Interest expenses

You can deduct interest on money you borrow to buy or improve your rental property. If you have interest expenses that relate to the construction or renovation period, see the rules for soft costs.

You can also deduct interest you paid to tenants on rental deposits.

If you are claiming interest as a rental expense on Form T776, Statement of Real Estate Rentals, do not include it as a carrying charge on Schedule 4, Statement of Investment Income.

Lump-sum amounts paid for interest, such as fees to reduce the interest rate on a mortgage, are not fully deductible in the year, but are prorated over the remaining original term of the mortgage or loan. A penalty or bonus paid to a financial institution to pay off your mortgage loan before it is due is treated in the same way.

For example, if the term of your mortgage is five years, and in the third year you pay a fee to reduce your interest rate, you must treat this fee as a prepaid expense and deduct it over the remaining term of the mortgage.

Loan fees

You can deduct certain fees you have 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 five years. Deduct 20% in the current tax year and 20% in each of the following four years. However, if you repay the mortgage or loan before the end of the five-year period, you can deduct the remaining financing fees at that time. The number of years for which you can deduct these fees is not related to the term of your mortgage.

If you have standby charges, guarantee fees, service fees, or any other similar fees, you may be able to deduct them in full for the year you incur them. To do so, they have to relate only to that tax year.

You can choose to treat finance fees you paid and the interest on money you borrowed to acquire depreciable property as capital expenses.

Forms and publications

• Guide T4036, Rental Income
• Form T2125, Statement of Business or Professional Activities
• Form T776, Statement of Real Estate Rentals
• Schedule 4, Statement of Investment Income

Related topics

• Completing Form T2125
• Expenses section of Form T2125
• Line 221- Carrying charges and interest expenses

Date modified:

2017-01-03