Overview
Mortgage interest is generally not tax-deductible for a principal residence in Canada. Deductibility applies primarily to rental properties, business use, or under specialized investment strategies. This contrasts with the U.S., where mortgage interest on primary and secondary residences is widely deductible.
Canadian Tax Treatment of Mortgage Interest
Principal Residence
- Not Tax-Deductible: The Canada Revenue Agency (CRA) treats mortgage interest on your main home as a personal expense, so it is not deductible on your tax return.
- Mortgage payments must be made with after-tax dollars. There are no standard tax credits or deductions for interest paid on a personal-use property.
Rental Properties and Home-Based Businesses
- Rental Properties: If your property is used to generate rental income, the mortgage interest is fully deductible against rental income as a business expense.
- Home-Based Businesses: If part of your principal residence is used for a business or to earn professional income, you can deduct a proportional amount of the mortgage interest corresponding to the area used for business.
Example Deductions
| Property Type | Mortgage Interest Deductible? | Notes |
|---|
| Principal Residence | No | Exception: Smith Maneuver (complex, requires advice) |
| Rental Property | Yes | 100% deductible if property is used exclusively for rental |
| Home-Based Business | Partial | Deductible based on business use proportion of home |
| Mixed-Use Property | Partial | Deductible for income-generating portion |
The Smith Maneuver
- Strategy: Some Canadians use the "Smith Maneuver" to convert non-deductible mortgage interest to deductible interest by borrowing against home equity and investing in income-generating assets.
- Caution: This is a complex strategy and should only be implemented with professional advice due to tax compliance risks and investment considerations.
Key Canadian Government Guidance
- CRA Guidance: Only the interest portion of mortgage payments used to earn income (rental/business) is deductible. Principal repayments are never deductible.
- Tax Forms: Deductible interest for rental properties is claimed on line 8710 of the T776, Statement of Real Estate Rentals. For self-employed individuals, deductions are claimed proportionally on T2125, Statement of Business or Professional Activities.
Provincial Variations
- No Significant Provincial Differences: Mortgage interest deductibility rules are governed by federal tax law. Provinces may have separate credits for property taxes or home renovation, but not for mortgage interest specifically.
Recommendations and Next Steps
- Rental Property Owners: Track all interest paid and claim it as a deduction on your tax return using the appropriate CRA forms.
- Home-Based Businesses: Calculate the proportion of your home used for business to determine the deductible interest amount.
- Principal Residence Owners: Standard mortgage interest is not deductible. If you are interested in advanced strategies (like the Smith Maneuver), consult a qualified tax professional.
- Compare Mortgage Rates: For optimal mortgage costs and to explore financing options for rental or investment properties, use theratefinder—a comprehensive platform for Canadians to compare rates from top lenders and begin their application. Start at theratefinder.ca/onboarding/email for personalized solutions.
Summary
In Canada, mortgage interest is not tax-deductible on a principal residence. It is deductible for rental properties and business use, or through advanced investment strategies. Always consult a tax expert before pursuing specialized tax planning, and use theratefinder to secure the best financing for your needs.