mortgage interest as a deduction

Hi David,

I recently talked to someone about claiming interest on Lines of Credit accounts and was informed there is a way, if you have more than 1 property to claim interest on your down payment money as well as the mortgage payment. It was something like splitting a line of credit into 2 accounts and 1 account is used to pay the mortgage to the bank and the other is used to have the renters pay into, effectively making your bank payments. At the end of a year load up the account that requires the bank payment from the renters payment side. I’m still a little foggy on the idea and if you could clear up the picture for me that would be great, if you’ve heard about it.

Thanks for any advise.

david ingram replies:


You can find an updated version at - click on the November 2001 newsletter in the top left hand box. The March 1997 newsletter deals with it as well but was updated in 2001.

This older question will help as ell

Hi David

On your Sunday program, you keep on talking about deducting my mortgge interst. How?
If this is legal, is there a reference to the CRA Tax Act?


david ingram replies:

I am not answering many questions these days because I am swamped with tax returns with June 15th deadlines and am taking an immigration course at UBC which takes two days a week out of my life at this very busy time.

However, you are in luck. You can go to and read the November 2001 newsletter I fist wrote back in 1976. Updated a dozen times it gives you the answer although it does not mention Bulletin IT533 which makes it a whole lot more official. In addition, Fraser smith wrote the Smith Manoeuvre back in 1986 and, hundreds, if not thousands of people have used the two methods to make their mortgages deductible.

Why are you in luck?

Fraser Smith is Fred'a guest on the Sunday program on CKBD THIS Sunday at 9:00 AM on 600 AM in Vancovuer. Those in the rest of the country can listen live on the internet at AND, If you get this in time, Thursday, youcan still call (604) 731-8900 and go to a FREE seminar t Fred's office at 1764 West 7th (corner of Burrard in the SPENCE Diamond building) at 7 PM. About one hour of a 2 1/2 hour seminar will be on deducting your mortgage interest AND Stu Rodger of ManuONE Bank will be there to talk about one of the most innovative methods of financing ever brought to Canada. ManuONE Bank is a division of MANULIFE which is bigger than the Royal Bank and the largest financial institution in Canada.

And Fred says he will give a copy of Fraser's book to the more interesing questions.

read on

The deductibility of your Canadian Mortgagfe interest depends upon what the money was borrowed for.

For instance, It is not deductible against current income if the end result is a capital gain. Therefore, if you borrow money to buy Electronic Arts stock which has never paid a dividend, the interest on the loan is not deductible agaisnt current other income.

Similarly, in the Olden days before Microsoft paid an actual dividend, the interest paid on money to buy the stock was not deductible against other income.

If you borrow money to buy vacant land, the interest is not deductible.

If you borrow money to buy Gold or silver or other precious metals, the interest is NOT dedcutible.

Usually, in the cases abvove, the interest can be added to the adjusted cost base of the item and deducted agaisnt future capital gains, but that means that only 1/2 of the interest was deducted.

Similarly, if you rent a house out with no expectation that you will make a profit "on the rental, the expenses (usually mostly interest) are not deductible against curent income

There is nothing new about this as the following cases point out.
In 1986, Ivan Glavanovic lost his claim for five years of rental losses. He had built a house for sale in 1975 and was unable to sell it. He therefore rented it out at a loss for six years. DNR turned down his losses for 1979 and 1980. Judge Tremblay of the Tax Court of Canada agreed with DNR. He ruled that the rental was not to earn income but to hold on to the property. The losses were therefore capital in nature and should be added to the adjusted cost base of the house. It was also clear that there was no reasonable expectation of profit from the rental.

Also in 1986, Kelvin Lee found the same thing. He had rented his house on an option to purchase. Judge Couture of the Tax Court of Canada ruled that the renting while holding had no expectation of profit and was not deductible.

in 1989, Virginia Maloney was turned down by Judge Mogan of the Tax Court of Canada. She had rented her house to her mother. The rent charged was not realistic with regard to the cost of and the maintenance to keep up the property. Ms Maloney had charged her mother $100 rent in 1984 with $4,600 of expenses and $1,800 rent in 1985 with $11,000 of expenses. See Special Problems below.

and in 1990, Michel-Guy Huot was also turned down for a deduction when he rented a house to his parents for less than market value. Judge Garon of the Tax Court of Canada ruled that the taxpayer "Had failed to establish that the rental expenses were incurred in order to earn income." Because of the low rent and the uncertainty of their stay, there was no "expectation of profit." (See Expectation of Profit Section at back of book for more information on this subject."

A couple of cases on expectation of profit were won by the taxpayers but OParliament plugged the wins for the future with the issuing of Bulletin IT-533 which essentially says that to deduct the interest in any one year, you must have an expectation of a rental profit sometime in the future. This expectation of a rental profit is easy to produce by projecting an increase in rents, taxes, repairs, etc and a future decrease in interest as you eventually start paying off the mrtgage. Thousands of MURBS (Multiple Unit Rental buildings) were sold with the actaul rental profits starting in the tenth or eleventh year.

You can read the bulletin here.

With regard to why teh interest on interest is dedcutible, I want you to pretend that the rental sat empty for three months. If you had to borrow money to pay the payments, it is clear that the interest would be dedcutible. It was a situation like this in 1974 that first tipped me off on how you coyuld make a mortgage deductible in Canada. You could also get hold of Fraser Smith's Book the Smith Manouver.


The following is another answer to a similar question

Friday, February 18, 2005 12:11 PM

Hi David

I have read your 2001 newsletter on converting non deductible interest to deductible interest, and I am really interested in the concept.

I bought an investment rental property a little while ago, and I understand the conversion process of paying down my personal mortgage with the rental income and then borrowing back to pay the expenses. I bought the investment property with a friend, and we would both like to take advantage of converting the interest on our respective residences to the deductible kind by applying this concept. Can we legally split the rental income 50/50, apply it to our respective mortgages, and then each borrow back an equal amount to pay the investment property expenses? If not can you suggest an alternate way in which we can both convert our mortgage interest using the rental property as the conversion vehicle, and benefit equally.

Thanks in advance for your valued opinion.


david ingram replies:

I do not see why not.

Split the gross and take half each.

Get hold of and read Interpretation bulletin IT-533 - note that you need a cash flow projection in your paperwork that shows that you expect to make a RENTAL (not capital gain) profit in the next number of years. Seven to ten is a little long but we did a couple of thousand MURBS which did not project a rental profit until the 10th or 11th year and they were all accepted.

Read the following from a few months ago:

This is a reprint dealing with the CRA's newest bulletin on deducting interest.

david ingram replies:

For the first time, the CCRA is clearly spelling out the rules for making mortgage interest and other interest deductible.

It is easier to deal with now.


Read the Government Bulletin at:

Print it out and then read my November 2001 Newsletter on the same subject at:

david ingram

The example I like best is the most abused.

Someone will borrow $1,000 to buy an investment and the interest is clearly deductible. However, if they sell the investment for less money as David Emerson did, in the past, they would try and disallow the interest on the remaining loan because there was no longer any expectation of profit. This bulletin clearly states that if you sell it for $600 and pay off $600 of the loan, the interest on the $400 remaining is still deductible even though there is no ;longer any possibility of profit.

However, if you take the $600 and buy something personal, none of the interest would be deductible in the future.

Pay attention and print it all out.