Is Your Mortgage Interest Tax-Deductible?

Peter's picture

If you are frowning and thinking to yourself, "Of course my mortgage interest is tax-deductible!" then you are likely a visitor from the United States. If you are frowning and thinking to yourself, "Of course my mortgage interest isn't tax-deductible!" then you are probably a Canadian. Our neighbours to the south have been enjoying a tax break on their mortgage interest for some time now. Although, as a Canadian, your home's mortgage interest is not normally tax-deductible, there is a technique that can make all or part of your mortgage interest expenses tax free.

Borrowing Money To Invest

Back when I first covered assets and liabilities, I warned against borrowing money to buy assets that quickly lose their value, such as fancy TVs and electronics. If you are going to borrow money, you should use that money to buy an asset that will appreciate in value over time, such as stocks or mutual funds.

One of the main reasons borrowing for the purpose of investing is so attractive, is the tax benefit. When you borrow money to invest, the interest you pay on that loan can be deducted from your income at tax time. So if you pay $1000 in interest on a loan used to purchase investments, you effectively reduce your taxable income by $1000.

One noteworthy exception to this is when you take out a mortgage to invest in a home that will be your principal place of residence. In this case, interest you pay on your mortgage is not tax-deductible. But it can be ...

The Asset Swap

If you've already got a decent sized investment portfolio, you can make all or part of your mortgage interest tax-deductible using what is called an asset swap. Here is an illustration showing how it is done:

Asset Swap: At the end of the day, you have a mortgage and an investment portfolio, only now, your mortgage interest is tax-deductible.Asset Swap: At the end of the day, you have a mortgage and an investment portfolio, only now, your mortgage interest is tax-deductible.

So basically, you sell your investments to buy a house, then you borrow against your house to buy back your investments. You've swapped one asset for another and ended up right back where you started. Only now, you've given yourself a big tax break!

The Partial Asset Swap

This doesn't have to be an all or nothing strategy though. If you don't have a big enough investment nest egg to buy a house completely, you can do a partial asset swap which will make a portion of your mortgage interest tax-deductible instead of the whole thing. Here's an example:

  • You are buying a house worth $200,000.
  • You have $50,000 in investment assets.
  • You make a $50,000 down payment on the house using your investment assets, leaving you with $150,000 left to pay.
  • You take out a mortgage for the full value of your house, $200,000.
  • Using the $200,000 mortgage money, you pay the $150,000 you still owe for the house, leaving you with $50,000 cash.
  • You purchase $50,000 worth of investments.

So now you have a $200,000 mortgage to pay off, except now, 25% of your mortgage interest payment ( $50,000 / $200,000 = 0.25 ) is tax-deductible! At the end of each year your mortgage provider will send you a statement showing how much interest you've paid on your mortgage for the year. You'll take that amount and multiply it by 25% to figure out how much to claim on your taxes.

Other Considerations

Asset swapping is a bit of a gray area in the tax laws so there are some other things you might want to keep in mind. Here are a few:

  • If you incur a capital loss when you sell your investments, you can't claim that capital loss if you re-purchase the exact same investment within 30 days. So you'll want to wait 30 days before getting back into the same investment.
  • Regardless of whether you had a capital loss or not, some investment professionals recommend waiting 30 days before re-purchasing the exact same investments when asset swapping. This helps make it clear that you've done two separate actions: selling investments to buy a house, then borrowing against the house to invest.
  • There is also some debate about what types of investments are eligible for this type of tax-deduction. In Revenue Canada's income tax guide there is a line the reads "... if the only earnings your investment can produce are capital gains, you cannot claim the interest you paid." Some people insist, however, that even if your investments don't pay interest or dividends, the interest can still be deducted. If you want to stay out of this gray area, buy an investment that pays a dividend or some interest income so you know you are in the clear.

As a result of some of these gray areas, you should make sure you keep good records of all the transactions involved in the asset swap. That way, if you are ever audited, you'll be able to show exactly what you did, and you'll have all the paper work to prove it.

