Are you wondering if Mortgage Interest is Tax Deductible in Canada? If yes then you're on the right page.
When it comes to tax-deductible, some factors can make a mortgage be considered tax deductible. All of this boils down to the way you use your property.
If you're a property owner and you kind of rent out a portion of your property for business, or probably living in the property and you're wondering if it can be considered tax-deductible, then keep reading. This article will help you understand the ins and outs of reclaiming your mortgage interest in Canada.
Before we dive straight into the main topic of discussion, I'd like you to take note of some key things regarding tax-deductible in Canada.
Things To Take Note Of On Tax-Deductibles
Your mortgage interest payments can be considered tax-deductibles depending on the situation. If for instance, you use your home as a rental property, a business office, or a designated area is used as an office, you may be able to claim some of your mortgage interest back.
Claiming of fees associated with your mortgage property is claimable.
With all that said, let us move to the main topic of discussion.
So the big question is,
Is Mortgage Interest Tax Deductible in Canada?
For us to ascertain if this is possible, we'll need to look at the two ways in which you can write off mortgage interest payments.
As I have mentioned before, what you use the property for plays a significant role in ascertaining if mortgage interest tax is deductible in Canada.
To know if the mortgage interest tax is deductible;
- The property Must Be Generating Rental Income
- The Property Is a Primary Residence
Properties Generating Income
According to the Canadian government guide on tax deductible, tax can only be deductible on mortgage interest payments when the property is being used as a means of generating rental income.
If the mortgage interest property of the property you own is part of your operation cost for your rental property, you have the option to claim back all, or even a portion of the interest.
Property Being Use as Primary Residence
If you own a property that is used primarily as a residential place, in most cases that property might not be considered eligible for tax-deductible in Canada. This scenario is usually complicated if you want to claim a mortgage interest on such property. But if you wish to take advantage of that, you can use a small portion of the house as an office where business can be conducted. With this technique, you can easily maneuver your way to get interested in your residential mortgage.
Also Read: How Does Reverse Mortgage Work in Canada?
Also Read: How You Can Get a Government Job in Canada in 2025 (Learn How)
Using A Mortgage For Income Tax Deduction Common Or Possible?
When you have a property that was purchased through a mortgage and used as a rental, then your chances of claiming back your interest in your tax return each year are very much possible.
When talking about using a mortgage for an income tax deduction in a residential context, this is usually less common in Canada.
Using of mortgage for income tax deductible in a residential context, you can claim back your mortgage interest on a primary residency. This is not really advisable for homeowners. However, as a property owner, you can engineer this technique to your favor by writing off your mortgage interest payments.
How much mortgage interest is tax deductible?
According to the Canadian government, you can deduct the interest you pay on any money you borrow to buy or improve a rental property. This means that as a property owner in Canada when you rent out your property within one year, that particular property will be eligible to earn interest on your tax deductible. However on the other hand, when you only rent out a particular portion of your property within one year, this property will only be able to get interest payment on tax deductible for just 12 months of it being rented out.
All of this depends on the portion or space being rented out and the length of time the property has been able to generate rental income.
Let me explain this in a layman's way for easy understanding. Here is an example below that negates the point above.
Let's say you own a property in Canada and you rented out the whole property for one year, you can earn 100% of mortgage interest as tax deductible. Aside from that, let us do some maths. When the whole of your property is rented out for some few months in the calendar year, this means that 100% of the interest payments for the time the property was rented out (e.g. 4 months = 4/12, or 1/3 of your total yearly interest) will be the amount of mortgage interest that’s tax deductible.
On the other hand, when a part or portion of your property is being rented out such as the basement suite of the property or just a single room for the whole year, this means that the amount of mortgage interest that’s tax-deductible is % total square footage x 12 months. (e.g. a 500 sqft. Basement suite rented for one year in a 1500 sqft home = ⅓ entire property space, and therefore ⅓ real yearly mortgage interest is tax deductible.
If you're to rent out part of your property for a few months the amount of % total square footage x 12 months. (e.g. a 500 sqft. Basement suite rented for one year in a 1500 sqft home = ⅓ total property space, and therefore ⅓ total yearly mortgage interest is tax-deductible and will be % total square footage x time rented. E.g. a 500 sqft basement in a 1500 sqft home, rented for 2 months, = ⅓ total interest payment for only those 2 months of the year is tax deductible.
One thing the Canadian government wants you to understand is that you are not allowed to deduct in total any lump-sum amount paid in interest. Instead, you would prorate the amount for the remainder of the term of your mortgage or loan. In other words, you spread out the amount you paid in interest in one year throughout the rest of your mortgage term.
What Are The Mortgage Fees To Claim In Canada When You Purchase Or Improve a Rental Property?
In Canada, you can claim some of the fees that have to do with the money you've borrowed to purchase or even improve your property. Some of these fees you can claim are Mortgage applications, appraisals, processing, and insurance fees, Mortgage guarantee fees, Mortgage brokerage and finder’s fees, and Legal fees related to mortgage financing.
With all of these fees mentioned above, one thing you need to also know is, that when you borrow money for a rental property that has to do with anything like construction or even renovation, these automatically fall under the category of what is regarded as "Soft Cost". Some of these soft costs are deductible only for the period of construction, renovation, or alteration of a property used for rental income. These costs are usually interest, legal fees, accounting fees, and property taxes.
Can Mortgage Interest I write Off Mortgage Interest When working from home
As a work-from-home individual, writing off various expenses that have to do with your home office is possible so long as your home office is deemed qualified for tax deductibles. What you need to know is that the amount you can write off depends on the size of your home office or work area. Let's say for example, your home office covers 5% of your property space, and you can claim 5% of your mortgage interest, insurance, or property tax.
Conclusion
With all of the points mentioned on mortgage interest tax deductible in Canada, I now believe you have an idea of how you can claim yours as a property owner.
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