In Canada, unlike in the US, mortgage interest on your residence is generally not tax deductible. However, you may be able to arrange your finances so that you can deduct part or all of your mortgage interest on your income taxes.
In order to deduct expenses for income tax purposes, they have to be laid out in order to earn income. Therefore, mortgage interest on your principal residence, or other personal use property such as a vacation cottage, normally isn’t tax deductible because your home is used to live in, not to make money.
There are some cases where you can, in fact, deduct part or all of the mortgage interest you pay on your income taxes.
- Where you use your home for business purposes, you can deduct a portion of the mortgage interest on your income taxes. The portion you can deduct is equal to that portion of your home used for business purposes. For example, if you use two rooms totaling 240 square feet for business, and the total area of you home is 2,400 square feett, then you can deduct 240/2,400 or 10% of the mortgage interest and other related expenses such as property taxes, utilities, hydro, heat, etc.
- Where you rent part of your principal residence, either a basement suite or room or rooms, you can deduct a portion of the mortgage interest and other related expenses. The portion you can deduct is equal to the portion of your home rented. Similarly, if you rent your entire home or vacation property for several months, you can deduct the entire mortgage interest and other costs for the period it is rented.
- If you have investments outside your RRSP, you could sell some or all of the investments, pay off the existing non-deductible mortgage, then take out a new mortgage and invest the mortgage proceeds. You can then deduct the mortgage interest on your tax return.
- If you don’t have investments outside your RRSP, you can borrow more money against the equity in your home and invest the proceeds. This can be done by renewing a mortgage for a higher amount or taking out a second mortgage, or by drawing on a home equity line of credit. It is very important to tie the receipt of the proceeds to the investment, so that the mortgage interest paid is tax deductible.
Even if you don’t use your home for business or rent it out, you may still be able to deduct some or all of your mortgage interest on your tax return. In order to do so, you have to establish that part or all of mortgage proceeds are being used to earn income.
The simplest way to do that is to invest the mortgage proceeds directly, ie, take out the mortgage and put the funds into the investment. If you already have a mortgage, you can still arrange to make some or all of your mortgage interest deductible. Two strategies are:
If you do not wish to increase your debt load, it is possible to arrange that as you make principal payments on your mortgage, the repaid principal amounts are then available for investment purposes. Generally, this is done by increasing a home equity line of credit by the amount of principal repaid on the mortgage. The home equity line of credit is then drawn on for investment funds.
There are a number of specialized mortgage products available to help segregate the borrowed funds by purpose, so that the maximum interest can be deducted. It is important to talk to your accountant or advisor regarding the best borrowing product or strategy for you.