Filing your taxes can be confusing sometimes, but a newly complicated return can pose several questions for first-time landlords or short-term rental property owners. For one, is your mortgage interest tax-deductible in Canada?
Fortunately, tax software and accountants can help guide you through the season, deciphering any nuances and exemptions. But they can’t read your mind, so you’ll need to plan and prepare all the necessary documents and details in advance to ensure you get the best tax refund available. To do this, you’ll need basic knowledge of tax deductions.
While this article does not constitute tax advice, it will provide a broad overview of what you can and can’t deduct regarding mortgage interest.
Key Takeaways:
- Sometimes, mortgage interest can be deducted from your income tax return, reducing your tax burden.
- You can only deduct your mortgage interest if your home generates income or houses your business.
- For homes used as short-term rentals, how much time it spent rented affects your mortgage interest deduction.
- You can also claim rental expenses like home insurance, repairs, and maintenance to reduce your overall taxes owed.
When is Mortgage Interest Tax-Deductible?
When you take out a mortgage, you’ll pay interest on top of your principal. The mortgage interest you pay over the life of the loan will depend on your interest rate.
In Canada, taxpayers can deduct most interest paid on money borrowed for investment purposes, including mortgages on income properties.
You may be able to deduct mortgage interest on any property you rent out or where you operate a business. For example, this benefit could apply to your primary residence if you rent out a portion of your home or use it for business purposes (you cannot deduct mortgage interest if you do not generate income from it). The amount of mortgage interest you can claim on your taxes will vary based on the type of space and how long it’s occupied throughout the year.
Here are a few scenarios that may qualify for a mortgage interest tax deduction.
- Your home is a full-time or short-term rental
- You rent out a portion of your home (like a spare bedroom)
- You run a business from your home
- You’re working for an employer from your home
More details on each situation can be found below.
Full-Time Versus Short-Term Rentals
If you own a short or long-term rental property, you’re probably wondering, is mortgage interest tax deductible on rental property in Canada?
Typically, if you rent out an entire property for the whole calendar year, all the mortgage interest is tax-deductible because the property generated income for that period.
Short-term rentals like Airbnb accommodations or seasonal cottage rentals are a different story. In this case, if you rented the entire space, you would calculate the number of days the rental property produced income to determine the portion of interest paid on the home.
Say you rent out your cottage from May to September (five months). Then, you could deduct about 41% (5 months/12 months = 41.7%) of your annual mortgage interest.
An Airbnb-style rental or cottage might be a little more complicated. If you rent out your house for 65 days (about two months combined) throughout the year, you could deduct about 17% (65/365 = 17.8%) of your mortgage interest.
Room Rentals
If you rent out a portion of your home, you’d have to break the calculation down even further. For example, if you rent out a bedroom or have a tenant living in your basement apartment, you’d need to determine the mortgage interest paid on the number of square feet the rented part of the home equals.
Again, the occupancy period matters here, too.
If, for instance, a tenant rented a room in your home for the whole year, you’d calculate the space occupied/used for income purposes. If your home is 1,000 square feet and the rented room is 150 square feet, you’d deduct 15% (150/1,000 = 0.15) of your mortgage interest.
However, if a tenant rented a room for only three months (or 25% of the year), you could claim only about 3.75% of your mortgage interest. This math comes from multiplying the rented square footage (15%) by the amount of time it was rented (25% of the year).
Self-Employed Business Space
Self-employed individuals working from home can claim their home office expenses, including a portion of mortgage interest, property taxes, and heating costs. To determine the eligible amount of workspace, you’d need to calculate how much of the space is designated for only work. If your workspace is shared, like a kitchen or bathroom, you’ll also need to calculate the portion of time you use it for work.
The Canada Revenue Agency (CRA) has a calculator tool to simplify this process.
Working From Home
As a precaution, many people are still working from home due to the COVID-19 pandemic, and employees are incurring additional expenses during working hours, such as utilities. As a result, the CRA announced a simplified version of the home office deduction to help recuperate some of those costs.
If you worked more than 50% of the time from home over at least four consecutive weeks in the year, you might qualify for a deduction of $2 a day during that period, up to a maximum deduction of $500 in 2021. This method applies to the 2020, 2021, and 2022 tax years but does not apply to the 2023 tax year and beyond
For the 2024 tax year, you’ll need to use the detailed method. This method requires you to complete Form T777S or T777. You’ll also need a completed and signed Form T2200S or Form T2200 from your employer, and you’ll need records of your work-related expenses.
Rental Expenses You Can Claim on Your Taxes
You can deduct several other rental expenses you incur from renting property that you own; however, many costs are exempt. Here are a few examples.
Rental expenses that you can deduct:
- Home insurance
- Repairs and maintenance
- Property taxes
- Travel to collect rent
- Eligible utilities
Rental expenses that you cannot deduct:
- Land transfer taxes
- Personal portion of the property
- Mortgage principal
Only expenses related to the investment income are tax-deductible and must be reported on a T776 Statement of Real Estate Rentals form at tax time. Consult a tax professional to ensure you get the highest possible tax refund or savings on your mortgage interest.
Is Mortgage Interest Tax Deductible In Canada?
It depends, but there are several scenarios when mortgage interest is tax deductible. Don’t forget to check for other tax credits you are eligible for as a homeowner in Canada.
If you are still saving to buy your first home in Canada, consider opening a First Home Savings Account. The contributions are tax-deductible, however the property you purchase must be a primary residence — not an investment property.
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