How Interest Rates Can Affect Your Taxes in Canada

Understanding interest rates and their economic impact

As a Canadian taxpayer, understanding how interest rates impact your finances is essential for effective tax planning and overall financial health. To start, here are the answers to some basic questions:

What are interest rates?

Interest rates are expressed as a percentage and represent the cost of borrowing money or the return on savings. Interest rates can vary depending on the prevailing economic conditions.

What is the Bank of Canada?

The Bank of Canada is responsible for setting the country's monetary policy, including the interest rate. The Bank of Canada adjusts interest rates to meet its goal of keeping inflation low, stable, and predictable.

How can interest rates impact the economy?

Changes in interest rates can have far-reaching effects on both the economy and your personal finances. When rates rise, the cost (or rate) of borrowing money increases, slowing down spending, which helps control inflation. In times of economic hardship—such as recession—lower rates can stimulate economic activity.

Interest rate fluctuations can affect the amount of interest you may pay on a loan, for example, or the amount you could earn on money held in a savings account.

How changes in interest rates affect you and your taxes

Any interest earned or received is subject to taxes. But interest paid on certain products like an investment loan could qualify as a deductible, potentially lowering your tax burden. Let's explore how interest rate changes can affect various aspects of your finances from mortgages to taxes:

Mortgages

Changes in interest rates can increase or decrease mortgage payments for those with variable-rate mortgages or who are renewing fixed-rate mortgages.

Tax implication: While mortgage interest on your primary residence isn't tax deductible, interest paid on loans for rental properties may be deductible. A decline in interest rates, for example, could decrease the interest portion of your mortgage payments, which in turn lowers the amount you can deduct as an expense, potentially increasing your taxable rental income.

Savings accounts

Interest rate changes influence the interest received, or returns, on money held in savings accounts and guaranteed investment certificates (GICs).

Tax implication: Rising interest rates tend to boost the amount of interest income you can receive. If this additional interest income pushes your total income into a higher tax bracket, a portion of your income may be taxed at a higher rate than before.

Consumer loans

Fluctuations in interest rates also affect the cost of borrowing for personal loans and credit cards.

Tax implication: While the interest paid on a personal loan isn't typically deductible, if you've borrowed money for investment purposes, lower interest rates could decrease your deductible expenses—potentially increasing your taxable income.

Student loans

When interest rates are on the move, it can also affect student loans in certain circumstances. In general, while you're attending school in Canada, you don't have to pay interest on student loans. However, it can start accruing after you graduate or stop attending school.

Tax implication: In a much anticipated move in April 2023, the federal government eliminated student loan interest entirely. However, this change doesn't affect loans taken out before April 2023 that are in the midst of being repaid. It also doesn't apply to student loans provincially—with interest rates and rules varying per province. Since the interest rate is usually linked to the prime rate, if rates go up, the amount you pay could too. But certain tax credits and deductions can help. For instance, non-refundable student loan tax credits let you claim an amount equal to the interest paid on student loans during the tax year. You can calculate this amount as 15% of the eligible interest paid, which can reduce your tax bill.

Investments

Interest rate changes impact TSE 300 performance and bond yields, influencing investment returns.

Tax implication: Lower rates may lead to higher stock dividends or capital gains, increasing your taxable investment income. Conversely, falling bond yields could reduce taxable income from fixed-income investments.

Interest rates and CRA debts: How changes affect your tax obligations and refunds

If you owe money to the CRA, interest charges apply to outstanding balances. These charges are influenced by current market interest rates, meaning that as rates fall or rise, so too can the costs associated with unpaid taxes. The CRA sets different interest rates for tax debts and tax refunds, with the rate for tax debts typically being higher.

To mitigate the impact of rising interest on tax debts, consider setting up a payment plan with the CRA or explore options for debt consolidation. Be aware of CRA interest rates and penalties, as timely payments can help you keep more money in your pocket.

Tax-planning strategies in a high-interest environment

In times of rising interest rates, you may earn higher amounts of interest income. While this can be positive, it's important to be prepared for the potential tax implications.

But tax-advantaged accounts like Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs) are crucial tax-planing tools. These accounts shelter investment income, allowing you to defer paying tax on that income—whether that's interest earned from assets such as bonds or capital gains (profits from selling investments such as stocks).

For 2025, the annual contribution limit to a TFSA is $7,000. But you may be able to increase that amount if you haven't made TFSA contributions in previous years. TurboTax Full Service includes tax expert advice for fast and easy filing. Or visit the CRA website under My Account to see how much you can contribute to your TFSA.

Interest income is taxed at your marginal tax rate, while capital gains are taxed more favorably, with only 50% of the gain being taxable. For example, if your marginal tax rate is 30%, then $150 interest income incurs $45 in tax ($150 x .30 = $45), but for a $500 capital gain, only half—or $250 of the gain—is taxable, resulting in just $75 tax ($250 x .30 = $75).

An important note concerning the future of capital gains: The capital gains rate may increase in 2026—whereby, for individuals, the capital gains that exceed $250,000 could be taxed at two-thirds instead of one-half).

While these financial tools boost tax efficiency, helping you save money after filings your taxes, there are also other strategies to consider:

Time your investments. Cash in on your investments later in life, such as in your retirement years. This can allow you to minimize taxes as you're likely to be in a lower tax bracket.

Tax-loss harvesting. Sell underperforming investments at a loss to offset capital gains from other investments. It's worth noting that tax-loss harvesting works on taxable investments, but not on retirement accounts such as RRSPs and TFSAs.

Deferring income. Delay receiving taxable income to a future year when your tax rate might be lower.

While each of these strategies can help optimize your tax situation, it's important to consult with a TurboTax expert to evaluate the full range of strategies available tailored to your specific circumstances.

Navigating the ups and downs of interest rates in Canada

Understanding the relationship between interest rates and taxes in Canada is essential for effective financial planning. By staying ahead of how the Bank of Canada's changes to rates affect various aspects of your taxes—from income earned on savings to obligations owed to the CRA—you can make informed decisions that support your financial goals.

Interest rates and taxes in Canada (FAQs)

How do changes in interest rates affect your mortgage payments?

Changes in interest rates can increase or decrease mortgage payments if you have a variable-rate mortgage.

Can you deduct mortgage interest on your primary residence?

No. Mortgage interest on a primary residence isn't usually deductible in Canada. However, it may be deductible if used for rental properties or investments.

Is all interest income taxable in Canada?

Yes. Any interest income earned from savings accounts or investments is taxable at your marginal tax rate.

What should you do if you owe money to the CRA?

If you owe money to the CRA, consider setting up a payment plan or consulting with a tax professional about your options.

The economy and tax rules evolve fast—be sure to stay on top of the changes

TurboTax can help you file your taxes, and also help you with your tax planning year round.

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