Did you know that homeowners in Canada may be able to declare mortgage interest as a tax deductible expense? Deducting mortgage interest can have significant financial benefits during tax season, but not all mortgage interest is eligible. 

Determining whether your mortgage interest is tax deductible will depend on how the property is used. This post will discuss the various scenarios that allow you to deduct mortgage interest and the advantages this can have for you at tax time.

Key Takeaways

• In Canada, deducting mortgage interest on a primary residence is generally not permitted. 
• The entire amount of mortgage interest can be deducted as a tax deduction on rental properties used solely to generate income.
• Partial tax deductions may be available for using part of your primary residence to rent or generate income.

Understanding Mortgage Interest Tax Deductions

The Canadian Revenue Agency (CRA) has strict guidelines for determining whether mortgage interest is eligible for a tax deduction. If your property is used as your primary residence, the interest you pay on your mortgage is not eligible for tax deductions. 

If the property is used to generate income or is a rental property, all or a portion of the interest you pay on your mortgage may be eligible for tax deduction. This means that you can subtract all or a portion of the interest paid on the mortgage from your taxable income at tax time. This will effectively reduce your taxable income and the taxes you owe, or you may receive a refund. 

How to Claim the Mortgage Tax Deduction

To claim mortgage tax deductions on your taxes, you will need to complete the necessary forms for the CRA. Using a tax specialist to help you determine your eligible deductions is advisable. 

If your property is used entirely as a rental property, the mortgage interest paid is tax deductible against the rental income reported on a T776 Statement of Real Estate Rentals. 

In situations where the property is a primary residence with a portion rented out, only expenses directly related to the portion of the home rented out are eligible to be used as a tax deduction. 

For multiplexes with separate addresses where a unit is used as an owner-occupied rental, the rented units are considered separate investment properties when claiming mortgage tax deductions. 

You can declare the portion of mortgage interest associated with the proportion of the home used to generate income using the T2125 Statement of Business or Professional Activities if the property is used for business or professional purposes that generate an income. 

Benefits of Deducting Mortgage Interest

Some of the benefits of being able to deduct mortgage interest expenses include:

Minimizing your tax burden: Utilizing all eligible tax deductions can offset your income, decreasing the taxes you owe at tax time, or you may get a refund.

Reduce interest and repay the mortgage faster: Money saved from using all available tax deductions can be used toward extra mortgage payments. This reduces the principal balance, helping you pay off the mortgage faster and reduces the interest paid over the life of the mortgage. 

Boost net worth: Paying down the mortgage principal can accelerate the equity you build in your home, contributing to a higher net worth. 

What is the Allowable Tax Deduction for Mortgage Interest?

The amount of mortgage interest you can claim as a deduction on your taxes will be determined by the purpose of the property and the portion used to generate income.

Tax Deductions for Properties Used as Short-Term Rentals

If your property is used as a short-term rental, you can only claim the mortgage interest expenses for the period the property is rented out. 

For example, you own a vacation property for personal use from June to August and rent it on Airbnb for the remainder of the year. You can only deduct mortgage interest expenses that relate to September to May. In this example, you can only deduct 9/12 of the mortgage interest or 75%. The other 25% cannot be deducted since the property was used for personal use. 

Tax Deductions for a Portion of Your Home That Is Rented

If your property is used as a primary residence with a portion rented out, you can claim a portion of mortgage interest. This applies to basement apartments or a separate unit with a separate entrance.

For example, you own a 4,000 sqft home and rent out the 1,000 sqft as a basement apartment. You can only deduct the proportion of mortgage interest related to the rented square footage. In this example, you can deduct 1,000/4,000 or 25% of the mortgage interest (from your annual mortgage statement) since that is the proportion of the home generating rental income. 

Tax Deductions for Renting a Room 

If your property is used as a primary residence with a rented room, you can claim a portion of the mortgage interest. The calculation will be based on the proportion of the square footage rented out and the length of time a renter occupied the room if it was less than a year. 

For example, you rented out a room in your home that makes up 10% of your total living space. You can claim 10% of your mortgage interest as a deduction. If you rented the room to a student who only occupied it during the school year from September to April and was left unoccupied the rest of the year, you can only claim 10% x 8/12 = 6.7%.

Tax Deductions for Business or Professional Use

If your property is used as a primary residence with a part of the home used for business or professional purposes, you can claim the proportion of mortgage interest related to the size of the space used to generate income and the amount of time it is used. 

For example, a dedicated home office makes up 10% of your living space and is used for your self-employed business. You work from this office five days a week, so you can only claim 260 working days in the calculation. 10% x 260/365 = 7.12%

Claiming Loan Fees as Deductions 

When getting a mortgage or loan to buy or improve a rental property, you can deduct some eligible fees associated with the purchase and interest paid. Full details and eligibility can be found on the CRA website. 

Some eligible fees include mortgage applications, appraisals, processing, insurance, mortgage guarantee, broker and finder, and legal fees. You can deduct 20% of the fees each year for 5 years, regardless of your mortgage or loan terms.

Restrictions When Claiming Mortgage Interest as a Tax Deduction

Some restrictions apply when claiming mortgage interest as a tax deduction in Canada. If the property is only used as a primary residence, the interest paid on the mortgage cannot be claimed as a tax deduction unless any part of the home is used to generate income.

If a rental property is used as collateral to secure a mortgage for personal use, the interest on the mortgage is not considered tax-deductible.

When a portion of the property is used to generate income or as a rental, only the percentage of the property and the amount of time it is used for these purposes can determine the portion of mortgage interest that can be deducted. 

Frequently Asked Questions

Final Thoughts 

Utilizing eligible tax deductions on mortgage interest can help offset taxes at tax time. Each person’s situation and taxes are unique, so the eligibility and regulations for deducting mortgage interest may vary. Seek advice from a certified tax professional to ensure you take full advantage of all eligible tax deductions. 

If you’re ready for mortgage advice, contact our mortgage professionals to help you develop a mortgage plan that aligns with your investment goals.