All Said And Done

If you are comfortable with the level of risk associated with asset swapping then this might be a great way to make a very common, and often large, expense tax-deductible. I would consider asset swapping an advanced investing technique, so just be sure you fully understand what you're getting into and that it is appropriate for your financial situation.


If you enjoyed this post you may want to consider subscribing to Plan Your Escape via Email or via RSS feed.


Sounds risky! Not only do

Sounds risky! Not only do you have the risk of running afoul of the law, you also face the question of where real estate is going.

That said, it's vaguely similar to a strategy my tax lawyer came up with: I'm taking money from my IRA, which in the U.S. is taxable at my ordinary income tax rate (about 28%--I'm over 59 1/2 years old) and using it to make mortgage payments on an investment house. Because I'm moving it from an investment to an investment, the tax on it is a wash and it does not push me into the AMT bracket.

When I go to sell the house, I will have to pay capital gains tax, which is significantly lower (for the time being) than ordinary income tax. No doubt after the Democrats get in, they will raise capital gains taxes, since something does have to be done to right our foundering economy. But if they don't raise it to 28%, I'm still ahead.

Peter's picture

Well, you always have the

Well, you always have the risk of sliding real estate prices, even if you go with a conventional mortgage. So you aren't risking anything more on that front by using an asset swap.

The risk of getting a negative ruling from the tax collector is a real risk, but if you wait the 30 days (or longer) you should be in the clear. You'll also want to make sure you've got all the required documentation to show what you did in case you do get audited.

As always, do your own research to make sure you're not getting into something that isn't appropriate for your personal situation.

how/where do you file this

how/where do you file this tax-deductible? Line#?

Peter's picture

Good question! You'll

Good question! You'll include this amount as a "Carrying Charge & Interest Expense" on line 221 of your tax return. Here is a description on the Canada Revenue Agency website.

Can you buy a cottage using

Can you buy a cottage using a mortgage and claim the interest back. The cottage would not be your primary residence.

Peter's picture

Yep. Actually, you buy a

Yep. Actually, you buy a cottage using your investments and then you mortgage your cottage in order to get some money to invest. It doesn't really matter what type of property is involved as long as the money is clearly used for investing.

I am always all ears

I am always all ears whenever I hear about my financial possibilities and this little "tutorial" you provided here will help me reorganize my priorities. I should pay more attention to tax deduction and profits because a smart move can save me good money. Accessing an e file to check my current tax status would be a good starting point.

will us canadians ever enjoy

will us canadians ever enjoy the tax breaks on mortgages the USA citazens get?

What are the risks? Other

What are the risks?

Other than the inherent risk in the value of your securities dropping, what are some of the other potential drawbacks?

I do not have a mortgage. I

I do not have a mortgage. I bought land using a home equity secured line of credit. Would the mortage swap still work under this scenario?

Peter's picture

@AnonymousRisk: What are the

@AnonymousRisk: What are the other risks? Well, the biggest and most significant risk is that you value of your investments will decrease in value. Let's say you borrow $50,000 against your home and buy $50,000 worth of dividend paying stocks. If the value of those stocks drops to $0 (i.e. the company goes bankrupt) then you own $0 in stocks but you still own $50,000 on your home. As long as the investments you purchase maintain their value, then you can always sell them, pay your debts and be back where you started.

The other risk is a cash flow risk. This would happen if you didn't have enough income coming in to cover the interest expenses on your loan. In the example above if your interest rate on your loan was 5% per year, then you'd need to have enough income coming in to pay the yearly interest expense of $2,500.

However, as long as you investment retain their value, you'll be able to sell them and repay your loan if anything else should come up.

@AnonymousLand: If you bought land with your home equity, then the only way you can claim the interest on your home equity loan is if you have a "reasonable expectation" of getting an income from your land purchase. So, for example, if your land is right next to a major highway and you are selling billboard advertising space to get some income, then you might be able to justify deducting your interest expenses. If your land is just sitting vacant waiting for you to build a cottage on it or something, then you likely won't be able to claim the interest as an expense on your taxes. You need to be able to generate some sort of income from your investment.

