If you own a rental property in Canada, you might be wondering:
Can I write off the interest from my HELOC on my taxes?
The answer is: yes—but the Canada Revenue Agency (CRA) has strict rules about when this is allowed.
Let’s break it down in simple steps.
Understanding HELOCs and Rental Property Investments
What Is a HELOC and How Does It Work?
A HELOC stands for Home Equity Line of Credit. It’s like a credit card tied to your house. If your home is worth more than what you owe, you can borrow money from that extra value.
You can use a HELOC to:
- Help buy another property
- Fix or upgrade a rental unit
- Invest in income-producing real estate
You only pay interest on the money you use—not the whole limit.
Why Investors Use HELOCs for Real Estate in Canada
Many investors like HELOCs because:
- You can reuse the money again and again
- You only pay interest if you borrow
- It’s easier to access than other loans
- You can write off the interest—but only if you follow the CRA rules
CRA Guidelines on HELOC Interest Deductibility
The “Current Use” Rule and Income-Generating Purpose
To deduct HELOC interest, the CRA looks at what the money is used for today, not what it was used for before.
This is called the “current use” rule.
To deduct the interest:
- You must use the money to earn income
- The income must come from things like rent, interest, or dividends
What the CRA Allows—and What It Doesn’t
✅ Allowed:
Using your HELOC to buy or fix a rental property.
❌ Not Allowed:
Using your HELOC to buy groceries, pay for a vacation, or pay personal debt—even if you also used some for a rental.
When HELOC Interest Is Deductible for Rental Properties
Using a HELOC to Buy or Improve a Rental Property
If you borrow from your HELOC to:
- Buy a rental property
- Make repairs or upgrades
- Pay for legal or closing costs
Then the interest may be tax deductible.
Ensuring a Clear Link Between Funds and the Property
You must be able to show:
- The money went straight from the HELOC to the rental
- You didn’t mix it with personal spending
- You kept good records of the transfers
If you can’t prove this, the CRA may deny your deduction.
The Tracing Principle: Linking Borrowed Funds to Investment Use
How the CRA Tracks Eligible Deductions
The CRA uses something called the “tracing rule.”
This means they look at:
- Where the HELOC money went
- What it was used for
- If it was used only for income-producing reasons
Examples of Proper and Improper Tracing
Good Tracing Example:
You borrow $20,000 from your HELOC. You send it directly to your rental property lawyer for closing costs. ✅
Bad Tracing Example:
You borrow $20,000 from your HELOC. You put it in your regular bank account. Then you use part for your rental and part for your car. ❌
5 Common Myths About HELOC Interest Deductibility
Myth 1: All HELOC Interest Is Tax Deductible
False. You can only deduct interest used to earn income.
Myth 2: You Can Deduct Interest on Mixed-Use Borrowing
False. If your HELOC is used for personal and rental costs, only the part used for the rental can be deducted.
Myth 3: Refinancing Always Makes Interest Deductible
False. Even if you refinance to access equity, you must use the borrowed money for rental or investment use.
Myth 4: Record Keeping Isn’t Necessary
False. If you don’t keep records, the CRA may disallow the deduction.
Myth 5: Personal Residences Qualify if Rented Temporarily
False. If you rent out your home for a short time (like Airbnb), you may not qualify unless it’s a true rental business.
Frequently Asked Questions
Can I Deduct Interest Used for a Down Payment on a Rental?
Yes—if the down payment comes from the HELOC and is only used for buying a rental property.
What If I Refinance My Home to Invest in a Rental?
The use of the borrowed money still matters. Even if it comes from refinancing, it must go to an income-producing rental.
Can I Deduct Part of the Interest If I Used the HELOC for Mixed Purposes?
Yes—but you must show how much went to the rental. Only that portion of interest is deductible.
Best Practices for Claiming HELOC Interest Deductions
Maintain Clear Records and Transaction History
✔ Keep copies of:
- HELOC statements
- Bank transfers
- Rental purchase documents
This helps if the CRA audits you.
Open a Dedicated HELOC or Bank Account
Use a separate HELOC or bank account just for the rental. Don’t mix in personal spending.
Work With a Tax Professional Familiar With CRA Guidelines
Not all accountants know the tracing rules. Choose someone who understands rental and investment tax strategies in Canada.
Conclusion: Using HELOCs for Tax-Efficient Real Estate Investing
HELOCs Can Be a Powerful Tool—If Used Properly
Using a HELOC to invest in rental properties can help you build wealth and lower your taxes. But you have to follow the rules.
Follow CRA Rules and Maintain Documentation
To claim the HELOC interest deduction in Canada:
- Use the money for income-producing purposes
- Keep your records clean
- Work with a tax expert
Do it right, and your interest may be tax deductible—saving you money at tax time.