Write off Mortgage Interest in -

1)  Can I write off the mortgage interest on an investment property?
2)  I increased the mortgage on my personal residence to obtain a down payment for my investment property - can I write off this interest?  Many thanks!
david ingram replies:
too busy to answer
Hope this helps!

My question is: Canadian-specific

QUESTION: We have a rental property generating regular rental income and got enough equity to cover our outstanding principle residence's mortgage. Is there a way we can move this equity to pay off the principle residence's mortgage and still be able to legitimately claim interest payable as tax deductible?

david ingram replies:

Had 91 people at a free seminar at the Holiday INN on Sunday August 12th.

The following is the handout at that seminar. 

Hope it helps.

We recently bought a 4plex in Kitimat as a rental investment. We used a Scotia home equity loan for the down payment and a TD mortgage for the other 75%. We have a mortgage on our principal residence in Langley of $244,000. Our monthly payments on the 4plex will total about $1,300 , and the rents will be about $2,000. What would be the smartest method for paying this mortgage? What do we do with the excess cash flow? Is it possible to deduct the interest on our primary residence mortgage? Thanks. Al Wood. 604-530-3430.

david ingram replies:

I had some 90 people at a free seminar on this subject today and am just about all "free"ed up on the subject.

You should be taking the rent you receive and use it to reduce the non-deductible mortgage on you r Langley house.
You can find out more by reading my November 2001 Newsletter in the top left hand box at www.centa.com.

Reading Fraser Smith's Book 'THE SMITH MANOUVRE' will also give you ideas on how to make the Langley Mortgage deductible.

Your excess  flow should be used to reduce the $244,000 mortgage as soon as possible.  Of course, the interest on the down payment loan is also deductible on Form T776.

The following is part of the handout at today's seminar -

David Ingram's US/Canada Services

Mortgage Interest as a Deduction in 2007 – dealing with GAAR

I first conceived of this method in 1975/76 when a client of mine had a rental duplex and had a tenant who was injured in a car accident.  It was at the time of the changeover from private insurance to ICBC and the injured single mother tenant was waiting for an insurance settlement. 

My client allowed his tenant to stay in the half duplex for more than a year and to stay afloat him self, he borrowed money to pay the duplex bills. When doing his 1975 tax return, we deducted the interest paid on the loan because the purpose of the loan was clearly to fund the rental duplex.   

When he finally got his cheque for more than $5,000 from the tenant, it would have been all over if he had just paid the loan off and we had not thought about it. But my client, bless his soul, phoned and asked if he had to pay off the loan (which was deductible) or could he use the money for another non-deductible purpose.

My answer, after thinking about it for a day or so, was that he could us e the $5,000+ for any purpose he could think of.  At the same time, I said this, I was also writing something for the North Shore Credit Union and put my ‘new’ method of making the mortgage interest deductible in this report which they then published as part of an advertisement in the North shore News in (I think) November, 1976. 

I expanded it and it was next published by Hancock House Publishers in my Investment Guide in 1979, 1980 and 1985 and 1991 and BC Business magazine in 1979. Sometime in there, the Ontario Dental Association also ran it in their magazine. It then became part of the Internet and can be found in the March 1997 and November 2001 newsletters.

I was pretty heavily involved in the Federal  Conservative Party (ran for the North Shore Nomination in 19780 and am proud to say that we got mortgage interest as a tax deduction on the 1979 federal Income tax return. 

Unfortunately, Joe Clark, the Prime Minister at the time, did not count the number of yes votes and lost a non-confidence motion on Dec 12, 1979, and on Feb 18, 1980, Pierre Trudeau was re-elected as Prime Minister and even though there was a 4-page form and a line on the T-1 General that year, the deduction was killed retroactively by the liberal government and we no longer had this benefit for all without manipulating the paperwork.

In 1981, Fred Snyder was running a series of seminars and teaching my method to a lot of different groups.  In one seminar, he taught it to Realtors, McCauley, Nicolls, Maitland and Company and the manager Fraser Smith wrote Fred a letter thanking him for explaining the methods.  In 1985, Fraser Smith than published the SMITH MANOUVRE which explains the method in great detail and at the time, VANCITY Savings Credit Union was featured in the book and was very good at setting up the method.

