A $1,013.82 loan payment leaves your bank account every month, and your bookkeeping software asks where it goes. If the full payment is booked as an expense, your profit is understated and your loan balance never goes down. If none of it is expensed, you miss a deduction for interest. Loans, lines of credit, equipment financing and government-backed loans all need the same discipline: separate interest from principal, and reconcile the loan balance to the lender's statement.
This guide covers how loans and lines of credit work in your books, what's deductible under the Income Tax Act, how to treat financing fees, why loan payments don't carry GST/HST, and how to reconcile balances. It's based on CRA's guidance on interest and bank charges in guide T4002, the CRA income tax folio on interest deductibility (S3-F6-C1), and CRA's GST/HST guidance on financial services. It includes an amortization table, journal entries and common mistakes.
Every loan payment has two parts:
| Part | What it is | Bookkeeping | Tax treatment |
|---|---|---|---|
| Principal | Repayment of the amount borrowed | Reduces the loan liability | Not deductible |
| Interest | Cost of borrowing | Interest expense | Generally deductible if the money was borrowed to earn business income |
Borrowed money isn't income when you receive it, and repaying it isn't an expense. Only interest (and some fees) hits the income statement.
Under paragraph 20(1)(c) of the Income Tax Act, interest is generally deductible when it's paid or payable under a legal obligation on money borrowed and used to earn income from a business or property. CRA's folio S3-F6-C1 stresses that what matters is the current use of the borrowed money, not what it's secured by. A loan secured by your house but used to buy business equipment can qualify; a business line of credit used for a family vacation doesn't.
Some special limits apply:
Most term loans have blended payments: the same total every month, with more interest at the start and more principal later. Ask your lender for the amortization schedule, or download it from online banking.
Example numbers for illustration only.
A business borrows $50,000 at 8% annual interest, compounded monthly, over 60 months. The monthly payment is $1,013.82.
| Month | Opening balance | Interest | Principal | Closing balance |
|---|---|---|---|---|
| 1 | $50,000.00 | $333.33 | $680.49 | $49,319.51 |
| 2 | $49,319.51 | $328.80 | $685.02 | $48,634.49 |
| 3 | $48,634.49 | $324.23 | $689.59 | $47,944.90 |
| 12 | — | $281.73 | $732.09 | $41,527.99 |
| Year 1 total | $3,693.83 | $8,472.01 |
Year 1 payments total $12,165.84 (12 × $1,013.82), which equals $3,693.83 of interest plus $8,472.01 of principal. Only the $3,693.83 is an expense.
When the loan is funded:
| Account | Debit | Credit |
|---|---|---|
| Bank | $50,000.00 | |
| Term loan payable | $50,000.00 |
The first monthly payment:
| Account | Debit | Credit |
|---|---|---|
| Interest expense | $333.33 | |
| Term loan payable | $680.49 | |
| Bank | $1,013.82 |
On the balance sheet, a term loan is split into:
Year-end financial statements and lenders' covenant calculations often need this split, so your bookkeeper should calculate it from the amortization schedule at year-end.
A line of credit works differently. You draw and repay as needed, and the bank usually charges interest monthly, often by withdrawing it directly from your account.
| Transaction | Debit | Credit |
|---|---|---|
| Draw $10,000 into operating account | Bank | Line of credit payable |
| Repay $4,000 | Line of credit payable | Bank |
| Monthly interest charged by bank | Interest expense | Bank (or line of credit, if added to the balance) |
Many banks show the line of credit as a separate account in online banking. Connect it to your bookkeeping software like a bank account and reconcile it monthly.
Example numbers for illustration only.
| Date | Activity | Balance owed |
|---|---|---|
| Opening | $15,000 | |
| Mar 5 | Draw | +$8,000 → $23,000 |
| Mar 20 | Repayment | −$10,000 → $13,000 |
| Mar 31 | Interest charged to the line | +$118 → $13,118 |
| Closing (should match bank statement) | $13,118 |
The $118 goes to interest expense. Draws and repayments only move money between the bank and the liability.
