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adamousacom, CPA, PFS, QFP, CGMA
Category: Canada Tax
Satisfied Customers: 2884
Experience:  CPA, Dual Citizen US and canada
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I have a question on interest deductibility on a mortgage for

Customer Question

I have a question on interest deductibility on a mortgage for a rental property. In May 2015, I removed my tenants from my townhouse and over the period June to September, I conducted some repairs and renovations and sold the property in October 2015. In December 2015, I paid off the mortgage along with a pre-payment penalty as the mortgage was a fixed 4 year mortgage.
- Am I able to deduct the mortgage interest after May 2015 until October 2015, or potentially, until December 2015
- Am I able to deduct the pre-payment penalty
- Does the answer change for 1 and 2, if I lived in the property from May to September while I was conducting renovations.
Submitted: 6 months ago.
Category: Canada Tax
Expert:  Lev replied 6 months ago.
If you removed tenants from the property - there are several options- you still treat the property as rental - and it was available for rent after tenants left - then - you deduct all related expenses as rental expenses on schedule E- if you stopped renting and converted the property to investment property - thus making renovations to have the property sold - in this case mortgage interest may be deducted as investment interest and other related expenses as investment expenses.- if you converted the property to your primary residence - you will deduct mortgage on schedule A as such.Mortgage prepayment penalty.If you pay off your home mortgage early, you may have to pay a penalty. You can deduct that penalty as home mortgage interest provided the penalty is not for a specific service performed or cost incurred in connection with your mortgage loan.Thus - the prepayment penalty is deducted the SAME way as mortgage interest.Questions?
Customer: replied 6 months ago.
Is the treatment as investment interest still included in T776 in the interest section, or is it part of the capital gains calculation, or is it declared elsewhere on the return (eg. Line 221)? I note CRA states "•most interest you pay on money you borrow for investment purposes, but generally only if you use it to try to earn investment income, including interest and dividends. However, if the only earnings your investment can produce are capital gains, you cannot claim the interest you paid. For more information, contact the CRA;" in this case, it appears the earnings are for capital gains purposes so they might challenge that... I guess I'm unsure of how to declare investment interest in Line 221 without a corresponding investment income entry at Line 121, as I currently have the sale of the property as part of Schedule 3 capital gains, not investment income.
Expert:  Lev replied 6 months ago.
I just noted that is Canadian tax related.I will opt out and forward to the Canadian tax expert.
Expert:  adamousacom replied 6 months ago.
I am a dual citizen and can respond. please let me know.

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