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When can mortgage interest be tax-deductible in Canada?

Wouldn’t it be nice if your mortgage interest could be tax deductible? What if I were to tell you it is possible in Canada. Maybe not in all cases, but I’d like to share some situations where it can be. Let’s demystify this seemingly complex topic and break it down to provide you with a better understanding of how it works.

Unlike our neighbours in the United States, Canadians typically can't deduct mortgage interest from their primary residence to decrease their overall taxes. However, there are several strategies, that may make mortgage interest tax-deductible.

The Smith Maneuver

One such example is the Smith Maneuver, named after British Columbian financial planner Fraser Smith who developed and popularized this tax strategy.

The way it works is homeowners re-borrow the principal portion of their mortgage payment after each payment is made and invest it in income-producing assets. This includes investments such as dividend-paying stocks, mutual funds, real estate and bonds. The interest on this borrowed money is tax-deductible, as it is used to generate investment income. 

Over time, this approach not only reduces the homeowner's tax liability but also helps in building a substantial investment portfolio while paying down the mortgage. 

Rentals and home-based businesses

For those with investment properties or working from home, the process of deducting mortgage interest can be more straightforward. 

If you own a secondary property that generates rental income, the mortgage interest may be considered part of your operating cost. This allows you to claim back the mortgage interest, along with other deductible expenses such as property taxes, utilities, maintenance, repairs and more. 

For property owners who rent out a portion of their primary residence, deductions are proportional. The percentage of the property used for rental purposes determines the amount of mortgage interest and other expenses that may be deducted. For example, if 25% of the property is rented out, then 25% of the mortgage interest and other related expenses may be claimed as deductions.

Another way owners may deduct a portion of the mortgage interest is if they regularly work from home and have designated a specific area of the home exclusively for business purposes. In this case, the deduction would correspond to the percentage of the house being used for work purposes.

That said, It's crucial to consider potential pitfalls when making deductions on your principal residence to reduce taxable income, such as affecting the principal residence taxable gain exemption–a benefit no one wants to lose. That’s why I work closely with your accountant or financial planner to help you avoid such issues. And if you need a trusted professional, I can make that introduction.

Contact me for more information

Navigating tax-deductible mortgages in Canada may seem daunting, but with the right knowledge and strategies, and being aware of any downsides, it does have the potential to provide significant financial benefits. Whether you're considering the Smith Maneuver, renting out your property or running a home-based business, understanding the potential tax deductions, legal framework and pitfalls is key to maximizing your investment.

Don’t hesitate to contact me if you would like to know more about these strategies and how they may apply to your personal situation. 
 



TMG
Tuesday, October 3, 2023

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