Is mortgage interest tax-deductible in Canada?

Not on your own home. Interest is deductible under paragraph 20(1)(c) of the Income Tax Act only when the borrowed money is used to earn income from a business or property. A home you live in earns no income, so its mortgage interest is personal. Interest on money borrowed to buy dividend-paying shares, a rental property or a business is deductible on line 22100.

Does the Smith Manoeuvre make my existing mortgage deductible?

No. It replaces non-deductible debt with deductible debt over time. The mortgage balance falls, the investment loan grows, and only the investment loan's interest is deductible. The CRA tests the current, direct use of each borrowed dollar (Folio S3-F6-C1), not what the loan was originally for.

Can I use the line of credit to buy investments inside my TFSA or RRSP?

Not if you want the deduction. Paragraph 20(1)(c) excludes borrowing to earn exempt income, and subsection 18(11) denies interest on money borrowed to contribute to an RRSP. The investments must sit in a non-registered account.

What if I take some money from the line of credit for a vacation?

That part of the loan is now personal borrowing and its interest is not deductible. Worse, Folio S3-F6-C1 says that when one account mixes eligible and ineligible borrowing, every repayment reduces both parts pro rata, so you cannot repay only the personal piece.

Do I need a special mortgage?

A readvanceable mortgage. That is a mortgage paired with a home-equity line of credit whose limit rises as the principal is paid down. Without the automatic readvance you would have to re-apply for credit after every payment.

Is the Smith Manoeuvre legal?

Borrowing to invest with a traceable income-earning purpose is accepted. The Supreme Court in Singleton v. Canada (2001 SCC 61) respected a refinancing that re-traced borrowed money to an income-earning use. In Lipson v. Canada (2009 SCC 1) it applied the general anti-avoidance rule to a version that also used the spousal attribution rules to shift the deduction to the higher-income spouse. Keep it simple and it is a documented deduction. Add clever steps and the GAAR risk rises.

What return do I need for it to pay off?

The after-tax return on the investments must beat the after-tax cost of the loan. At a 6% line-of-credit rate and a 36% effective deduction rate, the loan costs about 3.8% after tax. Dividends and capital gains are taxed more lightly than the deduction saves, which is why the strategy is usually built on equity investments, and why a bad year can still leave you owing more than the portfolio is worth.

The Smith Manoeuvre Explained (2026)

This guide is part of Tax-saving strategies for Canadians (2026).

Who this is for

Homeowners with a readvanceable mortgage, a high marginal tax rate, a non-registered investment account, and the stomach to carry investment debt for a decade or more. If you would sell in a downturn, or still have TFSA and RRSP room to fill, this is not for you yet.

How it works

The rule is paragraph 20(1)(c) of the Income Tax Act. Interest is deductible on line 22100 when the borrowed money is used to earn income from a business or property. Your own home earns no income, so its mortgage interest is personal.

The CRA’s Folio S3-F6-C1 says the test is the current, direct use of the borrowed money, traced dollar by dollar. The Smith Manoeuvre is built on that tracing:

You hold a readvanceable mortgage, a mortgage plus a home-equity line of credit whose limit grows by the principal you repay.
Each month, after the mortgage payment, you borrow the newly freed room on the line of credit.
You invest it in a non-registered account expected to produce income, such as dividend-paying shares, equity funds or a rental.
The interest on the line of credit is deductible. The mortgage interest still is not.

Your total debt stays about the same. What changes is how much of the interest the CRA lets you deduct. Many people put the tax refund against the mortgage, which frees more room and speeds up the conversion.

Worked example: $120,000 salary, $200,000 investment line at 6%

Assume a $200,000 investment line at 6%, so $12,000 of deductible interest for the year, and $6,000 of eligible Canadian dividends from the portfolio. Tax saved and tax on the dividends use the 2026 federal and provincial brackets in our data files.

