Is mortgage interest tax deductible in Canada? Not on the home you live in. The Income Tax Act only lets you deduct interest on money borrowed to earn income from a business or property, so a personal residence mortgage comes out of after-tax dollars. Interest becomes deductible when you rent the property out, run a self-employed business from it, or borrow against it to invest in something that produces taxable income.
Why Personal Mortgage Interest Doesn’t Qualify
The rule sits in paragraph 18(1)(a) of the Income Tax Act, which allows a deduction only when an expense is incurred “for the purpose of gaining or producing income from the business or property.”1Justice Canada. Income Tax Act RSC 1985 c 1 (5th Supp) – Section 18 A mortgage on the house you sleep in fails that test. The size of the loan, the rate, and how much of it is interest versus principal are all irrelevant.
This surprises people who know the U.S. rules, where homeowners can deduct mortgage interest on a personal residence. Canada doesn’t work that way. Refinancing your home to consolidate credit card debt or fund a renovation doesn’t unlock a deduction either, because the underlying purpose of the borrowing still isn’t to produce income.
Renting Out All or Part of the Property
Rent the place out and the interest becomes deductible against your rental income. The CRA permits a deduction for interest on money borrowed to buy or improve a rental property.2Government of Canada. Rental Expenses You Can Deduct: Interest Expenses If the whole property is rented, you deduct all of the interest. If only part is rented, you prorate.
Proration can be done by square footage or by number of rooms. Rent 4 rooms of a 10-room house and you can deduct 40% of the expenses that apply to the whole building, including mortgage interest, property taxes, and insurance.3Canada Revenue Agency. Rental Expenses You Cannot Deduct Costs that relate only to the rented space, such as a repair inside a tenant’s room, come off in full.
Only the interest portion of your mortgage payment qualifies. The principal portion is not deductible, because it reduces your loan balance rather than representing a cost of earning income.3Canada Revenue Agency. Rental Expenses You Cannot Deduct Your annual mortgage statement will split the two figures. Getting this wrong is one of the fastest ways to attract a review, so work from the interest number only.
If you pay a penalty to break a mortgage on a rental property early, or a lump sum to reduce the rate, you can’t write off the full amount in the year you pay it. The CRA requires you to spread these costs over the remaining original term of the mortgage.2Government of Canada. Rental Expenses You Can Deduct: Interest Expenses The same treatment applies to bonuses paid to a lender for early payoff.
Running a Business From Home
If you’re self-employed and work from home, a share of your mortgage interest can be claimed as a business-use-of-home expense. The CRA sets two qualifying conditions for the workspace: it has to be your principal place of business, or you have to use it exclusively and regularly for earning income and meeting clients.4Government of Canada. Business-Use-of-Home Expenses Meeting one is enough.
The deductible share is the workspace’s area divided by the home’s total area. Office takes up 10% of the floor space, 10% of the interest is in play. If the room doubles as personal space for part of the day, reduce the claim by the fraction of hours actually used for business. A room used half the day for work in a home where the office is 10% of the space produces a 5% claim.4Government of Canada. Business-Use-of-Home Expenses
Don’t reach for the whole mortgage payment. The CRA expects a reasonable calculation. Keep the measurements and a note on how consistently you use the space for work.
Employees Working From Home Cannot Claim It
This is the most common misunderstanding. If you’re a salaried or commission employee working from home, even with a signed Form T2200 from your employer, mortgage interest is off the table. The CRA specifically excludes mortgage interest and principal payments from the home office expenses available to employees.5Canada.ca. Expenses You Can Claim – Home Office Expenses for Employees Employees can still claim a share of utilities, rent paid, office supplies, and similar items. Mortgage interest belongs only to self-employed filers using Form T2125.
Borrowing Against Your Home to Invest
The most overlooked route to deductible mortgage interest has nothing to do with where you live. Paragraph 20(1)(c) of the Income Tax Act allows interest on borrowed money to be deducted when the funds are used to earn income from a business or property.6Justice Canada. Income Tax Act RSC 1985 c 1 (5th Supp) – Section 20 Take out a home equity line of credit secured by your house, use the money to buy stocks, bonds, or mutual funds in a non-registered account, and the interest on that borrowing is deductible.
