BC Sunshine Coast real estate by Menno at Royal lePage Real estate on the BC Sunshine Coast

Most people hate paying interest – on anything, and that definitely includes mortgage interest. Apart from keeping the interest rate as low as possible, is there perhaps a way to tax-deduct the interest you pay on your mortgage loan?

Very few people actually enjoy making interest payments - even though the current rates are so low that they're almost eaten up by the inflation value.

Is mortgage interest tax-deductible in Canada? Not really – although there are some ways to make the money work for you. It’s easy to legally deduct (some) of your mortgage interest.

We tend to look with envy to other countries (such as the US) where they can deduct mortgage interest paid, from their incomes. Tax-deducting your mortgage interest sounds like a great plan. Wouldn’t it be nice if the tax man paid part of your mortgage cost? What are the pros and cons of such a plan?

It would have a significant effect on your household financial situation, if you could deduct (all) your mortgage interest. It would be so profound that it’s worth considering. At the same time, how would society respond to that, in general? Many Canadians know that US residents (as well as in some other countries) can tax-deduct their mortgage interest. They can and we can’t; some say that’s not fair.

Others like to point out that there are many differences between Canada and the US – this just being one of those. Their system of mortgage deductibility (on interest only, not on principal) has been in place for almost 100 years with a market that has adapted to it. Are there real benefits to mortgage interest deductibility? Are there real disadvantages to it? Why don’t we have mortgage deductibility and why are there no loudly lobbying politicians that move to change our system?

If indeed you could deduct mortgage interest payments from your income tax, then your actual net mortgage interest cost would be even lower.

SOME MAY WIN, OTHERS MAY LOSE

The first obvious conclusion from the principle of mortgage interest deductibility is that those that pay the most interest are being subsidized, through taxation, by those that do not enjoy this tax deduction. If you already have money, you end up subsidizing those that are still working hard to pay off their mortgage. What a nice “social thought”: those that are struggling should be supported by those that have already made it.

Of course it’s also easy to see that the real poor do NOT enjoy this deduction because they don’t own a house – they rent! Other opponents say that it’s the rich who benefit the most because they might have the most expensive homes and therefore the largest mortgages with the fattest tax-deductions. No matter how you slice it: some would benefit, others would not.

Changing the tax system in any possible way will typically create quite an uproar. This is mostly because those that need to pay extra will outshout those that are getting tax relief.

There are many countries in the world where mortgage interest is at least partly tax deductible. Some believe it's good to allow a system of interest tax deductibility.

WHAT IF – WHAT IF

Making major tax changes, such as mortgage deductibility, will require a careful planning process or they won’t work. One thing is for sure … once you have a system of mortgage interest deductibility in place, it’s extremely hard to ever get rid of it. There are several countries that have been trying to get rid of it – inevitably it leads to endless political squabbles in which nobody wins or makes progress.

Home buying generates important spin-offs into neighbourhoods, communities and society in general through jobs and wealth. Home buyers get renovations done and spend money on appliances, furniture and landscaping. Money that they’re not spending on mortgage interest payments (because they get part of it back due to tax deductibility) can be spent on other things to stimulate the economy.

A society where home ownership is promoted is more stable than one where home ownership is not promoted. This is because home owners, on average, take better care of their property, their neighbourhood and surroundings. They tend to stay longer and be less transient.

There are compelling reasons why mortgage interest deductibility is not beneficial to society. This is because it tends to shift the problem rather than solve it.

THIS IS WHY WE DON’T TAX-DEDUCT

Opponents to mortgage interest tax deductibility are quick to point out that if taxes go down for some, they’ll have to go up for others – or governments will go broke. In the end there will be no tax savings. Because the rates (effectively) would go down for some and they will have to go up for others. This is assuming that everything else stays the same (Government spending, other revenue).

Mortgage rates tend to creep up. Countries where tax-deductible mortgages exist, have somewhat higher mortgage rates than countries where there is no tax-deductibility option; also real estate values will creep up. Because people can afford more (due to the tax credit) there will be upward pressure on property values. This will eat up some of the perceived gain;

Mortgage interest deductibility is generally seen as a disincentive for home owners to pay off their mortgages, which tends to prolong the term of their indebtedness.

We have what we have and we are where we are. On that premiss, we may see what we can do to work with the system, rather than against it.

WORKING WITH THE SYSTEM AS OPPOSED TO AGAINST IT

Although, in our lifetime, we’re probably not going to see general “tax-deductible mortgage interest” in Canada, there is already some form of mortgage ductibility available in Canada. For instance, those that run a business from their home can offset (part of) their mortgage interest. Others, who have invested in income properties, already know that those mortgages hold tax-deductible interest. What some investors will do, given the chance, is to “move” debt to the one property that generates income. That way, one can deduct mortgage interest completely as well  as fully legally.

Of course, the Smith manoeuvre has been around for a while too: http://www.mennorealty.ca/Blog.php/deductible – it promotes to shift your mortgage loan in such a way that it becomes sort of a business loan, therefore tax-deductible. It’s not a totally risk-free operation, of course, but if it works well for you, it can be quite profitable.

The crux of the matter remains that we really can’t avoid to pay taxes – we can however endeavour to shift the burden to those around us.

Interest payments, taxes, mortgages and house values ... it's complicated enough when you throw it all in the blender and then turn it on full speed.

SOMETHING FOR NOTHING? OR NOT?

It’s tempting, isn’t it? Tax-deductibility sounds like you’re getting something for free. It probably won’t happen in Canada because there are no real benefits, in the long run. If real estate prices will creep up because of it; if interest rates will tend to go up; if other tax rates will go up in compensation – there is no real gain. There would probably be some short-term excitement and possibly some economic benefit in the short run – but then it’ll all be leveling out again.

To quickly cool off the idea of tax-deductibility, look how they’re struggling to get rid of the tax deductibility in the US,  trying to make it apply only to principal residences (not second homes). There’s another move there to limit it to houses costing less than $500,000. Those changes are hard enough to make – getting rid of the tax-deductibility treatment altogether is even harder to imagine.

If mortgage interest deductibility is something you wish to look into, it’s definitely advisable to first talk to an accountant and tax specialist.

These blog pages are full of blog articles that you may also find interesting. Below is a small selection to get you started in style.

READ MORE – The topic of mortgages and tax issues is endless. Here is a bit more reading material that’s related:

The effect of lower mortgage rates: http://www.mennorealty.ca/Blog.php/buy-more-lowrates

The cost of a smaller home: http://www.mennorealty.ca/Blog.php/small-home

Who’s giving out free money? http://www.menno.ca/?p=20086

Self-serve real estate: http://www.menno.ca/?p=20137

Bank of Canada and mortgage rules: http://www.mennorealty.ca/Blog.php/80-or-81percent

Still, owning may beat renting: http://www.menno.ca/?p=20100

Mortgage interest at various points: http://www.mennorealty.ca/Blog.php/renewal-1