Province	Marginal rate at $120,000	Tax saved by the $12,000 deduction	Tax on $6,000 of eligible dividends	Net tax change
Ontario	43.41%	$4,345 (36.2% effective)	$1,059	−$3,286
British Columbia	38.29%	$3,878 (32.3% effective)	$933	−$2,945
Alberta	36.00%	$3,761 (31.3% effective)	$1,065	−$2,696
Quebec	45.71%	$4,855 (40.5% effective)	$1,778	−$3,078

In Ontario the deduction saves $4,345, not the $5,209 a “marginal rate times interest” shortcut would give, because $12,000 of deduction crosses the $117,045 federal bracket edge and part of it saves at the lower rate. After tax, the 6% loan costs about 3.8% in Ontario. The strategy makes money only if the portfolio’s after-tax return beats that number, year after year.

The rules that trip people up

Mixing personal and investment borrowing. Folio S3-F6-C1 (paragraph 1.43) says that when one account holds both eligible and ineligible borrowing, every repayment reduces both parts pro rata. Keep a separate line and never touch it for personal spending. The Folio calls the clean version “cash damming”.
Registered accounts. Interest on money borrowed to buy investments in a TFSA, RRSP or FHSA is not deductible.
Reasonable expectation of income. The Folio (paragraph 1.70) accepts common shares because they can pay dividends. A fund with a stated policy of never paying income may fail the test.
Spending return-of-capital distributions. If a fund returns part of your capital and you spend it rather than reinvest or repay the loan, that share of the loan no longer earns income and its interest stops being deductible.
GAAR. In Lipson v. Canada (2009 SCC 1) the Court applied the general anti-avoidance rule in section 245 to a plan that combined the borrowing with the spousal attribution rules.
Leverage. The loan is fixed. The portfolio is not. A variable line-of-credit rate can rise while markets fall.

What to do next

Run the Smith Manoeuvre calculator on your own mortgage, income and province to see net worth over 5 to 40 years against just paying the mortgage. Then run Prepay the mortgage or invest?, the decision underneath this strategy. The income tax estimator gives your marginal rate and the mortgage payment calculator shows how much principal each payment frees. More strategies: the tax-saving strategies.

Questions people ask

Is mortgage interest tax-deductible in Canada?: Not on your own home. Interest is deductible under paragraph 20(1)(c) of the Income Tax Act only when the borrowed money is used to earn income from a business or property. A home you live in earns no income, so its mortgage interest is personal. Interest on money borrowed to buy dividend-paying shares, a rental property or a business is deductible on line 22100.
Does the Smith Manoeuvre make my existing mortgage deductible?: No. It replaces non-deductible debt with deductible debt over time. The mortgage balance falls, the investment loan grows, and only the investment loan's interest is deductible. The CRA tests the current, direct use of each borrowed dollar (Folio S3-F6-C1), not what the loan was originally for.
Can I use the line of credit to buy investments inside my TFSA or RRSP?: Not if you want the deduction. Paragraph 20(1)(c) excludes borrowing to earn exempt income, and subsection 18(11) denies interest on money borrowed to contribute to an RRSP. The investments must sit in a non-registered account.
What if I take some money from the line of credit for a vacation?: That part of the loan is now personal borrowing and its interest is not deductible. Worse, Folio S3-F6-C1 says that when one account mixes eligible and ineligible borrowing, every repayment reduces both parts pro rata, so you cannot repay only the personal piece.
Do I need a special mortgage?: A readvanceable mortgage. That is a mortgage paired with a home-equity line of credit whose limit rises as the principal is paid down. Without the automatic readvance you would have to re-apply for credit after every payment.
Is the Smith Manoeuvre legal?: Borrowing to invest with a traceable income-earning purpose is accepted. The Supreme Court in Singleton v. Canada (2001 SCC 61) respected a refinancing that re-traced borrowed money to an income-earning use. In Lipson v. Canada (2009 SCC 1) it applied the general anti-avoidance rule to a version that also used the spousal attribution rules to shift the deduction to the higher-income spouse. Keep it simple and it is a documented deduction. Add clever steps and the GAAR risk rises.
What return do I need for it to pay off?: The after-tax return on the investments must beat the after-tax cost of the loan. At a 6% line-of-credit rate and a 36% effective deduction rate, the loan costs about 3.8% after tax. Dividends and capital gains are taxed more lightly than the deduction saves, which is why the strategy is usually built on equity investments, and why a bad year can still leave you owing more than the portfolio is worth.

Sources

Every figure in this guide comes from one of these primary sources, checked on September 11, 2026.