Mortgage Interest and Deductibility

Introduction
Understanding mortgage interest and deductibility is essential for homeowners, landlords, real estate investors, and business owners across Canada. Mortgage interest is one of the most misunderstood areas of Canadian tax law. Although Canadians often assume mortgage interest is deductible—similar to U.S. rules—it is NOT deductible for your personal residence. However, mortgage interest is deductible in many other situations: rental properties, business-use properties, mixed-use homes, and leveraged investing. This guide explains when mortgage interest and deductibility applies, how CRA evaluates the purpose of a loan, and how to structure borrowing to maximize deductions legally.

Legal and Regulatory Framework
Mortgage interest and deductibility are governed by:

• the Income Tax Act (ITA)
• CRA Interpretation Bulletins (IT-533, IT-304R2)
• the Excise Tax Act (for GST/HST on business-use properties)
• Québec’s Taxation Act and Form TP-80
• CRA jurisprudence on “direct use of borrowed funds”
• case law on investment interest deductions

CRA applies the “current use of borrowed funds” test to determine loan deductibility.

1. Mortgage Interest on Your Principal Residence

NOT Deductible in Canada

Unlike the United States, Canada does not allow homeowners to deduct mortgage interest on their primary residence.

If you live in the home and do not rent any portion of it, mortgage interest is not deductible.

This is a key rule in mortgage interest and deductibility.

2. Mortgage Interest on Rental Properties (Fully Deductible)

For rental properties, mortgage interest is:

• 100% deductible
• claimed annually on T776 (CRA) and TP-80 (Quebec)
• not restricted unless property is also personally used

You can deduct interest for:

• primary mortgage
• second mortgages
• refinanced mortgages
• HELOCs used for rental purposes

Mortgage principal is never deductible, only interest.

3. Mortgage Interest on Mixed-Use Homes

If you rent part of your home:

• allocate mortgage interest between rental and personal use
• based on square footage and actual use
• only the rental-use portion is deductible

Examples:

• Renting basement → deduct % of interest
• Airbnb of one room → allocate based on number of rooms
• Duplex where you live upstairs → deduct interest for rental unit only

CRA and ARQ audit improper allocations frequently.

4. Mortgage Interest for Business Purposes

Interest is deductible if borrowed funds are used to:

• run a business
• buy equipment
• purchase inventory
• finance improvements
• support operations

The purpose of the loan determines deductibility—not the loan’s security.

Meaning:

• a home mortgage used to fund a business → deductible interest
• a business loan used to buy a home → NOT deductible

This rule is key in mortgage interest and deductibility across Canada.

5. Mortgage Interest for Investments (Deductible)

Interest is deductible when borrowed funds are used to purchase:

• stocks
• bonds
• mutual funds
• ETFs
• investments that generate taxable income

This follows the Smith Manoeuvre principle: converting nondeductible mortgage interest into deductible investment interest.

Important limitation:

• cannot deduct interest for investments generating only capital gains (no income)
• cannot deduct interest for TFSA or RRSP loans

6. Refinancing and HELOC Interest

Interest on a mortgage refinancing or HELOC is deductible only if borrowed funds are used for:

• rental property
• business activity
• taxable investment purposes

You must track borrowed funds by purpose.
CRA requires:

• bank statements
• loan documents
• tracing of funds

If you refinance for personal reasons (vacation, car, personal debt), that portion is not deductible.

7. Mortgage Interest vs CCA (Depreciation)

For rental properties:

• mortgage interest is fully deductible annually
• CCA is optional depreciation

CCA should be used strategically, as explained in Blog #95.

Mortgage interest is separate and remains deductible even when you choose not to claim CCA.

8. Mortgage Interest and Principal Residence Exemption (PRE)

Claiming mortgage interest deductions on mixed-use homes affects:

• capital gains reporting
• principal residence exemption
• percentage of home treated as business use

If you deduct mortgage interest for rental or business portions:

• that portion may become taxable at sale
• CRA may restrict PRE
• CCA should be avoided in most mixed-use cases

Proper planning is essential.

9. Québec-Specific Rules (TP-80)

Revenu Québec requires:

• detailed allocation of mortgage interest
• documentation of rental-use areas
• proof of business purpose for borrowed funds
• strict tracing of fund deployment

Québec audits mortgage interest claims more aggressively than CRA.

10. Documentation Requirements

To claim mortgage interest, keep:

• mortgage statements
• HELOC advance records
• proof of purchase for rental/business use
• bank transfer logs
• amortization schedules
• rental agreements
• invoices for investments/business purchases
• property-use calculations

Keep documentation for at least six years, or longer for real estate.

Key Court Decisions

Canadian courts consistently rule:

• interest deductibility depends on direct use of funds
• using a home as collateral does NOT affect deductibility
• taxpayers must trace borrowed funds
• partial rental/business use requires allocation
• refinancing interest is deductible only to the extent used for income earning
• inaccurate allocations may lead to reassessment

These rulings reinforce the importance of understanding mortgage interest and deductibility rules.

Why CRA and Revenu Québec Audit Mortgage Interest Claims

Auditors focus on:

• mixed-use homes
• Airbnb income
• HELOC tracing
• refinancing transactions
• undocumented investment loans
• excessive interest claims
• lack of proof of rental or business use
• PRE conflicts with rental deductions

Ensuring proper documentation prevents reassessments.

Mackisen Strategy

Mackisen CPA provides full support for mortgage interest and deductibility:

• tracing borrowed funds properly
• allocating interest among rental, business and personal use
• preparing T776 and TP-80
• structuring HELOC borrowings tax-efficiently
• implementing Smith Manoeuvre strategies
• protecting PRE eligibility in mixed-use homes
• defending interest deductions in CRA/ARQ audits
• preparing complete audit-proof documentation

Our approach ensures compliance, optimization and long-term tax savings.

Real Client Experience

Examples of how Mackisen assisted clients:

• A Québec duplex owner improperly deducted 100% of mortgage interest. We corrected allocation and avoided penalties.
• An Airbnb host used a HELOC for renovations but lacked tracing. We reconstructed use-of-funds documentation and preserved deductions.
• A self-employed professional used a mortgage to fund their business. CRA challenged deductibility. We proved business purpose and won the objection.
• An investor refinanced to buy stocks. CRA questioned interest claims. We provided detailed tracing and secured approval.
• A homeowner unintentionally jeopardized their PRE. Mackisen corrected filings to preserve the exemption.

Common Questions

• Is mortgage interest deductible on my home?
No—unless part is rented or used for business.

• Can I deduct HELOC interest?
Yes—if funds are used for business, rental or investment purposes.

• Do I need receipts for refinancing?
Yes—CRA requires tracing.

• What if I mix personal and investment use?
Interest must be allocated.

• Does CCA affect mortgage interest?
No—mortgage interest remains deductible regardless of CCA decisions.

• Does Québec audit mortgage interest?
Yes—very aggressively.

Why Mackisen

With more than 35 years of combined CPA experience, Mackisen CPA Montreal helps homeowners, landlords, and investors navigate mortgage interest and deductibility with full compliance. Whether you're allocating mixed-use interest, tracing HELOC transactions, or defending deductions in a CRA or ARQ audit, our expert team ensures accuracy, protection and optimal tax outcomes.