Yes, you can use a line of credit (LOC) to purchase or renovate a rental property in Canada. However, the tax treatment of the interest you pay depends on how you use the borrowed funds. If you borrow money specifically to purchase or improve a rental property that generates income, this CRA rule may apply to you: the interest on that LOC becomes a deductible rental expense, similar to mortgage interest. The key is that the funds must be used to acquire income-producing property, not for personal use. When you borrow money through a line of credit to buy or upgrade a rental property, the interest paid on that debt is generally considered a rental expense. This differs from personal LOC interest (like borrowing to buy a car or take a vacation), which is never deductible. The CRA looks at the direct connection between the borrowed funds and income-generating activity. If you can trace the LOC proceeds to the rental property purchase or improvement, the interest qualifies for deduction.
No. The interest is only deductible if you can prove the borrowed funds were used to purchase or improve the rental property, not for personal expenses. The CRA requires a clear connection between the LOC and the income-producing property.
Only the portion of the LOC used for the rental property generates deductible interest. If you draw $50,000 and use $40,000 for the property and $10,000 for personal use, you can only deduct interest on the $40,000 portion. You must calculate and track this split carefully.
Keep the LOC agreement, bank statements showing the draw, property purchase documents or renovation invoices, and proof that funds were transferred to the property. These records should clearly show the timeline and amount used for the rental property.
This depends on the timing and circumstances. If you are actively preparing the property for rental (renovations, marketing), the interest may still be deductible as a capital cost. However, if the property remains unused long-term, the CRA may deny the deduction. Consult a tax professional about your specific situation.
Report the total LOC interest paid in the tax year on Form T776 (Rental Income) under Line 9250 (Interest paid on loans). Include it with your other rental expenses when calculating taxable rental income.