If you’re a homeowner with a mortgage, part of each mortgage payment goes towards paying interest. You may have asked yourself, “is mortgage interest tax deductible in Canada?” After all, our American neighbours can declare the interest on their mortgages as a tax deduction.
The question is, can Canadian homeowners do the same?
Key Points
- With few exceptions, you cannot deduct mortgage interest on your primary residence in Canada.
- To be eligible for mortgage interest tax deductions, your home must generate an income. For instance, you must rent out your home or use it to run a business.
- While running a business from home may allow you to deduct your mortgage interest, you can’t deduct this interest if you work from home as a salaried or commissioned employee.
Is Mortgage Interest A Tax Deductible In Canada?
Generally, you cannot deduct mortgage interest on your primary residence in Canada.
However, mortgage interest in Canada can be tax-deductible if the property is being used for investment income purposes. That means you claim the interest you pay on your mortgage for your primary residence if you use part of your home to rent out or run a business.
| Did You Know? In 2009, a case was brought before the Supreme Court of Canada, wherein two homeowners deducted over $100,000 in interest expenses on their mortgage loan between 1994 and 1996. Unfortunately, upon examination, the Minister of National Revenue cited the deductions as “abusive tax avoidance,” and had them declared invalid. After the homeowners took legal action, the Supreme Court sided with the Canadian Government, officially proclaiming that tax deductions could not be made on mortgage interest payments, unless the home generated an income. |
Can You Claim Your Mortgage Interest As A Tax Deductible If You Run A Business From Home?
If you run a business from home, you can write off several expenses, including mortgage interest. However, you can only write off a certain amount of your mortgage interest based on how much of your home’s space you use for business purposes.
For instance, if your home office takes up 10% of your home, you may deduct 10% of your mortgage interest. Given the complexities of this and the uniqueness of each individual taxpayer’s circumstances, consider consulting an accountant first.
Can You Claim Your Mortgage Interest As A Tax Deductible If You Work From Home?
If you are a salaried or commissioned employee and work from home, you cannot deduct mortgage interest. In this case, you can only deduct expenses directly related to your home office space, such as heat, electricity, and internet.
You could also write off supplies needed to work from home, such as your computer, phone, printer, and paper.
Can You Claim Your Mortgage Interest As A Tax Deductible If You Rent Your Home?
As mentioned earlier, one way to get a tax deduction on your mortgage interest would be to use your house for rental purposes. In other words, you would need to turn your home into an investment property.
As such, if you rent out part of your home, such as a private room or the basement, you may be able to claim certain expenses associated with the rental, including mortgage interest.
How Much Mortgage Interest Can You Deduct On A Rental Property?
As noted earlier, the mortgage interest on a rental property is tax-deductible. The amount you can deduct, however, depends on how much of the home is being rented out:
- Entire home is rented out year-round. If you rent out 100% of a home you own for 12 months a year, then you can deduct 100% of the mortgage interest.
- Entire home is rented out for part of the year. If you rent out 100% of a home for only part of the year, you can deduct 100% of the mortgage interest paid only during the rental period. For example, if you rent the home for 3 months a year, then 100% of the interest from those 3 months is tax-deductible.
- Part of the property is rented out year-round. If you rent out part of your house (such as a basement or a room) for 12 months a year, you can deduct the applicable portion of the mortgage interest for the whole year. For instance, if your home’s square footage is 2,000 square feet and you rent out a 1,000 square-foot basement, this represents 50% of your home. In this case, you could deduct 50% of your total annual mortgage interest.
- Part of the property is rented out part of the year. If you rent out a portion of your house for only part of the year, you can deduct the applicable share of the mortgage interest for the time period that the space is rented out. For instance, if you rent out 50% of your home’s overall square footage for 3 months a year, you can deduct 50% of your mortgage interest only for those 3 months.
What Happens If You Sell Your House?
Running a business from home or turning your primary residence into an investment property may come with certain tax advantages, but selling it after you’ve generated an income comes with one big disadvantage: capital gains tax.
