Mortgage Interest: Home Office Tax Deduction

Is Mortgage Interest Tax Deductible in Canada for Home Offices?

The short answer is: sometimes. It depends on how the property is used. For a mortgage to be tax-deductible in Canada, the property must be used for generating income, whether that's rental income, business, or professional income. This includes primary residences used in some rental capacity.

Mortgage interest on a primary residence

In Canada, mortgage interest on a primary residence is generally not tax-deductible. However, there are certain scenarios where tax deductions on mortgage interest are possible, even for primary residences.

Rental Properties

If you own a rental property that generates income, the mortgage interest on that property is 100% tax-deductible. This applies whether the rental property is your primary residence or not.

Primary Residence with Rental Capacity

If only a portion of your primary residence is rented out, you can claim deductions on a portion of the mortgage interest. The amount you can deduct is based on the percentage of the home that is rented out and the amount of time it is rented out for. For example, if you rent out a room that makes up 10% of your home's total living space for six months of the year, you can claim 5% (10% x 0.5) of the mortgage interest paid as a deduction.

Home Office

If you work from home and use a portion of your primary residence as a workspace, you may be able to deduct a portion of the mortgage interest. To qualify, your workspace must meet one of two conditions: it must be your primary place of business, or you must use the space solely to earn business income. The amount you can deduct is based on the percentage of the home that the workspace occupies and the amount of time it is used for business purposes. For example, if your home office occupies 15% of your total living space and you work there five days a week, you can claim 10.7% (15% x 260/365) of the mortgage interest paid as a business expense.

Building an Investment Portfolio

There is a strategy that Canadians can use to effectively deduct mortgage interest by building an investment portfolio. This strategy involves borrowing back the principal portion of each mortgage payment and investing it in an income-producing portfolio. Since interest paid on money borrowed to earn an income is tax-deductible in Canada, the interest on the loan used to build the investment portfolio becomes tax-deductible.

It is important to note that the eligibility criteria for deducting mortgage interest in Canada are stringent, and not all situations allow for tax deductions. Consulting a tax expert or financial advisor can help you determine which deductions you qualify for and ensure that you maximise all eligible deductions.

Mortgage interest on a rental property

In Canada, mortgage interest on a primary residence is generally not tax-deductible. However, if the property is a rental property owned solely to generate income, the mortgage interest is 100% tax-deductible.

How to Claim the Tax Deduction

To claim the mortgage interest deduction when filing your taxes, you must complete the relevant forms. A tax expert can help you ensure you're claiming all eligible deductions. If you rent out your entire home, all rental expenses, including mortgage interest, are tax-deductible from the rental income you claim on a T776 Statement of Real Estate Rentals.

Deductible Fees

In addition to mortgage interest, you can also deduct certain fees associated with getting a mortgage or loan to buy or improve your rental property. These include:

• Mortgage applications
• Appraisals
• Processing
• Insurance fees
• Mortgage guarantee fees
• Mortgage brokerage and finder's fees
• Legal fees related to mortgage financing

These fees can be deducted over a period of 5 years, regardless of the term of your loan. You can deduct 20% in the current tax year and 20% in each of the next 4 years.

Limitations

If the property is used solely as a principal residence, the mortgage interest is not eligible for tax deductions unless a portion of the home is used to generate income. Additionally, if a mortgage or loan is taken out for personal use, even if a rental property is used as collateral, the mortgage interest is not tax-deductible.

Mortgage interest on a home office

Mortgage interest on a primary residence is generally not tax-deductible in Canada. However, if you run a business from your home, you may be able to deduct a portion of your mortgage interest as a business expense. This is because the mortgage interest tax deduction in Canada applies only to properties used for generating income, which can include a primary residence.

If you use a portion of your home for business purposes, you can deduct a percentage of your mortgage interest based on the amount of space used for business activities. For example, if your home office takes up 10% of your home, you can deduct 10% of your mortgage interest. It's important to note that this deduction only applies if you are self-employed or a business owner. Salaried or commissioned employees who work from home cannot deduct mortgage interest.

