Federal and provincial taxes play an important role in the functioning of our economy. They help build government programs, fund health care, education, and maintain our cities, towns, and villages. Over the years as a Canadian taxpayer, you will find a variety of ways to save money here and there during the tax period. You will learn which expenses are tax deductible, how you can reduce your taxable income, and other benefits while advancing in life and contributing to our country.
One of the questions we are often asked is whether in Canada the interest on your mortgage is tax deductible. Our American neighbors are lucky and can declare their mortgage interest as tax deductions. So, is this the case in Canada? To give a simple explanation, our tax system does not work that way. But the good news is that if you decide to sell your principal home and make a profit, you will not have to pay tax on that money. While in Canada you will not be able to claim interest on your mortgage, you will benefit from the system when selling your home, tax free.
Why are mortgage interests not tax deductible in Canada?
In 2009, a case was heard in the Supreme Court of Canada, where two homeowners deducted more than $ 100,000 in interest on their mortgage between 1994 and 1996. Unfortunately, after review, the Minister of National Revenue cited the deductions as “abusive tax avoidance” and declared them invalid. After the owners brought lawsuits, the Supreme Court sided with the Canadian government, officially proclaiming that no tax deduction could be made on mortgage interest payments, unless the house does not generate income when it is rented.
What if you use your home to run a small business?
If you work from home, or use it to run a small business, you can deduct certain costs associated with your workspace. This may even include home-related expenses, such as electricity, but you can not under any circumstances deduct the interest on your mortgage.
For example, if a homeowner sets up a home office, equipped with a computer, a fax machine and a printer, because of the extra power the appliances create, the electricity bill will increase. The owner might even need office supplies, maybe even pay employees to help him with his workload. They can contact the Canada Revenue Agency and find out if their home qualifies as a business and what expenses, if any, can be claimed. If the home is eligible, the landlord may report things such as the supply, property taxes (or property costs) and other related costs related to taxes, and be entitled to a deduction for amounts spent during the tax year.
What if your house produces rental income?
As mentioned above, one of the only ways to get a tax deduction on your mortgage interest would be to use your home or condominium for rental purposes. In other words, you should turn your house into an investment property. For example, if you rent one or more of your rooms, or if you need to renovate a portion to make a living suite in the basement and earn income through a tenant, your expenses will be as well. related to the rental. You can then claim the taxes. However, if your property or condo does not generate any income from a business or lease, you will not be entitled to any tax deductions.
What happens after the sale of your house?
First of all, be aware that working from home or converting your principal residence into an investment property has certain tax advantages. Selling your house after generating income with it has a persistent disadvantage. If and when you decide to sell your house, you will have to pay taxes on the profits of your investment property. This is called “the capital gains tax, in which you will pay taxes on about half of the profits that your property (your house) has earned since it started producing you a returned.
However, if you decide not to convert your principal residence into an investment property, the income generated by the sale of your home will be tax-sheltered. In other words, if you bought a house 10 years ago for $ 350,000 and sell it today for $ 500,000, the additional $ 150,000 earned will not be taxable. Keep in mind that since 2016, the Canada Revenue Agency has clarified that homeowners and condominium owners must now report profits from the sale of their homes under schedule 3 of their rebate even if you sell your principal residence and are exempt from capital gains tax.
Should I try to make the taxes on my mortgage interest deductible?
In conclusion, mortgage interest payments are not tax deductible except in special circumstances, such as renting your property to earn income. In addition, home-based businesses that do not involve rental of any kind will not benefit from tax deductions on mortgage interest. So if you’re thinking of turning your home into a small business or investment property, and want to save some tax dollars, do not forget to consider all the factors and know what you’re getting into.