Two limits matter here.
- The investment has to be capable of producing income. If the only possible return is capital gains, the interest isn’t deductible. The money has to point at something that can generate dividends, interest, or business profits.7Canada.ca. Line 22100 – Carrying Charges, Interest Expenses, and Other Expenses
- The investment can’t sit in a tax-sheltered account. Interest on money borrowed to contribute to a TFSA, RRSP, RESP, RDSP, FHSA, or DPSP is not deductible.7Canada.ca. Line 22100 – Carrying Charges, Interest Expenses, and Other Expenses
What matters is the current use of the borrowed money, not what secures the loan. A mortgage secured by your home is fine as long as the proceeds go directly into eligible investments. Keep a clean paper trail showing the funds moving from lender to investment account without any detour through personal spending.
The Smith Manoeuvre
The Smith Manoeuvre is a long-term structured application of the same rule. It uses a readvanceable mortgage, which automatically increases your available line of credit each time you pay down principal. You reborrow that amount through the attached line of credit and invest it in income-producing assets outside a registered account. Because the reborrowed money is used to earn investment income, the interest on the line of credit qualifies under paragraph 20(1)(c).6Justice Canada. Income Tax Act RSC 1985 c 1 (5th Supp) – Section 20 Over time the non-deductible mortgage shrinks while the deductible investment loan grows, and you claim the investment interest on line 22100.7Canada.ca. Line 22100 – Carrying Charges, Interest Expenses, and Other Expenses
The strategy is legal but unforgiving. Keep the borrowed investment funds fully separate from personal spending, invest only in assets capable of producing taxable income, and never route the money through a registered account. One sloppy transfer that mixes personal and investment money can taint the deductibility of the whole loan. Your home equity is also on the line if the investments fall.
Converting Your Home Into a Rental
Stop living in the property and start renting it out, and the mortgage interest becomes deductible going forward because the property’s purpose has shifted to earning income. The conversion itself has tax consequences. The CRA treats a complete change from personal to income-producing use as a deemed disposition at fair market value, meaning you’re considered to have sold and immediately reacquired the property.8Canada.ca. Income Tax Folio S1-F3-C2, Principal Residence Any gain up to that point may be sheltered by the principal residence exemption, but it has to be dealt with at the time of conversion.
Filing a subsection 45(2) election with your return for the year of the change of use lets you avoid the deemed disposition. The election can keep the property designated as your principal residence for up to four additional years even though you no longer live there, provided you don’t designate another property for those years.9Canada Revenue Agency. Principal Residence The trade-off is that you can’t claim capital cost allowance on the building while the election is in effect. Mortgage interest and other operating expenses still come off against rental income during that period.
Records, Forms, and What Happens If You Get It Wrong
Keep everything supporting a mortgage interest deduction for at least six years from the end of the tax year it relates to.10Canada Revenue Agency. Where to Keep Your Records, for How Long and How to Request the Permission to Destroy Them Early At a minimum, that means the annual mortgage statement showing interest paid, your calculation of the business or rental-use percentage, and documentation of the workspace or rental space dimensions.
The form depends on how the property earns income.
- Rental income goes on Form T776, Statement of Real Estate Rentals. The interest is entered in the interest and bank charges section.11Canada Revenue Agency. T776 Statement of Real Estate Rentals
- Self-employed business income goes on Form T2125, Statement of Business or Professional Activities. Mortgage interest for business use of home is calculated in the business-use-of-home section.12Canada Revenue Agency. T2125 Statement of Business or Professional Activities
- Investment interest is claimed on line 22100 of your personal return as a carrying charge.7Canada.ca. Line 22100 – Carrying Charges, Interest Expenses, and Other Expenses
Overstating a deduction is treated seriously. The gross negligence penalty is the greater of $100 or 50% of the understated tax tied to the false statement.13Canada.ca. False Reporting or Repeated Failure to Report Income Claiming mortgage interest on a property that doesn’t qualify, or inflating the business or rental share, is exactly the kind of thing that draws it.