Mortgage Interest Deduction in Canada and the U.S.

With skyrocketing mortgage interest rates upon us, now may be an opportune time for a refresher on the cross-border differences in mortgage interest tax deductibility in Canada and the U.S.

Canadian Rules

There’s a reason why Canadians are famously averse to mortgage debt and generally prefer to pay down their mortgages as quickly as possible: mortgage interest on a personal use property unfortunately isn’t tax-deductible in Canada. That means that, by and large, Canadians are stuck making their mortgage payments with after-tax dollars.

If a property is generating rental, business, or professional income however, that’s a different story – mortgage interest on a property that is used for these purposes is tax-deductible as an operating expense against the gross income generated.

That said, an interesting (pun intended) strategy exists which, if executed properly, can convert otherwise non-deductible mortgage interest on a Canadian resident’s primary residence into tax-deductible mortgage interest. Known as the Smith Maneuver, this strategy relies on the fact that interest paid on money borrowed to invest is tax-deductible. With this strategy, a homeowner must take out a Home Equity Line of Credit or readvanceable mortgage against their property and then use the borrowed proceeds to invest in capital property expected to generate taxable income. Professional advice should be sought out before implementing this strategy.

U.S. Rules

Unlike us Canadians, our neighbours to the south benefit from the ability to deduct mortgage interest on a personal use residence, which includes a main home and secondary homes. That said, the ability to deduct interest isn’t unlimited – before 2018, the maximum amount of mortgage debt eligible for the deduction was $1 million USD. As of 2018, under the Tax Cuts and Jobs Act (TCJA), the debt maximum was reduced to $750,000 ($375,000 if filing as Married Filing Separately).

That said, a bigger caveat makes the U.S. mortgage interest deduction irrelevant to most U.S. taxpayers: the mortgage interest deduction is only available to taxpayers who itemize their deductions. Roughly 90% of U.S. taxpayers take the standard deduction because they are better off doing so given the generous expansion of the standard deduction which also occurred under the TCJA in 2018. For a single taxpayer under age 65, the standard deduction is $13,850 in 2023, and for a married couple filing jointly who are both under 65, it’s $27,700.

So, even though Americans get to deduct their mortgage interest, the reality is that the vast majority don’t benefit from the deduction in practice. It’s also worth noting that all provisions of the TCJA are set to expire after 2025 unless further legislation is enacted, so the landscape may change in a few years.