Other Deductible Expenses

In addition to mortgage interest, there are several other expenses that you may be able to deduct for your home office, such as electricity, property taxes, heating, and internet costs. You can also write off supplies needed for your work, such as computers, phones, printers, and paper.

Claiming the Deduction

To claim the mortgage interest deduction, you will need to fill out the relevant tax forms when filing your taxes. For business or professional income, this would typically be Form T2125, Statement of Business or Professional Activities. It is recommended to consult a tax expert or accountant to ensure you are claiming all eligible deductions correctly.

Claiming mortgage interest tax deductions

Overview

In Canada, mortgage interest on a primary residence is generally not tax-deductible. However, there are scenarios where you may be able to claim tax deductions on mortgage interest. This typically involves using your property to generate income, such as through rentals or business operations.

Eligibility for Tax Deductions

To be eligible for mortgage interest tax deductions, your property must be used for generating income. This can include rental income, business income, or professional income. Even if you use only a portion of your primary residence for these purposes, you may still be eligible for partial tax deductions.

Calculating the Deduction Amount

The amount of mortgage interest you can deduct depends on how your property is used for income generation. If your entire property is rented out for the entire year, you can deduct 100% of the mortgage interest paid.

However, if you rent out your property for only a portion of the year or rent out only a part of your property, you can only deduct a proportional amount of the mortgage interest. For example, if you rent out a room in your home that makes up 10% of your total living space for six months of the year, you can claim 5% (10% x 6/12) of the mortgage interest paid.

Claiming the Deduction

When filing your taxes, you must complete the relevant forms to claim the mortgage interest deduction. For rental income, use Form T776, Statement of Real Estate Rentals. For business or professional income, use Form T2125, Statement of Business or Professional Activities.

Benefits of Claiming Mortgage Interest Deductions

• Lower tax burden: By claiming eligible deductions, you can reduce the amount of taxes you need to pay and may even receive a refund.
• Faster mortgage repayment: You can use any tax savings or refunds to make additional payments towards your mortgage principal, reducing the overall interest paid and helping you pay off your mortgage faster.
• Increased net worth: By allocating tax refunds or savings to pay down the mortgage principal, you can build home equity and increase your net worth.

Limitations and Considerations

While claiming mortgage interest tax deductions can provide financial benefits, it's important to consider the limitations and potential risks. Consult with a qualified tax professional or financial advisor to ensure you understand the implications and make informed decisions.

Limitations of mortgage interest deductions

Mortgage interest on a primary residence is generally not tax-deductible in Canada. However, there are certain circumstances in which mortgage interest can be tax-deductible. These circumstances include using the property for investment income purposes, such as renting out the property or using it to run a business.

Limitations for Self-Employed Individuals

If you are self-employed and run a business from your primary residence, you can deduct a certain amount of your mortgage interest based on the percentage of your home's space used for business purposes. For example, if your home office takes up 10% of your home, you can deduct 10% of your mortgage interest.

Limitations for Salaried or Commissioned Employees

If you are a salaried or commissioned employee and work from home, you cannot deduct mortgage interest. However, you can deduct expenses directly related to your home office space, such as heat, electricity, and internet. You can also write off supplies needed to work from home, such as your computer, phone, printer, and paper.

Limitations for Rental Properties

If you rent out your entire property for a full year, you can deduct 100% of the mortgage interest. If you rent out your entire property for only part of the year, you can deduct 100% of the mortgage interest paid during the rental period. If you rent out a portion of your property for a full year, you can deduct the applicable portion of the mortgage interest for the whole year. For example, if you rent out a 1,000-square-foot basement in your 2,000-square-foot home, you can deduct 50% of your total annual mortgage interest. If you rent out a portion of your property for only part of the year, you can deduct the applicable share of the mortgage interest for the rental period.

Capital Gains Tax

If you sell your home that has been used to generate income, you will have to pay capital gains tax on any profit earned. Capital gains tax is payable on half the profits that your asset (your home) has gained since it started producing income for you up to $250,000, and on two-thirds of profits over $250,000.

Frequently asked questions