Assuming all mortgage payments are deductible
Principal repayment is a financing cash outflow, but CRA guidance says it is not a deductible rental expense. A useful model shows principal, interest and total debt service separately.
Canadian real estate tax planning
Can you deduct mortgage interest on a rental property in Canada?
The answer depends on the legal obligation, the use of the borrowed money, and whether the expense is connected to earning income—not simply on which property secures the loan.
Short answerCRA guidance says interest on money borrowed to buy or improve a rental property may be deductible. Mortgage principal is not deductible. When a rental property is refinanced, the use of the new funds must be traced; personal use can make the related interest non-deductible.
Written by Calvin Zhou. Reviewed September 26, 2026. General educational information only—not tax or legal advice.
The governing question
What was the borrowed money used for?
A mortgage is both a financing instrument and security over property. For interest deductibility, the important question is generally the current use of the borrowed money. Borrowing used to acquire or improve an income-producing rental property is different from borrowing used for a personal purchase.
CRA's rental-income guide specifically states that interest on money borrowed to buy or improve rental property can be deductible. It also gives an example in which refinancing proceeds were used for a down payment on a personal residence; the additional interest was not deductible against rental income.
Read CRA Guide T4036: Rental Income and the CRA Interest Deductibility Folio.
Keep the financing trail visible
| Original borrowing | Acquisition or improvement |
| Refinancing | Trace each use of funds |
| Mortgage payment | Separate interest and principal |
| Loan fees | Review timing of deductions |
Three common mistakes
The mortgage statement does not answer the whole question.
Ignoring the use of refinanced funds
The rental property may secure the loan while the proceeds fund a personal purchase, another investment, renovations or mixed uses. The records should preserve that trail.
Looking only at taxable income
A deduction does not make weak financing affordable. Test cash after operating costs, debt service, tax estimates, reserves and future capital spending.
Decision model
Connect the tax assumption to the property cash flow.
For an acquisition or refinance, model the property both before and after financing. Identify which interest assumptions still require confirmation, then test the result under higher rates, vacancy, repairs and refinancing pressure.
- Separate land, building, closing and financing costs.
- Track each borrowing and its use of funds.
- Reconcile interest expense to the debt schedule.
- Show cash flow before tax and after estimated tax.
- Confirm the tax treatment before relying on the result.
Need the decision model?
HS can model the financing, operating cash flow and alternative assumptions, working alongside the accountant or tax lawyer who confirms the applicable tax treatment.
Discuss the property decision
Further reading by Calvin Zhou
A Guide to Canadian Real Estate Tax Planning
Explore how ownership structure, borrowing, cash flow and exit planning interact across Canadian real estate decisions. Kindle edition: CAD $39.99.
The book provides general educational analysis. Current rules and property-specific implementation should be confirmed with qualified tax and legal professionals.