Line 8710 – Interest and bank charges
You can deduct the interest charge on money you borrow to buy or improve your rental property. If you have interest expenses that relate to the construction or renovation period, go to Construction soft costs.
You can also deduct interest charges you paid to tenants on rental deposits. If you are claiming interest as a rental expense on Form T776, do not include it as a carrying charge on Form 5000-D1, Federal Worksheet (for all except non-residents).
Do not deduct in full for the year any lump-sum amounts paid for interest or a fee paid to reduce the interest rate on a mortgage. You prorate these amounts for the rest of the original term of the mortgage or loan. You also prorate a penalty or bonus paid to a financial institution to pay off your mortgage loan before it is due.
For example, if the term of your loan or mortgage is five years, and in the third year you pay a fee to reduce your interest rate, treat this fee as a prepaid expense and deduct it over the remaining term of the loan or mortgage.
You can deduct certain fees when you get a mortgage or loan to buy or improve your rental property. If the loans relate to the construction or renovation period, first read about soft costs.
Loan fees include:
- mortgage applications, appraisals, processing, and insurance fees
- mortgage guarantee fees
- mortgage brokerage and finder's fees
- legal fees related to mortgage financing
You deduct these fees over a period of 5 years, regardless of the term of your loan. Deduct 20% (100% divided by the 5 years = 20%) in the current tax year and 20% in each of the following 4 years. The 20% limit is reduced proportionally for fiscal periods of less than 12 months.
If you repay the loan before the end of the 5-year period, you can deduct the remaining financing fees then. The number of years for which you can deduct these fees is not related to the term of your loan.
If you incur standby charges, guarantee fees, service fees, or any other similar fees, you may be able to deduct them in full in the year you incur them. For more information, see Interpretation Bulletin IT-341R4, Expenses of Issuing or Selling Shares, Units in a Trust, Interests in a Partnership or Syndicate and Expenses of Borrowing Money.
You can choose to treat finance fees you paid and the interest on money you borrowed to acquire depreciable property as capital expenses.
If you refinance your rental property to get money for a business or other investments, you may be able to claim the interest expenses on Form 5000-D1, Federal Worksheet (for all except non-residents). Go to Line 22100 – Carrying charges and interest expenses or the "Expenses" chapter in Guide T4002, Self employed Business, Professional, Commission, Farming, and Fishing Income.
If the funds are for personal use, you cannot deduct the interest expenses.
Karim owns and rents a semi-detached house. This year, he refinanced the property to increase the mortgage for a down payment on his personal residence.
He cannot deduct the additional interest on the mortgage when he calculates his net income or loss from his rental property, because he is making personal use of the funds.
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