Updated Checked by the Tax-Services.ca editorial team How we check
The tax on convertible notes in Canada starts with its interest, not its conversion. If you lend through a note, the CRA’s guidance on investment income says you report interest as it’s earned, even with no slip and no cash in your hand. What happens when the note turns into shares is a separate tax question with no official answer we could find, so below you’ll get the questions to ask instead.
How is interest on a convertible note taxed?
For the person who lends the money, interest is investment income. The CRA says interest and other investment income form part of your total income and go on line 12100 of your return. It also says the $50 threshold only decides if a T5 slip is issued. You report the interest either way, as its page on interest and other investment income explains.
The timing is what surprises people. For long term investments such as GICs, the CRA says you report the interest earned during each complete investment year, even if you didn’t get a slip. Whether a particular note counts as an investment contract in that sense turns on the paperwork, so ask your accountant. But plan as if the interest could be taxable each year, because that’s the safer assumption.
| Item | What we confirmed |
|---|---|
| Interest as income | Reported on line 12100, slip or no slip |
| Reporting year | Interest earned in each complete investment year |
| T5 slip | Accrued interest is reported to each anniversary day |
| Interest you pay to borrow | Deductible if borrowed to earn investment income |
| Borrowing to buy a registered plan | Not deductible |
What does that cost on a real income?
Say you put $50,000 into a note at 8% and the first year’s interest is $4,000. If you earn $100,000 of employment income in Ontario, our income tax calculator shows the extra $4,000 adds about $1,259 of income tax, a rate near 31.5%. In Quebec the same interest adds about $1,445.
So an 8% note leaves you with under 5.5% after tax, and you might not see a cent of it until the note matures. That’s the cash flow problem. Try your own numbers in the interest calculator, and the marginal tax rate calculator tells you which slice the interest lands in.
Put it in everyday terms. If the tax bill came to roughly $1,259 and the interest is still sitting inside the company, you’re paying that out of your own paycheque. Many investors set the tax money aside the moment the interest starts accruing so April doesn’t bring a surprise.
What about the company that issues the note?
A company that borrows to earn income can usually look for an interest deduction, but the rules on when interest is deductible and on accrued interest that isn’t paid are technical, and they aren’t confirmed here. Ask your accountant two things: when the interest becomes deductible, and whether it matters that it’s added to the note instead of paid in cash.
The CRA’s line 22100 page covers deductions for individuals who borrow to invest. It says interest is deductible on money borrowed to try to earn investment income, and not when the only return the investment can produce is capital gains. Remember that if you borrow personally to fund a note.
What happens when the note converts?
That’s where convertible notes get interesting, and where guesses cost money. Conversion swaps a debt for shares. Whether there’s a gain, a loss or nothing to report on that swap, what the shares cost you for tax, and how unpaid interest is handled at conversion are all questions no CRA page we found settles.
So before you sign, ask these in writing. What value do the shares get when the note converts? Is the accrued interest paid, added to the conversion amount or cancelled? Will the issuer send a T5 slip? And does the note give you a cap, a discount or both on conversion? The answers decide your tax, not the label on the document.
If you later sell the shares, the capital gains tax calculator shows the tax on a gain. It uses a 50% inclusion rate, which is what we’ve assumed for 2026. That figure isn’t confirmed on a CRA page, so check it before you rely on it.
How can you keep a clean paper trail?
Keep four things in one folder: the signed note, a running tally of accrued interest by date, every email that changes the terms, and the conversion paperwork when it comes. Suppose Lena in Ottawa lends $20,000 to a friend’s startup on a two-year note. When it converts, she’ll need to know what interest built up, on which dates, and what she got in return. If she wrote it down as she went, that’s a five-minute job.
Mistakes investors make
Forgetting accrued interest is the big one. The note says nothing is due for two years, so nothing goes on the return. Then the CRA asks.
Another is assuming the note is a loan between friends and ignoring it. A family loan still carries interest that may be reportable. A third is deducting interest on money borrowed to buy a registered plan, which the CRA says is not allowed.
And don’t treat a slip as the whole story. The CRA says the T5 threshold affects the slip, not your duty to report.
Where this information comes from
Reporting of interest, the line 12100 rules and accrued interest come from the Canada Revenue Agency‘s pages on interest and other investment income and on accrued interest for T5 slips. Interest deductibility comes from its line 22100 page. The tax examples come from our calculator using 2026 federal, Ontario and Quebec rates. This site is independent of the CRA and any government.
Frequently asked questions
Is interest on a convertible note taxable?
Yes, for the lender it is investment income, reported on line 12100. The CRA says you report it even if you get no slip.
Do I pay tax before the note is repaid?
You may. The CRA says interest on long term investments is reported for each complete investment year. Check how your note is classed.
Is tax due when the note converts to shares?
We couldn't confirm the conversion rules on an official page. Ask your accountant before you sign.
Can I deduct interest if I borrow to buy a note?
Generally yes if the investment can earn interest or dividends. No if it can only produce capital gains.
Will I get a T5 slip?
Possibly. The CRA sets a $50 threshold for slips, but you report the interest either way.
- How Canadian income tax works: brackets and credits
How federal and provincial Canadian income tax stack up, what marginal and average rates mean, and how credits and deductions change your bill