitimate business interest, while a card marketed as "business" can still contain non-deductible personal debt.

Follow the Borrowed Money

The CRA expects a direct link between the borrowed funds and an eligible business use. Common examples include interest on money borrowed to pay for:

Suppose you charge a $1,200 annual software plan used entirely for freelance work and carry that balance. The interest attributable to that purchase may be deductible. If the same card also carries groceries and vacation costs, the interest tied to those personal charges is not.

Interest on money borrowed for personal purposes or to pay overdue income taxes is generally not deductible as a T2125 expense.

Mixed Credit Cards Need a Defensible Allocation

Using one card for everything does not automatically disqualify the business portion, but it makes the calculation harder. The CRA says adequate records must support how interest on a mixed card was divided between business and personal use.

Keep:

A simple percentage based only on the number of transactions can be misleading because charges have different values and payments change the balance. A dedicated business card or credit line is cleaner: the statements create a direct trail, and the interest calculation is easier to defend.

Do Not Confuse Interest With the Purchase

The borrowed principal is not itself an interest deduction. Record the underlying purchase according to its normal T2125 treatment, then record eligible interest separately.

For example, supplies may be a current expense, while a laptop that provides a lasting benefit may need to be claimed over time through Capital Cost Allowance (CCA). Financing the laptop does not turn its full purchase price into an immediate deduction. It may create two separate records: the asset for CCA and the eligible interest paid on the financing.

Ordinary business interest and applicable bank charges are generally reported on T2125 line 8710. Payment-processing and administration fees can follow different guidance, so use the category that matches the charge and do not claim it twice.

Watch the Special Limits

Some financing costs do not receive the same treatment as ordinary monthly interest:

Large loans, refinancings, and mixed-use borrowing are good reasons to have an accountant review the tracing and timing.

Track Interest With ClaimHero

ClaimHero is a free Canadian T2125 expense tracker for sole proprietors. Record eligible interest under the appropriate CRA category, add a note linking the debt to its business use, and keep personal amounts out. At year-end, export organized totals for your tax software or accountant instead of trying to reconstruct twelve months of financing charges.