Making Your Canadian Mortgage Tax Deductible
There is a significant difference in the Canadian tax laws pertaining to mortgages as compared to other countries. Even the US follows a distinct tax code which is dissimilar to the one applied this side of the border. The main distinction between the tax rules for the two countries relates to the interest you pay on the Canadian mortgage you have borrowed. The interest you pay is non-deductible. On the other hand, any capital gains you make by selling off the home you bought are not liable to tax.
On the surface, it doesn’t seem as though you can make your Canadian mortgage tax deductible. This is where you have to be a little shrewd and use the tax laws to your advantage. As mentioned above, no taxes apply on capital gain you earn when you sell your house. This means that any increase in equity would be tax-deductible virtually giving you a free asset you can borrow against. This is exactly what you have to do.
When you make a mortgage payment, the amount is made up of both principal and interest. Depending on the mortgage rates that apply to your Canadian mortgage, the amount that goes towards paying off the principal can be considerably higher than the interest. As mentioned before, the interest you pay on the mortgage is non-deductible so you don’t need to consider that for making your mortgage tax deductible.
Coming back to the point, each dollar you pay off the principal amount is added to the equity. You have to keep in mind the fact that you don’t own the home until you have made the last mortgage payment. Till then, the home is under encumbrance from the lender who financed your Canadian mortgage. So, as the amount of the principal decreases, your equity and net worth increase. In a nutshell, you own more of the home than you did after the previous payment.
The thing to keep in mind here is that your equity is increasing. As you know, you can borrow against your equity. Since the increase in equity is a capital gain, it is tax deductible. What you need to do is to borrow an amount equal to the principal you are paying off with each payment. The interest varies but the principal amount remains the same. For instance, if each mortgage payment you make includes $500 principal amount, you have to borrow that after you make the payment.
The next step is to invest the money you have borrowed. Under the tax laws, interest paid on money borrowed to generate income is tax-deductible. Thus, what happens is that the amount of your Canadian mortgage debt remains the same but most of it is now tax-deductible. As you keep investing the money you borrow every time you make a mortgage payment, gradually your investment would grow enough to pay off your entire debt.
Hence, you can kill two birds with one stone: make a worthwhile investment and pay off your mortgage while reducing your taxes.