YourThe amount we pay in taxes to the government each year adds up. Unsurprisingly, many are interested in claiming as many deductions as possible to help lower these tax bills. Things like donations, student loan interest, and child-care expenses are common tax deductions – but what about mortgage interest? Let’s have a look to see if –and how—mortgage interest can be tax-deductible in Canada.
Is mortgage interest tax-deductible in Canada?
The short answer is: Possibly. It all depends on how the property is used. For a mortgage to be tax-deductible in Canada, the property the mortgage belongs to must be used for generating income (whether that’s rental income, business, or professional income). The good news is that primary residences can qualify for mortgage interest tax deductions.
Why you would want to use a mortgage for income tax deduction?
During tax season, it’s always smart to claim as much as possible when filing taxes. Doing so will lower the amount of tax you’re required to pay the government, meaning you’ll either lower the amount of taxes you’ll have to pay or you’ll increase the amount of tax return you’ll be given by the government.
However, it’s important to know if your mortgage is tax-deductible before claiming it at tax time. Below are a few scenarios where your mortgage interest might be tax-deductible.
Is mortgage interest tax-deductible on a rental property in Canada?
Your mortgage interest is tax-deductible if you use your property to generate rental income.
Come tax time, you would use the rental income and expenses on Form T776 to claim your rental income, according to Turbotax.
The amount of mortgage interest you can claim on your taxes depends on how your property was used as a rental (for example, there are different amounts you can claim if it’s a long-term rental vs. a short-term rental, such as an Airbnb).
We’ll dive a little deeper into those details in the next section.
How much mortgage interest can be deducted from taxes?
If your total property is rented out for the entire year, you can deduct 100% of the mortgage interest paid on that property.
However, if your property operates as a short-term rental, you may only claim a portion of the interest paid on the home.
Here are a few basic math examples:
Short-term rentals of your entire home
If you rent your entire property as an Airbnb, you can only deduct mortgage interest based on how often the property is rented out.
For example, if you rent out the property for a total of two months in the year, you can deduct 2/12 (16.7) of your mortgage interest. If you rent it out for a total of six months, you can claim ½ (50%).
Things get a little more complicated if you rent a portion of your home.
Say you rent your basement to a tenant for the entire year. In this case, you must adjust your deduction to be equivalent to the portion of your home that’s rented. So, if your basement is 500 square feet and your entire home is 2,000 square feet, you can deduct 25% of your mortgage interest.
And if you’re just renting a room?
Now, if a portion of your home was rented for part of the year (say you rent a room on Airbnb), you would need to calculate the amount of time it was rented during the year as well the amount of space it occupies.
For example: If you rent out 500 square feet in your 2,000 square foot home for a total of six months of the year, you could claim 12.5% of your mortgage interest. How we arrived at that calculation: The rental portion makes up 25% of the entire home and it was rented out for half the year (so, 25 divided by 2).
What portion of your mortgage is tax-deductible?
Know that the principal portion of your mortgage payment is not tax-deductible. Only the portion of your payment that goes toward interest is tax-deductible.
However, there are some other mortgage-related fees you can claim when you purchase or improve a rental property. These include;
- Mortgage applications, appraisals, processing, and insurance fees
- Your mortgage guarantee fees
- Mortgage brokerage and finder’s fees
- Legal fees related to mortgage financing
Can you write off mortgage interest if you’re working from home?
The past year and a half have seen record numbers of people across the country working from home. If you own your own business, you can deduct expenses for the business use of your home workspace, as long as it meets one of two conditions: It’s your primary place of business or you use the space only to earn business income.
In this case, you can deduct mortgage interest, along with other things such as electricity, property taxes, and heating. But, relative to the portion of your home you’re using for business purposes.
Say you occupy a room that is 100 sq. ft. in your 2,000 sq. ft. house, and work there 5 days a week for the year. The math works out to 5% of your home x 260/365 days. So, if your electricity bill is $1,200 per year, then you can claim $42 for business use.
Don’t fret if it sounds confusing, the tax software companies make it simple and do the math for you.
Finally, mortgage interest is not tax-deductible if you’re working from home for an employer.
The bottom line
Figuring out what you can and can’t claim on your taxes is confusing and time-consuming. There are plenty of ways to lower your tax bill but, since every person’s circumstances are different, it’s important to get the advice of a licensed accountant when trying to figure out what you can and should deduct come tax time.
- Home-based business insurance: Do I need it to WFH?
- Getting a Mortgage if You’re Self-employed
- A primer on the smith manoeuvre (How to use your mortgage to invest)