Borrowing money against a rental house to buy a principal residence in Canada

QUESTION: Hi David,

I own two homes. I have one rental property worth 500,000 with a mortgage
of 250,000.

I want to sell my principle residence to buy a new one. I want to do an
equity take out on the rental to enhance the down payment on my new home.
Is the increased mortgage on the rental tax deductable?

thx

david ingram replies:

The answer is absolutely NO!!!

Only interest on money used/borrowed for investment purposes is deductible.
Therefore, when the money from a mortgage on your principal residence was
used to buy income mutual funds or a rental house, the interest is
deductible against rent from the rental or income from the mutual funds or
other investment.

But a mortgage (registered against / on a rental house) where the money
borrowed was used to buy you a pleasure boat or the house you live in or a
motorhome or other personal use item is NOT deductible.

The best case to see this is the 1979 Manfred Holman Case.

On the other hand, you can use rent from the rental house to pay down the
non-deductible mortgage on your new principal residence. After paying down
the mortgage by $500 or a $1,000 or whatever, use the new equity in your
house to fund a Line of Credit loan to pay the expenses on the rental house.
The expenses would include repairs, property taxes mortgage payments
(including principal). The expenses paid with borrowed money (but not the
principal) are deductible on your T776 rental statement.