Is the Interest on Your Mortgage Tax Deductible in Canada?

Is the Interest on Your Mortgage Tax Deductible in Canada?

Written by Bryan Daly
Fact-checked by Caitlin Wood
Last Updated January 13, 2018

Federal and provincial taxes are an important part of how our economy functions. They help build Government programs, pay for healthcare, education, and finance the upkeep of our cities, municipalities, and towns. As you live out your years as a Canadian taxpayer, you’ll start finding various ways you can save money, here and there, during tax season. You’ll learn about which expenses are tax deductible, how you can decrease your taxable income, and other such benefits, so you can get ahead in life while still making a contribution to our country.

One of the questions we get asked most often is whether or not the interest on your mortgage is tax deductible in Canada? Afterall, our lucky American neighbours are able to declare the interest on their mortgages as a tax deduction. So, why isn’t this the same case for Canada? Simply put, that’s just not how our tax system works. But the good news is if you should ever decide to sell your principal residence, and you make a profit from the sale, you don’t need to pay any taxes on that money. While you might be annoyed that you can’t claim the interest on your mortgage in Canada, you will benefit from selling your house, tax-free.

Want to know if you’ll be able to buy a house if you owe too much in taxes? Read this.

Why is Mortgage Interest Not Tax Deductible in Canada?

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 actions, the Supreme Court sided with the Canadian Government, officially proclaiming that tax deductions could not be made on mortgage interest payments, unless the home is generating an income because you are renting it out.

What if You Use Your House to Run a Small Business?

If you work from home or use your home to run a small business, you can deduct certain costs associated with your work space. This may even include house related expenses, such as electricity, but you still can’t deduct the interest on your mortgage.

For instance, if that homeowner sets up a home office, complete with a computer, fax machine, and printer, because of the extra wattage that office creates, their electricity bill is going to get more expensive. They also might need office supplies, maybe even pay some other employees to help them with their workload. They can then contact the Canada Revenue Agency, and find out if their home qualifies as a business, and which expenses if any, they can claim. If it does qualify, they can declare their such things as supplies, property taxes (or condo fees), and other related costs on their taxes, and would be entitled to a deduction relating to how much they spent during that tax year.

Click here for more information about borrowing using your home equity.   

the cost of buying a house in Canada

Want to know how much it costs to buy a house in your city? Check out this infographic.

What if Your House Produces a Rental Income?

As we mentioned earlier, one of the only avenues where it would be possible to get a tax deduction on your mortgage interest would be to using your house or condominium for rental purposes. In other words, you would need to turn your home into an “investment property.” For example, if you rent out one or more of your rooms, or need to renovate to make a basement suite more livable, then earn an income from a new tenant, or tenants, your expenses count as rental related, and you should be able to claim them on their taxes. However, if your property, whether the property is a house, apartment or a condo, does not generate any revenue from a business or rent, you will not be entitled to any tax deductions.

What Happens After Your Sell Your House?

Firstly, be forewarned that while working from home or turning your primary residence into an investment property does come with certain tax advantages, selling it after you’ve generated income from it has one lingering disadvantage. If and when you do decide to sell your home, you will have to pay taxes on the proceeds from your investment property. This is known as the “capital gains tax,” wherein you’ll have to pay taxes on roughly half the profits that your asset (your home) has gained since it started producing an income for you.

However, if you decide not to turn your principal residence into an investment property, any revenue that you generated by selling the house will be tax sheltered. In other words, if you bought a house 10 years for $350,000, and end up selling it today for $500,000, the extra $150,000 you made will not be subject to taxation. Just remember, as of 2016, the Canada Revenue Agency has specified that home or condominium owners must now declare the profit they’ve earned from the sale of their home under Schedule 3 of their income tax refund, even if you’re selling your principal residence and are exempt from the capital gains tax.

Canadian household debt

For more information on debt and specifically mortgage debt in Canada, take a look at this infographic

Should I Try to Make My Mortgage Interest Tax Deductible?

So, in conclusion, mortgage interest payments are not tax deductible, except under specific circumstances, such as renting out your property to earn an income. Once again, home based businesses that do not involve renting of any kind, will not benefit from mortgage interest tax deductions. So, if you are thinking about turning your home into a small business or rental property, thereby saving yourself a bit of money in taxes, just remember to consider all the factors, and know what you’ll be getting yourself into.

What’s the difference between a tax credit and a tax deduction in Canada? Find out here.

Like any kind of investment, trying to make your mortgage interest tax deductible by turning your primary residence into an investment property comes with its own share of risks. You have to be certain that you’ll get back whatever you’ve invested in the property in the first place. It could be months, if not years until you see a return, and later, if you decide to sell your home, you need to be prepared to pay taxes on whatever profit you made. So, if you’re thinking about doing this, discuss it with a financial advisor first. They will be able to tell you if your business venture will likely be profitable.   

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Bryan is a graduate of Dawson College and Concordia University. He has been writing for Loans Canada for five years, covering all things related to personal finance, and aims to pursue the craft of professional writing for many years to come. In his spare time, he maintains a passion for editing, writing screenplays, staying fit, and travelling the world in search of the coolest sights our planet has to offer.

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