Mortgage Basics

Is Mortgage Interest Tax Deductible in Canada

Is Mortgage Interest Tax Deductible in Canada

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    As a Canadian homeowner navigating the ever-rising cost of homeownership, the potential to claim mortgage interest as a tax-deductible expense could provide significant financial advantages at tax time. Lowering your taxes through a strategic mortgage plan can be alluring, but not all situations allow mortgage interest to be tax deductible. 

    Depending on how the property is used, mortgage interest can be a tax-deductible expense. This guide will explore how mortgage interest tax deductions in Canada work and the benefits of deducting mortgage interest at tax time.

    Key Takeaways

    • Mortgage interest on a primary residence is generally not tax-deductible in Canada. 
    • Mortgage interest is fully tax-deductible on rental properties owned solely to generate income. 
    • Partial tax deductions on mortgage interest are possible if a portion of a primary residence is used as a rental or to generate business or professional income.

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    How Mortgage Interest Deductions Work

    In Canada, the eligibility criteria for deducting mortgage interest are more restricted than in the US. The CRA has stringent requirements determining whether a mortgage qualifies for tax deductions. 

    For example, a home you use as your primary residence is not eligible to claim mortgage interest expenses at tax time. However, if the home is used to generate income, operate a business, or as a rental property, some or all of the mortgage interest could be tax deductible.

    During tax season, deducting mortgage interest expenses would allow you, as a homeowner, to subtract a portion of the interest paid on the mortgage from your taxable income. This effectively reduces the overall taxes owed and could even mean you get a refund.  

    How to Claim the Mortgage Tax Deduction in Canada

    You must complete the relevant forms to claim the mortgage interest deduction when filing your taxes. A tax expert can ensure you make the most of your eligible deductions. 

    If you rent out your home entirely, all rental expenses, including the mortgage interest paid, are tax-deductible from the rental income you claim on a T776 Statement of Real Estate Rentals. You can claim only the expenses related to the portion of the home rented out, including the mortgage interest on the Statement of Real Estate Rentals if the home is a primary residence with a portion rented out. In the case of a multiplex with separate unit addresses where it’s an owner-occupied rental, the rented unit would function as a separate investment property.

    You can claim the portion of expenses relating to the business, including mortgage interest, on the T2125 Statement of Business or Professional Activities if the home or a portion of the home is used for business or professional purposes. 

    Tax-Deductible Mortgage Benefits

    The benefits of being able to deduct mortgage interest as a Canadian homeowner include: 

    • Lower your tax burden – Claiming as many deductions as you are eligible for can lower the taxes you need to pay at tax time and could even mean you get a refund instead. 
    • Repay your mortgage faster and reduce interest – You can use the tax savings or refunds received from mortgage interest deductions to make additional payments towards your mortgage principal, effectively reducing the overall interest paid over the life of the loan and helping you pay off your mortgage faster.
    • Increase your net worth – By strategically allocating tax refunds or savings to pay down the mortgage principal, you can accelerate the growth of your home equity, contributing to a higher net worth.

    You can also combine the above to serve yourself even better, such as preemptively using the tax deduction to contribute to your RRSP, increasing the possible amount of your tax refund. Then, you can use the difference between the refund you would have gotten versus what you got to pay down the mortgage. By investing and lowering your debt load, you could increase your net worth faster and take advantage of the time value of money.

    How Much Mortgage Interest Can Be Deducted From Taxes?

    The mortgage interest you can deduct from your taxes will depend on what the property is used for and how much is used to generate income. 

    Deductions for Short-Term Rental Properties

    If you own a property you use for a short-term rental, you can only deduct the portion of mortgage interest based on the time the property is rented. For example, if you own a home you use for personal use from May to September and rent out as an Airbnb from October to April, you can only deduct the mortgage interest from October to April, which is 7/12 or 58.3%.

    Deductions for a Rented Portion of Your Home

    You can claim only the portion of the mortgage interest if the home is your primary residence with a portion rented out, such as a basement apartment or separate unit with its own entrance. If you own a 3,000 sqft home and 1,000 sqft is rented out, you can deduct 1/3 or 33.33% of the mortgage interest paid. 

