Mortgage Interest and Tax Deductions Explained for Canadians

Many Canadians assume that mortgage interest is tax-deductible—but the reality is more nuanced. While mortgage interest is not usually deductible for personal homes, there are important exceptions and strategies that can make interest deductible in certain situations.

Here’s a clear explanation of mortgage interest and tax deductions in Canada, including what’s allowed, what’s not, and how homeowners can plan smarter.

Is Mortgage Interest Tax-Deductible in Canada?

For most homeowners, mortgage interest on a primary residence is not tax-deductible in Canada. This differs from countries like the U.S., where mortgage interest deductions are common.

However, there are specific scenarios where mortgage interest can be deducted.

When Mortgage Interest Is Tax-Deductible

1. Rental Properties

Mortgage interest on a rental or income-producing property is generally deductible against rental income.

Deductible expenses may include:

• Mortgage interest (not principal)

• Property taxes

• Insurance

• Maintenance and repairs

2. Investment or Business Use

If borrowed funds are used to:

• Invest in income-producing assets

• Operate a business

…the interest may be deductible.

This applies whether the loan is a mortgage, HELOC, or other borrowing—as long as the use of funds is clearly traced.

3. The Smith Manoeuvre (Advanced Strategy)

The Smith Manoeuvre is a tax strategy where homeowners:

• Re-borrow home equity

• Invest the funds

• Deduct the interest

This strategy requires strict documentation and professional advice when implemented correctly.

When Mortgage Interest Is Not Deductible

Mortgage interest is not deductible when:

• The home is your principal residence

• Funds are used for personal expenses

• Borrowed money isn’t generating income

Even refinancing your home does not automatically make interest deductible unless the funds are used for eligible purposes.

HELOCs and Tax Deductibility

A Home Equity Line of Credit (HELOC) may offer deductible interest only if the funds are used for investment or business purposes.

Mixing personal and investment spending in one account can complicate deductions and may trigger CRA issues.

CRA Rules and Documentation Requirements

To claim mortgage interest deductions, the CRA expects:

• Clear tracing of borrowed funds

• Separate accounts for investment use

• Proper receipts and records

• Consistent reporting year-to-year

Poor documentation is one of the most common reasons deductions are denied.

Should You Structure Your Mortgage for Tax Efficiency?

Tax efficiency can improve cash flow—but it shouldn’t drive mortgage decisions alone. Interest deductions may help, but:

• They don’t eliminate interest costs

• They add complexity

• They increase audit risk if done incorrectly

Always consult a tax professional and mortgage expert before restructuring.

Final Thoughts

Mortgage interest is generally not tax-deductible for Canadian homeowners, but there are legitimate exceptions for rental properties, investments, and business use.

Understanding these rules can help Canadians make informed decisions, avoid costly mistakes, and structure their finances more effectively.