By Rozvytok CPA | Toronto, ON
In Canada, mortgage interest on a principal residence is generally not tax deductible. However, with careful planning, there are several legitimate, CRA-compliant strategies that allow homeowners—particularly entrepreneurs and investors—to transform this non-deductible cost into a potential tax-saving opportunity.
Here are three professionally recognized methods that may allow for deducting mortgage interest in specific situations:
1. Partial Deduction via Business or Rental Use of the Home
When a portion of your home is used to generate income—either through self-employment, rental activities, or corporate use—a corresponding share of mortgage interest becomes deductible.
Examples of Qualifying Use:
- Designated home office for a sole proprietorship or incorporated business
- Rental suite (e.g., basement apartment or separate unit)
- Shared workspace used exclusively for client meetings or administration
Calculation:
If 20% of your home is used for eligible business or rental purposes, and you pay $15,000 in annual mortgage interest, then:
$15,000×20%=$3,000 deductible
Key Compliance Tips:
- Maintain detailed records of square footage and use
- Ensure the space is regularly and exclusively used for income generation
- If claiming business use, the income must be reported and reasonable expenses deducted accordingly
2. The Smith Manoeuvre: Converting Non-Deductible Debt Into Deductible Investment Debt
The Smith Manoeuvre is a well-established Canadian financial strategy that involves replacing non-deductible mortgage debt with deductible investment debt through a re-advanceable mortgage product.
How It Works:
- You make regular mortgage principal payments
- The principal portion you pay down becomes available to re-borrow through a line of credit (HELOC)
- You re-borrow those funds to invest in income-producing assets (e.g., stocks, ETFs, your corporation)
Example:
You pay $20,000 in principal over a year → You borrow that $20,000 via the HELOC to invest in dividend-paying securities
✔ The interest on this $20,000 becomes tax-deductible under section 20(1)(c) of the Income Tax Act
Key Considerations:
- Investments must have a reasonable expectation of income
- Detailed tracking is essential: each borrowed dollar must be traceable to an eligible investment
- Seek advice on interest tracing rules and attribution risks for spousal accounts
3. Refinancing to Invest in a Corporation (Shareholder Loans)
Another advanced strategy is to refinance your home and use the proceeds to invest in a corporation—particularly one that you own or control. If structured correctly, this allows for a deduction of the interest expense against your personal income.
Conditions for Deductibility:
- You lend or invest the borrowed funds into a Canadian corporation
- The corporation uses the funds to earn active business income
- There’s a documented shareholder loan or investment agreement
- A reasonable interest rate is charged if applicable
Example:
You extract $150,000 through a mortgage refinance and lend it to your operating company to fund equipment or expansion. As long as the funds are used for income generation, the interest on the borrowed $150,000 is deductible to you personally.
Professional Insight:
- Ensure proper legal documentation (e.g., promissory note or shareholder loan agreement)
- Confirm that the corporation is using the funds directly for eligible purposes
- Speak with your CPA before initiating this strategy to avoid triggering attribution or benefit-in-kind concerns
Final Word: Structure is Everything
While mortgage interest on a personal residence is not deductible by default in Canada, with strategic structuring and proper documentation, it can become deductible in many cases. These strategies require professional oversight to ensure compliance with CRA guidelines and to avoid costly errors.
At Rozvytok CPA, we work with business owners, real estate investors, and incorporated professionals to design custom tax strategies that maximize deductions while managing risk.
Rozvytok CPA
Accountants you want on your team. Serving Toronto and beyond.
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