    Deductions for Renting a Single Room

    If you rent out a room in your home, the calculation is based on the percentage of the home that is rented, similar to renting a portion of your home, like a basement or separate unit. However, if the room is rented out for less than a year, you also need to calculate the length of time a renter occupied the room.

    For example, if you rented out a room in your home for a year that made up 10% of your total living space, you would claim 10% of your mortgage interest paid as a deduction. However, if you rented a room to a student that occupied the room from September to April, you would only claim 10% x 8/12 = 6.7% of the mortgage interest paid. 

    Deductions for Business or Professional Purposes

    If you use part of your home as a business or for professional purposes, you can claim the portion of mortgage interest you pay based on the size of the space used to generate income. The deduction for renting a room in your home is based on the percentage of the space dedicated to generating income and the time it is used. 

    For example, you have a home office for your self-employed business that makes up 15% of your total living space. You work from this home office 5 days a week, so you can only account for the days you work in the calculation. You can claim 15% x 260/365 = 10.7% of the mortgage interest paid. 

    Deducting Loan Fees When You Get Your Mortgage

    In some instances, if you are getting a mortgage or loan to buy or improve a rental property, you can deduct some other eligible fees associated with the purchase and the interest paid. 

    Some of these fees include:

    • mortgage applications, appraisals, processing, and insurance fees
    • mortgage guarantee fees
    • mortgage brokerage and finder’s fees
    • legal fees related to mortgage financing

    20% of the fees can be deducted each year over 5 years regardless of your mortgage or loan terms. 

    Limitations When Deducting Your Mortgage Interest

    While mortgage interest deductions can provide some financial relief, there are limitations depending on the property’s use. 

    If the property is used solely as a principal residence, the mortgage interest paid is not eligible for tax deductions unless a portion of the home is used to generate income. Similarly, if a mortgage or loan is taken out for personal use using a rental property as collateral, the mortgage interest is not eligible for tax deduction. 

    When only a portion of the property is used as a rental or to generate income, only the percentage portion of the home used for these purposes and the amount of time it is used for these purposes is eligible to be used to calculate the tax-deductible mortgage interest. 

    Frequently Asked Questions

    Can you write off mortgage interest?

    You can write off mortgage interest in some instances, such as when the property is used to generate rental, business, or professional income. Mortgage interest on a principal residence is not tax-deductible unless a portion of the home is used to generate income.

    Is the mortgage interest 100% tax deductible?

    The amount of mortgage interest that is tax deductible will depend on the use of the property. If the entire property is used to generate rental income, you can deduct 100% of the mortgage interest paid. 

    However, only a portion of the mortgage interest can be deducted if any portion of the property is used for personal use, such as a primary residence with a rental suite. The portion that can be deducted in this case is based on the percentage of the property used to generate income and the time it is used.

    Is mortgage interest tax deductible on rental property in Canada?

    Mortgage interest is tax deductible on rental properties in Canada. If you own a property solely used as a rental, you can deduct 100% of the mortgage interest you pay.

    What house expenses are tax deductible in Canada?

    In addition to mortgage interest, Canadian homeowners can deduct other expenses related to properties that generate income. These include but are not limited to commercial/homeowners insurance premiums, interest and bank charges, repairs and maintenance, property taxes, and utilities.

    Final Thoughts

    Mortgage interest tax deductions can help homeowners offset some of their tax burden. Since every individual’s circumstances are unique, the deductions you qualify for and tax rules surrounding mortgage interest deductions in Canada may vary. Seek expert guidance from a qualified tax professional to ensure you maximize all tax deductions for which you may be eligible. 

    If you’re ready to move ahead with mortgage advice, reach out to nesto’s mortgage experts to help you craft a mortgage strategy to reach your long-term real estate investment goals.

    Why Choose nesto

    At nesto, our commission-free mortgage experts, certified in multiple provinces, provide exceptional advice and service that exceeds industry standards. Our mortgage experts are non-commissioned salaried employees who provide impartial guidance on mortgage options tailored to your needs and are evaluated based on client satisfaction and advice quality. nesto aims to transform the mortgage industry by providing honest advice and competitive rates using a 100% fully digital, transparent, seamless process.

    nesto is on a mission to offer a positive, empowering and transparent property financing experience – simplified from start to finish.

    Contact our licensed and knowledgeable mortgage experts to find your best mortgage rate in Canada.

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