Use your principal property in two ways to benefit from the tax system in Canada and make mortgage Interest tax deductible.
Let’s start from the very basics. Citizens of Canada, like citizens of any other country, are required to pay taxes. The tax system in Canada is based on the principle of self-assessment, which means that individuals must file their tax documents each year at the beginning of the tax season. The deadline for filing an individual tax return and paying the required taxes is usually the end of April.
However, besides paying taxes, it is also possible to qualify for some tax credits and benefits. There are some legal ways to save money during tax season for citizens who have lived in Canada for several years. For example, it is possible to make some expenses deductible or increase taxable income.
One of the most frequently asked questions about paying taxes is whether to get a tax deduction for mortgage interest in Canada? Unfortunately, there are no official, government-approved ways to make mortgage interest tax deductible in Canada like there are in the U.S., where you can get a tax refund on the amount of interest you owe if you have a mortgage.
However, there are a few other ways to benefit from a tax system in Canada. For example, if you plan to sell your primary residence and make a profit, you will not have to pay tax on that amount.
In this article, we will go over some exceptional cases where mortgage interest is tax deductible.
There are two well-known options to receive benefits as a taxpayer:
- Use your home as a workplace
- Use your house for rental purposes
Is it a good idea to set up a business in your own home?
You can get a tax deduction if you use your home as an office for your own business. It’s even possible to get some deductions for costs associated with your workplace – bills for electricity or supplies.
Specifically, if you set up your home office, you’ll need to use a computer, a printing press, and a telephone for work. Using these devices can result in additional electricity usage and higher utility bills. You may also need to buy supplies such as pens, calendars, and paper – the cost of which may also be deductible.
A special organization called the Canada Revenue Agency is responsible for deciding whether a specific home qualifies as business premises and declaring a list of costs for which a business owner can claim a tax return.
Nevertheless, it should be separately noted that you cannot qualify for a mortgage interest deduction in Canada for any type of property, residential or commercial.
Why should one not receive rental income?
One legal way to make a non-deductible mortgage interest tax deductible is by using your property for rental purposes. In particular, you want to rent a room or two in your house and decide to renovate these rooms to create a more comfortable environment for future tenants. Once you have completed the renovation and are receiving rental income from the tenants, you can claim the expenses incurred on your tax return.
What if I sell my house?
If you never used your home for investment purposes, any income you receive from the home’s sale is exempt from taxes. Let us say you bought a house 20 years ago for $500,000 and now decide to sell it for $750,000. In this case, you will realize a gain of $250,000 and will not have to pay taxes on that amount.
However, if you rent out your property before selling it, you will have to pay taxes on the capital gains you made. This major drawback is called “capital gains tax” and means that you will have to pay taxes on about half of the profit you made from renting out your property.
In 2016, it was announced by Canada Revenue Agency that all homeowners are required to declare the profit they made from the sale of their property in Schedule 3 of their income tax return.
Final thoughts on how to make a non-deductible mortgage interest tax deductible
There is no statutory provision for claiming tax refunds on mortgage interest in Canada. However, there are some special ways to legally get around the law – if you use your property for investment purposes or as business premises. In these circumstances, you may be able to get a tax refund.
However, before you try to make your mortgage interest tax deductible, consider that both of these options come with some risk. If you decide to use your property for investment purposes, remember that it may take years for the income to exceed the expenses, and you may have to pay a large amount of tax if you decide to sell your primary property.
Anyway, if you are thinking about making mortgage tax-deductible in Canada by using your property, you should first and foremost consult a professional financial advisor. He will help you find the best solution for the use of your main property and weigh all the possible risks.