Great post and I'm really

Great post and I'm really glad I finally found some sound CANADIAN advice on the internet. Well done! I have a follow up question I am hoping you can help me with. Here's my situation:

I have a $200,000 mortgage on principal residence.
I have a $45,000 line of credit (against the principal residence) on a U.S. vacation property.

The bank won't acknowledge the U.S. property. So it's just a $200,000 mortgage on my house, and a $45,000 home equity line of credit as far as the bank is concerned.

I sell the house. The mortgage and the attached home equity line of credit has to be paid off according to the bank.

I get a new mortgage for $245,000 on my new and better principal residence.

The bank will not give me a $45,000 line of credit because I am "maxed out" with regards to debt ratios. So I still own my home and the U.S. property is owned "outright" (I don't own anything on it).

I know that I could ask for a $45,000 line of credit (probably unsecured) and then use that money to pay down the residential mortgage. That line of credit would be unsecured; the interest rate would probably be higher. But can I avoid the legal fees and interest differential of opening up an unsecured line of credit and just "dedicate" $45,000 of my residential mortgage to a vacation property?

In other words, can I just split one mortgage on paper for tax purposes or do I need to physically establish two separate lines of credit / mortgages?

Many thanks!

Peter's picture

@Wiebes: Well from my

@Wiebes: Well from my experience, CCRA (Canada Customs & Revenue Agency) would want to see an actual separate mortgage or line of credit. If you ever got audited, I expect that they would ask to see the paperwork and if you didn't have any then they would disallow your claim and ask you to repay any deductions you've claimed. Of course, you might get a different (and more accurate) answer by consulting a tax lawyer or accountant since they would be able to tell you for sure. Good luck!

I have not found any

I have not found any evidence anywhere to contradict what you have said. I agree, I think I need to establish a separate line. Good advice, and I will take it, many thanks!

Using your example: You are

Using your example:

You are buying a house worth $200,000.
You have $50,000 in investment assets.
You make a $50,000 down payment on the house using your investment assets, leaving you with $150,000 left to pay.
You take out a mortgage for the full value of your house, $200,000.
Using the $200,000 mortgage money, you pay the $150,000 you still owe for the house, leaving you with $50,000 cash.
You purchase $50,000 worth of investments.

This would leave the investor with one mortgage of $200,000 and assets of $50,000 in "investments" and $200,000 worth of house. Wouldn't this scenario be exactly the same as I described above? The $200,000 mortgage would not be split out, it would just be all-included. In this scenario, do you just take the mortgage amount and write off 25% of it?

What I have found is that

What I have found is that even if it is legitimate CRA auditors take a dim view of people who aggressively use legitimate tax laws. It is bullying, harassment. If somewhere else in your financial activities or your friends' or business associates' financial activities they find something they do not like they will pounce on your mortgage deduction and make your life miserable, even if you are able to come up with satisfactory documentation. In my case I was able to preserve about half of the deduction, after appeals. I did things in a way that was different from described, to make the mortgage interest a deductible expense by my company. I had my house mortgage jointly in my name and that of my consulting company, the consulting company made the payments, but the consulting company used the proceeds from the mortgage loan to pay my shareholder and other loans to the company. About half of these loans to the company had well documented terms and paid interest, the other half were more typical shareholder loans that did not have formal terms. CRA claimed that my company did not use the proceeds of the mortgage loan to earn income, therefore initially disallowed 100%. Only after showing, after much effort, that half the proceeds were used by the company to pay down debt they had a history of paying interest on did they allow the company to take 50% of the interest as a deduction. It was a horrible experience, I had to go back almost 30 years to original loans that had been replaced by other loans multiple times. It was not worth the aggravation and legal fees. CRA knows this. They abide by the "Susan Nelles" principle: if you (or associates) are using advanced tax saving methods you probably are cheating someplace so throw as much mud on the wall as possible to see what sticks.

