Investing

Cash out from refinanced home: are interests tax-deductible?

  • Last Updated:
  • Aug 4th, 2021 11:32 am
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[OP]
Newbie
Feb 4, 2014
62 posts
42 upvotes
Canada

Cash out from refinanced home: are interests tax-deductible?

Hi all,

I found lots of threads on this topic in general, but nothing that specifically answers my question. Here is the situation:
- My mortgage on my principal home is expiring next month with a balance of $400,000
- I am refinancing with a different lender for a total amount of $500,000 ($400k to close past mortgage and $100k cash)
- I know the ideal is to have the $100k taken as a HELOC to fully take advantage of the Smith Maneuver, however the HELOC rates were much higher than the regular term mortgage rates. For that reason I opted to simply have a single $500k mortgage rather than a $400k mortgage + $100K HELOC.
- The $100k cash obtained will be used to invest in income producing assets (dividend paying stocks or rental real estate)
- My question: Will interest paid on the $100,000 be tax deductible? If yes, which portion of interest payments am I allowed to deduct each year? ($100K/total balance or simply 1/5). Anything else I should keep in mind before doing this?

Thank you in advance for your answers!
3 replies
Deal Addict
Dec 4, 2011
1865 posts
1470 upvotes
Montréal
If 100k will be fully invested, or at least all in a brokerage account (you don't need to invest it all at once although that is another discussion), you can deduct 1/5 of your mortgage interest as carrying charges on your income tax. That's it.

Have no idea how rental income impacts this, I would keep these two things very separate so it is easy for you to show CRA where the money went if they ask. For example if you went 50k investments and 50k rental real estate, you could deduct 1/10 of your interest as carrying charges.

Whatever deductions you get for the rental stuff should be tracked separately since that will be a different line in your tax forms (as I said I have no idea about that side of things) than investment interest deduction. Keep it simple.
Last edited by admiralackbar on Aug 4th, 2021 11:32 am, edited 1 time in total.
[OP]
Newbie
Feb 4, 2014
62 posts
42 upvotes
Canada
admiralackbar wrote: If 100k will be fully invested, or at least all in a brokerage account (you don't need to invest it all at once although that is another discussion), you can deduct 1/5 of your mortgage interest as carrying charges on your income tax. That's it.

Have no idea how rental income impacts this, I would keep these two things very separate so it is easy for you to show CRA where the money went if they ask. For example if you went 50k investments and 50k rental real estate, you could deduct 1/10 of your I test as carrying charges.

Whatever deductions you get for the rental stuff should be tracked separately since that will be a different line in your tax forms (as I said I have no idea about that side of things) than investment interest deduction. Keep it simple.
Thanks for your answer! Happy to know it will be deductible Smiling Face With Open Mouth. I have one more question: My wife and I are both owners of the house and the mortgage will be under both our names. My wife has a much lower income than I, so I was wondering if it was ok if she takes the whole $100k and invests it in a brokerage account under her name? The goal of that is to minimize taxes but want to make sure it's allowed first.
Deal Addict
Dec 4, 2011
1865 posts
1470 upvotes
Montréal
yasben wrote: Thanks for your answer! Happy to know it will be deductible Smiling Face With Open Mouth. I have one more question: My wife and I are both owners of the house and the mortgage will be under both our names. My wife has a much lower income than I, so I was wondering if it was ok if she takes the whole $100k and invests it in a brokerage account under her name? The goal of that is to minimize taxes but want to make sure it's allowed first.
Yes, since you are both on the mortgage that will work.

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