Then on Oct 27, 1988 John Singleton had approximately $300,000 in his lawyer’s capital account.  He got permission to take the $300,000 out (it was his but was being used as security in his law practice).  He used it to buy a house and then used the house as security to borrow $300,000 which he then put into his capital account; this was all done in one day.  Of course, since the money in the account was now borrowed for business purposes, he deducted the interest on his 1988 and 1989 returns and the Tax Department turned him down.  He appealed and lost in the Tax Court of Canada but won in the Federal court of Appeals.  The CRA appealed to the Supreme Court and in October 2001, the Supreme Court of Canada found in favour of John Singleton in a 5 to 2 decision.

This case has now been quoted and cited in many other cases.  In OVERS 2006 TCC 26, Mr Overs paid back a shareholder-loan, which would have been included in his income.  By doing what he did, co-incidentally, the interest expense was made deductible. 

Mrs Overs borrowed funds to purchase shares of his holding company at their fair market value.  However, Mr Overs did NOT use a 73(1) rollover as Lipson did.  Therefore, no capital gain was realized but the attribution rules in section 74(1) worked to transfer the interest expense on the wife’s borrowed funds -- back to him.

Judge Little turned down the CRA’s claim that tax benefits arose from this series of transactions.  The taxpayer followed the Income Tax Act in repaying his loan and transferring the shares to his wife. Justice Little ruled that the transactions were NOT avoidance transactions and therefore GAAR did not apply. Judge Little ruled that none of the transactions could be considered “abusive tax avoidance”.

And Judge Bowman ruled in favour of Evans (2005 TCC 684).  Judge Bowman found there were no avoidance transactions in what could only be described as a super complicated and very sophisticated series of business restructurings that ended up with a former shareholder receiving cash by using  specific rules in the Act, including sections 85

(rollovers), 110.6 (capital gains exemption), 112 (tax free inter-corporate dividends), 74.5 (attribution) and ss. 84(3) (deemed dividends).

Judge Bowman assumed that there ‘were’ avoidance transactions.  He then dealt with them on an individual basis to decide whether the avoidance transactions were ‘abusive’.  His final decision was that provisions of the Income Tax Act operated as intended and there could not be any abuse.

However, he was not of the same opinion with the LIPSON Family who lost in Lipson v. The Queen, 2006 TCC 148 

Mr Lipson owned a profitable business and:

  1. The Lipsons contracted to buy a home in Forest Hills in Toronto
  2. Mrs Lipson took out a demand loan to buy share in the family business from her husband.
  3. The shares were transferred to Mrs Lipson as a section 73(1)  rollover
  4. Mr Lipson used the funds to buy the house
  5. They “both” took out a mortgage on the house to repay the demand loan

 Judge Bowman used the Section 245 GAAR provisions to rule that the Lipson family was guilty of Gross Abuse of the Tax system.  Perhaps, if they had a business reason for the loan or had not used the Section 73(1) tax free rollover, he would have found in their favour as he did with the EVANS 2005 DTC 1762 case.  In the LIPSON case the wife’s borrowing did not put income in her hands and it was unclear

The following was an excel spreadsheet that was presented and you might be able to figure it out.

  by david Ingram - www.centa.com - 
(604) 980-0321
 $  100,000.00 3
Let's pretend that you are paying 6%
0.06  times 6000.00 4

How much do you have to earn to pay 
6000.00 6
     At a  0.3 marginal tax rate
you would need  8571.43 7

you would pay tax of

2571.43 8

To Have enough to pay the interest of
6000.00 9

 $  300,000.00 11
Let's pretend that you are paying 6%
0.06  times 18000.00 12

How much do you have to earn to pay 
18000.00 14
     At a  0.35 marginal tax rate
you would need  27692.31 15

you would pay tax of

9692.31 16

To Have enough to pay the interest of
18000.00 17

 $  600,000.00 19
Let's pretend that you are paying 6%
0.06  times 36000.00 20

How much do you have to earn to pay 
36000.00 22
     At a  0.4 marginal tax rate
you would need  60000.00 23

you would pay tax of

24000.00 24

To Have enough to pay the interest of
36000.00 25

You can easily see that the larger the mortgage payment

the more money you have to make and the larger your

marginal tax rate would be - BC runs from 23% up to $35,000

and is 44% over $118,000 or so


But if the last mortgage of 600000 could be deductible
36000.00 32
the interest paid of  36000 would get a tax deduction of
14400.00 33

and you would only need to earn the difference
21600.00 34

instead of the  60000
on line 23 above
Why only  21600

Well, you could earn 21600 , borrow
14400 (line 33)
 for a few days from Fred, and then pay Fred back with the refund