If you sell your home that has been used to generate an income, you’ll have to pay taxes on your capital gains, which refers to any profit earned when you sell the property for more than what you paid for it. Capital gains tax is payable on two-thirds of the profits that your asset (your home) has gained since it started producing an income for you.
Thankfully, you won’t be subject to capital gains taxes if your home is your primary residence that is not rented out or used to run a business. Just remember that you still have to report the sale of your home when you file your tax return, even if you’re exempt from the capital gains tax.
Using The Smith Maneuver To Make Mortgage Interest Tax Deductible
The Smith Maneuver is an advanced financial strategy that allows Canadians to convert the non-deductible interest of a residential mortgage into a tax-deductible investment loan. Here’s how it generally works:
To implement this strategy, you need to secure a re-advanceable mortgage, which pairs a conventional mortgage with a home equity line of credit (HELOC). As you make mortgage payments, an equivalent amount of credit becomes available on the HELOC.
You then re-borrow the principal portion of the mortgage payment from the HELOC each month and invest this sum in income-generating assets such as dividend-paying stocks or mutual funds. The crucial aspect here is that the investments should be eligible for generating income to ensure the interest on the HELOC can be tax-deductible.
On your tax return, you can deduct the interest paid on the HELOC, provided the borrowed funds were invested for income production. The tax refund received can then be applied towards accelerating the mortgage payment, thus reducing the principal faster and increasing the amount available to re-borrow for investment.
However, the Smith Maneuver is complex and carries risks, particularly if the investments perform poorly or if interest rates rise. It’s crucial to thoroughly understand this strategy and consult with a financial professional before proceeding. This approach is not recommended for beginners due to its intricacies and the financial knowledge required to manage it effectively.
What Other Tax Deductions And Credits Are Available To Canadian Homeowners?
While you may not be able to deduct your mortgage interest on your primary home (with certain exceptions, as mentioned), there are plenty of other deductions and credits that you may qualify for as a homeowner in Canada:
First-Time Home Buyers’ Tax Credit (HBTC)
The First-Time Home Buyers’ Tax Credit is a non-refundable tax credit that allows first-time buyers to claim up to $10,000 for the purchase of a qualifying home. If you’re eligible, you could receive a credit of up to $1,500 when filing your income taxes.
Home Buyers’ Plan (HBP)
The Home Buyers’ Plan allows first-time homebuyers to withdraw up to $35,000 from their RRSPs tax-free for a down payment on a home. The funds must be repaid within 15 years of withdrawal.
GST/HST New Housing Rebate
Newly built or substantially renovated homes are subject to GST or HST. However, you may qualify for the GST/HST New Housing Rebate. This rebates up to 36% of the GST paid on your home purchase, up to a maximum of $6,300.
Work-From-Home Tax Deductions
As mentioned earlier, a few expenses may qualify as tax deductions if you work from home as a salaried or commissioned employee. While mortgage interest isn’t one of them, there are several other expenses that you can write off, such as:
- Heat
- Electricity
- Water
- Internet access
- Rent
- Maintenance
- Computer
- Phone
- Printer
- Ink cartridges and toner
- Envelopes, folders, and paper
- Stamps
Multigenerational Home Renovation Tax Credit (MHRTC)
The Multigenerational Home Renovation Tax Credit allows homeowners to claim a 15% tax credit for up to $50,000 in renovation costs to build a secondary suite to accommodate additional family members. If you qualify, you can get up to $7,500 back when you file your income taxes thanks to this tax credit.
Home Accessibility Tax Credit (HATC)
If you need to update your home to make it more accessible for you or a family member with mobility issues, you may qualify for the Home Accessibility Tax Credit. This non-refundable tax credit can help you save taxes on eligible renovation expenses up to $20,000, giving you up to $3,000 back when you file your taxes.
Final Thoughts
Unfortunately, with few exceptions, you can’t deduct your mortgage interest on your primary residence. While our neighbours south of the border may be able to, Canadians need to either operate a business out of their homes or rent out part or all of their properties to qualify for mortgage interest deductions.
Mortgage Interest FAQs
How do mortgage interest deductions work?
Where do I claim mortgage interest deductions on my tax return?
Is there a way to make my principal residence mortgage tax-deductible?
