Taxes take up a sometimes surprising amount of Canadians' yearly expenses. However, some Canadians may be paying more than they need to. Even though we all can benefit from paying taxes, most people are also happy to take deductions when they are offered. The government allows for many different tax deductions and a savvy filer can find hundreds of dollars in savings each year if they deduct as much as possible.
Many Canadians pay thousands a year in mortgage interest and may be wondering if this amount is tax-deductible. This article will cover everything you need to know about mortgage interest tax deductions, who is eligible, and how much they can claim.
This article does not constitute official tax advice. Often, deductions and tax rules have many nuances and complications. Be sure to consult an accountant about exactly how much you can safely deduct before trying to deduct mortgage interest. Tax errors or willing tax fraud can cost you a lot of money, so do your due diligence. A professional can also help you save as much money as possible on taxes.
Mortgage interest is not always going to be tax-deductible. For most homeowners who simply use their property as a residence, you will not be able to deduct mortgage interest, but there are other situations where you, as the property owner, can deduct your mortgage interest payments.
One of the biggest justifications for tax deductions is if the money was spent for the sake of generating income. This is why business expenses are usually tax-deductible. It takes money to make money but since you already pay tax on your income, paying tax on business expenses would equal to double the amount of taxes.
So generally, if you make income from your property, either entirely or in part, your mortgage interest may be tax-deductible. This includes full rental properties, rental units in your home, or home offices, and more.
While mortgage interest is sometimes deductible, not all mortgage payments are deductible. What is not ever deductible on your mortgage is payments made towards principal value. Even if your property is entirely used for income, you can not claim these amounts for a tax deduction.
Keep in mind that with each mortgage payment, the ratio between principal and interest paid can vary so be sure to calculate the exact amount of mortgage interest paid each month or ask your lender to provide you with these figures.
If you have a rental property that generates rental income, your mortgage interest payment may be tax-deductible. You may be able to claim only a portion of your interest, or as high as the full amount depending on how your property was rented. Since rental income is taxable income in Canada, this can help you recover some of the money lost to taxes.
For a long-term rental property that is continuously rented out and generating rental income, you can claim the full amount paid in interest as a deduction on your taxes.
If you have a short-term rental property, things are a little different. For short-term rentals, you may only deduct an amount proportional to how long your unit was rented out of the year. So if you only rented out your unit for half of the year, only half of your mortgage interest will be tax-deductible.
If you are only renting out a portion of your home, such as a room or an apartment, you will need to determine how much of the space in your home that rental comprises. If you rent out a unit that is a quarter of the total size of your home, you can deduct up to a quarter of your interest payments, assuming the unit was rented through the year. For only portions of the year, the same division from above applies, and you will need to account for both the portion of your home that is rented and the portion of the year in which it is rented.
In addition to mortgage interest, you will likely have various expenses that you incur from the operation of a rental property. Maintenance and carrying costs such as repairs, renovations, or utilities may be tax-deductible for your property or the portion of your property that is rented. You may also be able to deduct fees such as mortgage insurance, home insurance, and property tax.
The question of whether or not you can deduct interest paid when your home is your place of work is extremely poignant in today's world as more people are making their home their workplace. There are rules that may allow you to deduct your interest in this case, but it will be a bit more complicated.
First of all, if you work from home for an employer, you are unfortunately not able to deduct your interest payments. However, you may still be able to deduct some of your taxes if you work from home. For the 2020 tax year, the Canada Revenue Agency simplified the process and allowed a $2 claim for every day worked from home, up to $400. This option may be extended for the 2021 year given ongoing restrictions.
You can also go for a more detailed deduction process that can allow you to deduct a portion of home expenses such as utilities, internet access, rent, and more. You may also be able to claim office supplies or phone bills if your work requires you to pay for them and commissioned employees may claim additional expenses such as property taxes and home insurance.
To learn more about tax deductions for work from home employees, see the government's website on the topic.
If you own your own business and operate it out of a property you own, you will be able to deduct your mortgage interest.
The most simple calculation is for a property used solely for the purpose of generating income for the property owner. For example, if you own an office that is only used during work hours for work-related activities, you could deduct up to 100% of this property's interest from your taxes.
If you own a property of which only a portion is used for generating income, then you can only claim a portion of your interest payments. For example, if you own a business with an apartment above, and use the business to generate income while you live in the apartment, you can only deduct interest payments for the portion of the property that is used for generating income.
It is a similar situation if part of your property is used for generating income, but only for part of the time. In this case, you will need to calculate not only the portion of your property that this space makes up but also for which percentage of time it is used to generate income. This portion of your interest payment is tax-deductible.
Similar to work from home deductions above, business owners may deduct more than just mortgage interest if the expenses are related to their business. For example, you may deduct costs of utilities, rent, property taxes and more. If you are only deducting for a portion of your property, again you may only deduct a portion of these costs, proportional to how much of your property is used for business.
Tax filings can be notoriously difficult, and the government will do little to help you simplify the process. If you own property and want to deduct an amount of your expenses from your taxes, the duty will be on you to not only keep detailed records of these expenses but to know how to properly apply the relevant tax deduction. If done right, however, this effort will be more than worth it, as you can save hundreds of dollars off your tax payments, or take home a much larger tax return.
To make sure you are getting the most out of your return, especially if you own multiple properties or a small business, be sure to consult an accountant. In many cases, the amount of savings you will gain from their services will far outweigh the amount that you will pay for their help.
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