The difference in earnings is  60000
line 23

minus new necessity of 21600
Line 34

for  an earnings savings of 38400

or a monthly difference of 3200


And, if you are self employed as I am, I would have to do

$200,000 of business and pay $140,000 of expenses to have a profit  of
$60,000 left over to pay the tax on the $60,000 on line 23 (Aug 11, 2007) 47

And this will also show the mathematics of paying down a mortgage with the earnings from a Mutual fund.

Using New Securities Account to make mortgage deductible
This is to show the method only

Most, if not all people buy a Mutual fund and have the dividends reinvested

in the fund.  Do NOT DO THAT if you want a deductible mortgage


Deductible Non   HELOC
Assume you  have a borrowed
100,000 to buy funds and they pay  0.06 original  less Deductible interest
A  B  C D E F    New G H I J K L M
You pay  0.06 pay your 35% Tax borrow for Invest't Mutual   earnings worth mortgage earnings original  not de-

borrowed interest Refund new funds loan  Fund 0.06

2007 100000 6000 2100 6000 106000 100000 6000 106000 100000 6000 94000 6000
2008 106000 6360 2226 6360 112360 106000 6360 112360 94000 6360 87640 5640
2009 112360 6742 2360 6742 119102 112360 6742 119102 87640 6742 80898 5258
2010 119102 7146 2501 7146 126248 119102 7146 126248 80898 7146 73752 4854
2011 126248 7575 2651 7575 133823 126248 7575 133823 73752 7575 66177 4425
2012 133823 8029 2810 8029 141852 133823 8029 141852 66177 8029 58148 3971
2013 141852 8511 2979 8511 150363 141852 8511 150363 58148 8511 49637 3489
2014 150363 9022 3158 9022 159385 150363 9022 159385 49637 9022 40615 2978
2015 159385 9563 3347 9563 168948 159385 9563 168948 40615 9563 31052 2437
2016 168948 10137 3548 10137 179085 168948 10137 179085 31052 10137 20915 1863
2017 179085 10745 3761 10745 189830 179085 10745 189830 20915 10745 10170 1255
2018 189830 11390 3986 11390 201220 189830 11390 201220 10170 11390 -1220  

Because the earnings from the mutual fund are mostly dividends and capital gains which are very tax efficient

there will be litle tax on the earnings - certainly less than half of the tax savings in column D

In this example, I have assumed an interest only HELOC and assumed that you would have paid your regular non-dedcutible interest
which would decrease each year because of the principal being paid down in column K. column M represents HELOC interest

Every one's situation is different.  YOUR cash flow will be different.  And to escape GARR, you must be making a business decision
If you wish to make your mortgage deductible.  A perceived increase in earnings from a mutual fund loan would likely be sufficient
but there are NO, NONE, NOT ANY Guarantees.

If this situation interests you, you are advised to get a written financial plan from Fred Snyder FIRST - His Number is (604) 731-8900

david ingram,  home office  phone (604) 980-0321 - Please do NOT phone before 10 AM or after 9 PM but you can phone 7 days a week
there are NO message machines - If you do leave a message with a person, If I do not get back in 4 hours, I WILL NOT BE RETURNING 
the call - I leave it to YOU to follow up. I get over 700 emails a day and my record for phone calls on April 30 2006 was over 140.

I hope the formatting stays with the email.

Not sure if this will help or not.  What you should do is get Fred Snyder to do a written financial plan for you. see the red a couple of lines up.

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 www.centa.com - 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 mortgage interest.  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 www.centa.com 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's guest on the Sunday program on CKBD THIS Sunday at 9:00 AM on 600 AM in Vancouver.  Those in the rest of the country can listen live on the Internet at www.600am.com. AND, If you get this in time, Thursday, you can 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 interesting questions.
read on
The deductibility of your Canadian Mortgage 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 against 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 deductible.
Usually, in the cases above, the interest can be added to the adjusted cost base of the item and deducted against 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 current 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.


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