A few common mistakes people

A few common mistakes people make when trying to make their mortgage tax efficent.

They buy stocks they don't know.
They buy stocks which distirbutes income or dividends, which means taxes which lowers the real return.

They do their own taxes or have someone who does their taxes and does not know what they are doing.

No risk management (insurance) or not enough.



"If you incur a capital loss

"If you incur a capital loss when you sell your investments, you can't claim that capital loss if you re-purchase the exact same investment within 30 days. So you'll want to wait 30 days before getting back into the same investment."
.......Just to be clear, it's that you can't claim the loss IMMEDIATELY, you'll have to wait until later (after you've sold again and not rebought within 30 days). The capital loss isn't eliminated, just carried forward. I'm clearing this up because comments, as you've stated, I've heard a number of times, and confused me into thinking the "initial" capital loss would be lost/unclaimable for good.

Peter's picture

Thanks John Doe for adding

Thanks John Doe for adding that clarification. I hadn't considered that particular situation. Good to know!

With the introduction of the

With the introduction of the Tax Free Savings Account (TFSA) in Canada, one common strategy that mirrors this is the use of home equity specifically for the investment in rental real estate as a primary use due to the tax efficient advantages of the TFSA. The downpayment source can be pulled from a re-advanceable mortgage and used. Particularly people starting their investment portfolio's will want to focus on maximizing RSP (depending on their employment pension situation obviously) and then focusing on their TFSA.

Just my $.02

Good call - wonder how you

Good call - wonder how you did with your investment property! Hope well.

A variation of your

A variation of your borrowing against a mortgage for which I would like some advice.

I remortgage an existing revenue property to 75% of it's value. That gives me about $110,000 when considering the existing outstanding mortgage. I take this money and invest it in my principal residence to build an addition that is dedicated to office space for my company.

Given I am using dedicated space within my principal residence for business, would Revenue Canada be prepared to accept my position that the interest on the existing revenue property is tax deductable? I believe it is but would like your feedback?

Thank you.

Peter's picture

On the surface, I would

On the surface, I would agree with you that it seems like your loan is clearly being "invested" into your business, and should therefore be tax deductible. However, often where we see a clear cut case, Revenue Canada sees an issue. I would see if you can find if there have been any similar cases to yours and see what the rulings have been. You could talk to a tax lawyer or possible call CRA directly. All the best with your business!

There was a small company

There was a small company holding seminars in Canada selling this same concept a few years ago. Back then (and even now) I did not see this structure as making mortgage interest tax-deductible. Rather it continues to be that borrowing money to invest in the market is tax deductible and mortgage interest payments are not tax-deductible. When you strip away the layers, all this does is advocate using your home as collateral to borrow more to invest in the market to get a tax deduction. If you have to borrow at a rate that is higher than your return it makes no sense. So you would clearly have to bet the money in the stock market and hope for the best. Again, your mortgage payments are still not tax-deductible as is in the US.

Thank you for this

Thank you for this article.
I have a question...
We sold our investment property, and will use the capital gain to invest in another investment property. Is this considered asset swapping? How would we report that on our income tax?

Thanks again.

I have bonds in an

I have bonds in an investment account paying 8%. I take out a sum that is less than the market price of these bonds and I use the money to buy a child a house. My investment company charges me 4.4% on the money taken out of the investment account but it is tax deductible?

Peter's picture

@Sunsu, I believe you would

@Sunsu, I believe you would report the capital gain on the sale of your first investment property on your tax return and you would owe taxes on 50% of the gain.

@popa, for tax purposes, I expect the 4.4% fee you paid would reduce your capital gain on the sale of your funds (or increase the capital loss, depending on your situation). So, yes, it is tax deductible in that it either reduced your gain or increased your loss.

Hi. I had to take out a

I had to take out a mortgage to payout my husband in a divorce settlement.
He was cheating on me after 18 years and 2 children and I kicked him out.
Can I claim this mortgage interest on my tax return, and do you happen to
know if any of my fees charged in the divorce are tax deductible.
Thank you so much.