Lenders often charge setup or application fees, legal fees, appraisal fees and standby fees. Under paragraph 20(1)(e) of the Income Tax Act, many financing expenses incurred to borrow money for a business are deductible over five years, at 20% a year (prorated for short tax years), rather than all at once. If the loan is repaid early, the remaining balance can generally be deducted then. Standby charges and guarantee fees may have their own rules. Ask your accountant to confirm which fees fall under which rule.
Example numbers for illustration only.
| Item | Amount |
|---|---|
| Loan setup fee | $1,500 |
| Deductible per full year (20%) | $300 |
| Years to fully deduct | 5 |
In the books, the fee can be recorded as a deferred financing cost (an asset) and amortized, or as an expense with a tax adjustment at year-end. Agree on the approach with your accountant.
| Account | Debit | Credit |
|---|---|---|
| Deferred financing costs | $1,500 | |
| Bank | $1,500 |
Lending money and charging interest are generally exempt financial services under the Excise Tax Act. That means:
Don't code loan payments with a GST/HST tax code. A common error is applying the default sales tax to an interest charge and claiming ITCs that don't exist. Some fees charged by non-lenders, such as legal or appraisal fees, may carry GST/HST, so check the invoice.
Equipment financing is often a loan in disguise: you own the equipment and pay it off over time. Record the equipment as a capital asset (claimed through CCA) and the financing as a loan, separating interest and principal. A true lease is different: the lessor owns the asset, and lease payments are generally deductible as rent, with GST/HST charged on each payment. Read your agreement or ask your accountant which one you have, because the bookkeeping is very different.
| Feature | Financing (loan) | True lease |
|---|---|---|
| Who owns the asset | You | Lessor |
| Asset on your balance sheet | Yes | Generally no |
| Monthly payment | Interest + principal | Lease expense |
| GST/HST on payments | No (paid upfront on purchase) | Yes, on each payment |
| Tax deduction | CCA + interest | Lease payments (subject to vehicle lease limits) |
A loan from you, a family member or another company you own also belongs on the balance sheet. Owner loans to the corporation are recorded as shareholder loans (due to shareholder). If the corporation pays interest on that loan, it's generally deductible by the corporation and taxable income for the lender. Document the terms in writing.
Many small businesses borrow through the federal Canada Small Business Financing Program (CSBFP), where a private lender makes the loan and the government shares the risk. The bookkeeping is the same as any term loan: proceeds go to the liability, and payments are split between interest and principal. The program charges a registration fee of 2% of the loan amount for term loans, which the lender pays and passes on to you; it can be financed as part of the loan within program limits. Treat it as a financing cost and ask your accountant how to deduct it. Check the current program terms on the Innovation, Science and Economic Development Canada website, since limits and fees change.
When a lender forgives part of a business debt, the forgiven amount isn't simply free money for tax purposes. Depending on the facts, it may be included in income or reduce other tax balances, such as losses or the cost of assets, under the debt forgiveness rules. Record the forgiveness as a separate entry, not as a reduction in interest, and flag it for your accountant.
| Step | Done? |
|---|---|
| Match each loan balance to the lender's statement | |
| Split each payment between interest and principal using the schedule | |
| Reconcile the line of credit like a bank account | |
| Record interest added to the balance | |
| Confirm no GST/HST was coded on loan payments | |
| Calculate current portion at year-end | |
| File loan agreements and schedules |
According to its website, Accelo Bookkeeping assigns a dedicated bookkeeper who categorizes transactions monthly, with bank reconciliations and a reviewer closing each month, so loan and line of credit balances match your statements. You get year-end tax-ready financials for your accountant. Starter is $199/month (first month free); Growth is $349/month with cash and accrual accounting; Custom plans are scoped on a 15-minute call and can add AP and AR. You own your records and general ledger. See Accelo pricing.
Only the interest portion. The principal reduces the loan balance on the balance sheet.
Generally yes, if the borrowed money is used to earn business or property income. Use matters, not security.
No. Lending and interest are generally exempt financial services, so there's no GST/HST and no ITC.
Many financing expenses are deducted over five years at 20% per year. Ask your accountant which fees qualify.
Monthly, against the lender's statement, along with your bank accounts.
Loans are simple once each payment is split correctly. Get the amortization schedule, record interest and principal separately, reconcile every loan and line of credit monthly, and keep GST/HST off financial services. For monthly reconciliations and tax-ready year-end books, start with Accelo Bookkeeping.