Is there such a thing as tax deductible mortgages?

If you are a resident of the United States, the answer to this question is - yes.  For decades Americans have been able to apply the interest portion of their mortgage as a tax deduction against their personal income.  Regardless of whether it was an investment property or a principal residence - the interest was an eligible tax deduction.

How about Canada, can we deduct the interest portion of our mortgage payments?

Absolutely, but only if the mortgaged property is generating an income.  Here are some examples:

• Among other home expenses such as utilities and internet services, if you run a small business from your home a portion of your mortgage interest is eligible for a tax deduction against your personal income
• If your principle residence includes a self-contained rental suite, a portion of your mortgage interest is eligible for a tax deduction
• If you own a separate property that exclusively generates an income from short or long term rent/leases, the interest portion of your mortgage is tax deductible

What if you reside in your property and do not generate any income from it (i.e. you don’t rent it out)?

This is where things get interesting.  If you reside in the property and do not generate any sort of rental revenue from it, or do not operate a business out of your home, then the interest portion of your mortgage is not tax deductible (nor is the principle of course). 

HOWEVER, there is a way to create a tax deduction by restructuring and repurposing the mortgage that is currently registered on your non-income generating property.  The concept is very simple to understand:

Refinanced mortgage proceeds can be tax deductible if the proceeds are used for investment purposes.

For example, let’s say your home has an existing $300,000 mortgage and you decide to refinance it to $350,000 to invest in a non-RRSP mutual fund.  The $50,000 that you invest in a non-registered mutual fund is now eligible for a tax deduction as you are borrowing to invest.  Here are some other examples of how you can create a tax deduction from your mortgage:

• Using the refinance proceeds as a down payment to purchase a rental property
• Using the refinance proceeds to purchase stocks, mutual funds, and other types of financial products
• Using the refinance proceeds to invest in a business
• Using the refinance proceeds to invest in other vehicles that generate an income/revenue

As long as the mortgage proceeds are used to invest (or generate an income/revenue), the interest portion of your mortgage payment is eligible for a tax deduction.  Furthermore, only the portion of the mortgage proceeds that is used to invest is eligible for the tax deduction, not the entire mortgage.  So in the example above, only the interest payments on the $50,000 would be eligible for a tax deduction.

OTHER important points to know:

• Investing in RRSPs with the proceeds of a mortgage will not generate a tax deduction as RRSPs already create a tax deduction
• It is critical to segmentize your mortgage when employing a tax deductible mortgage strategy.  There are specific mortgage products that give you the ability to re-structure and re-purpose your mortgage into tax deductible and non-tax deductible components (call me for more details)

DISCLAIMER:

This information is for conceptual/illustrative purposes only.  If you are interested in employing any of the above, consult directly with a professional accountant and a financial planner.

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