If you’re a Canadian homeowner with a mortgage, you may be wondering whether or not the interest on your loan is tax deductible. The good news is that, in most cases, it is! So, whether you’re a first-time homebuyer looking to get more tax deductions, read on to learn how to make your Canadian mortgage interest tax deductible.
Let’s get into it!
Is Mortgage Interest Tax Deductible in Canada?
From a tax perspective, there are two ways to make a mortgage interest tax deduction, depending on the property type. In this article, we will focus on the following cases:
The Property Is Generating Rental Income
According to the Canadian government, tax deductions are only applicable to mortgage interest payments in case the property produces rental income. If your mortgage interest is a portion of the operating costs of a rental property, you can receive a part or the whole interest back.
You might be interested: How to Avoid the Capital Gains Tax on Rental Property in Canada
The Property Is a Primary Residence
Contrastingly, the mortgage interest tax deduction on a primary residence is a little tricky. Namely, the mortgage interest for a primary residence in Canada isn’t tax deductible, not even if you use a section of your home for a small business. The good news is that you can use an approach like the Smith Maneuver to claim interest on your residential mortgage successfully.
Read on to find out all about the Smith Maneuver and how you can use it to your advantage.
How to Make Your Canadian Mortgage Interest Tax-Deductible?
Thanks to the Smith Maneuver, homeowners can make their mortgage interest tax-deductible. This strategy can help you achieve your financial objectives faster by providing many tax and investment growth perks.
Let’s see how the maneuver works in a few simple steps:
- When you purchase a property, when your mortgage is due to be replaced, or when you pay off an existing mortgage, simply register for a readvanceable mortgage plan.
- Pay down your mortgage as usual.
- Use the additional HELOC space to invest in higher return investments.
- To get a higher tax refund, claim a tax deduction for the HELOC interest you paid when you borrowed money to invest.
The tax deductible mortgage in Canada is regulated by strict rules set by the government, so if used properly, the Smith Maneuver is legal. However, despite all the advantages, this maneuver can be risky.
So, we advise you always to consult an expert when deducting your tax interest. A professional in the field will provide you with the best help with taxes on rental income in Canada while minimizing risks like taxation issues and level of debt.
How Much Mortgage Interest is Tax-Deductible?
Per Canada’s government, the interest paid on money you borrowed to purchase or upgrade a property is tax-deductible. On the other hand, if you rent out the property for the whole year, the full interest amount is tax deductible. However, if you rent it out for part of the year, only the interest amount for that period is tax-deductible.
Essentially, the amount of tax deductible mortgage in Canada is based on the dimensions of the space rented out and the time span in which the space creates rental income. We created a table to clarify:
|Space size / Time rented
|Portion of tax-deductible mortgage interest
|Entire property for an entire year
|Entire property for a part of the year
|The whole amount of interest payments made while the home was rented out.
|Part of the property for an entire year
|% total square footage x 12 months
|Part of the property for a part of the year
|% total square footage x time rented
Lastly, the government of Canada advises that any lump-sum interest payments are not fully deductible. Therefore, you would prorate the sum over your loan or mortgage length. To put it simply, you stretch out the interest you paid within a year over the remaining time on your mortgage.
What Kinds of Mortgage Fees Can You Claim?
As per the Canadian government, when you obtain a mortgage or loan to purchase or renovate your rental property, you are able to deduct a number of costs.
The loan fees include:
- Mortgage applications, appraisals, processing, and insurance fees
- Mortgage guarantee fees
- Mortgage brokerage and finder’s fees
- Legal fees related to mortgage financing
It’s also important to note that some “soft costs” are also deductible if the funds you borrow for a rental property is used for construction or restoration. Check the soft costs to learn more about tax deductions in a case like this.
Can You Write Off Mortgage Interest If You’re Working From Home?
Unfortunately, if you run a company from home in Canada, you cannot deduct your house mortgage principle payments from your taxes. However, the good news is that you have a lot of expenses you can claim.
If you are following the Temporary flat rate methodology, you do not need to figure out your costs to compute your claim for home office expenditures.
Using the temporary flat rate technique, you can deduct expenses for your home offices, such as rent, power, and home internet connection fees, as well as for office supplies like pens and paper and mobile phone minutes.
You use the Detailed method to calculate the amount of work-space-in-the-home expenditures you may deduct if you claim the employment component of the actual amounts you paid. You must divide the costs for using your house for work and personal (non-work) purposes.
We hope this article helped you better understand how to make your Canadian mortgage interest tax deductible. Remember that it is crucial to keep all of your paperwork in order and consult with a tax specialist if you have any questions. By following these guidelines, you can save money on your taxes and reduce the amount of time you spend worrying about them. Have a remarkable tax season!
Any lump-sum rate of investment paid is not deductible in its entirety. Instead, you would prorate the sum over your loan or mortgage length. This is crucial information to know if you’ve been wondering how to make your Canadian mortgage interest tax deductible.
There are many things that are tax deductible in Canada. These include charitable donations, medical expenses, Political contributions and expenses, childcare expenses, and more. You can check out the Canada Revenue Agency website for a complete list of deductions.
You can only name one home as your family’s primary residence each calendar year beginning in 1982.