Peter's picture

@karen: I don't know about

@karen: I don't know about that, but I suspect that it would not be tax deductible. I would check with your lawyer.

Thanks for the excellent

Thanks for the excellent article and comments! Does it matter if my investments are in a US brokerage with US stocks? Can I still sell those to buy my house and re-buy dividend paying stocks after 30 days in the US brokerage? Would CRA allow that? Also, if I incur capital losses on those stocks in the US, can I obtain Tax deduction on the Canadian return? I also file a US tax return and they would be allowable in the US return, but wanted to be sure about the Canadian one.

Peter's picture

@Anonymous (12/29/2012): As

@Anonymous (12/29/2012): As long as you are declaring all the income from those investments on your Canadian tax return you should be OK. The fact that they are US securities held in the US should not matter. Just make sure you've got a very good paper trail to document the money flow. I would also consider keeping all the investments in their own separate account (i.e. when you mortgage the house, have an account where you invest that money and only that money and don't withdraw or deposit anything else into the account other than returns/dividends). It just keeps things very clear which is always best. You may also what to check with a tax professional who is familiar with cross-border issues like this, just to be certain.

we purchased a rental

we purchased a rental property and put 20% down using the equity of our home from our home equity line of credit. Does that mean that we can claim both the interest that is being charged on the rental property's mortgage as well as 20% of the interest of our home equity line of credit??
your opinion would be much appreciated! thank you!

I have done the exact same

I have done the exact same thing as anonymous above. 20% downpayment borrowed against secured line of credit (in order to eliminate the CMHC insurance cost), then 80% mortgaged. Would be great if the Line of Credit interest were also tax-deductable. Plan on renting out to students at University of Ottawa.

Have you ever thought

Have you ever thought about creating an e-book or guest authoring on other blogs?

I have a blog based on the same subjects you discuss and would really like to have
you share some stories/information. I know my visitors would enjoy
your work. If you are even remotely interested, feel
free to send me an e mail.

I read this post fully about

I read this post fully about the difference of hottest and previous
technologies, it's remarkable article.

Peter's picture

@Walter & Anonymous: It

@Walter & Anonymous: It sound like the interest on the line of credit would be tax deductible in this case. Make sure it is easy to follow the money though ... I'd recommend having only the 20% down payment on the line of credit so that it is clear that all the interest from the line of credit is from the property purchase. If you put a TV and other stuff on the same line of credit, it gets very messy and is less likely to be accepted.

I had a commercial rental

I had a commercial rental property where the mortgage interest was very high and was hard for me to cope with it as the rent was lower than my payments.
I remortgaged my house and paid off the commercial mortgage. Can I deduct that portion of my house mortgage interest? Even though, I did not claim the penalty I incurred when I refinanced for that purpose.

Halloo gibt, ich Ihre

Halloo gibt, ich Ihre website duch die Nutzung während Suche nach bezogenen Thema, website bekam hier kam auf,
es sieht aus große. Ich habe Lesezeichen in meinem Google-Bookmarks.

Hallo gibt, einfach nuur verwandelte sich in bewusst Ihre Blog durch, und gefunden dass es wirklich
informativ. Icch bin wirst aufpassen für Brüssel.
Ich schätzen müssen Warum Sie diesen Kredit im Internet nutzen solten und nicht djesen Kredit im Internet
(Precious) weiter
dies in Zukunft. Zahlreiche Menschen wird wahrscheinlich aus Ihrer Schreiben. Cheers!

Es ist definitiv iel zu

Es ist definitiv iel zu lernen Thema. Ichh liebe alle vorgenommenen.

My webb blog Diee Vor- unnd Nachteile von Buying Kreditvergleich Used.


Post new comment

The content of this field is kept private and will not be shown publicly.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.
  • HTML tags will be transformed to conform to HTML standards.

More information about formatting options