Updated Checked by the Tax-Services.ca editorial team How we check
Home equity tax in Canada comes down to two questions: what you do with the money you borrow against your home, and if the home is your principal residence when you sell it. The first decides if your interest is deductible. The second decides if the gain is taxed.
Is the interest on a home equity loan deductible?
Only when the money goes to earning income. The CRA’s page on line 22100, carrying charges and interest expenses lets you claim interest on borrowed money used to earn investment income, such as interest and dividends. It draws the line at investments that can only pay off through a gain.
If the only earnings your investment can produce are capital gains, you cannot claim the interest you paid.
Line 22100, Canada Revenue Agency, canada.ca
What you borrowed against doesn’t matter. What you did with the cash does.
So a home equity line used for a kitchen renovation on the house you live in earns nothing, and the interest isn’t deductible. The same line used to buy a dividend-paying investment can be. Think of it as a purpose test.
Here’s what that means in dollars. Say you own a $900,000 home with a $400,000 mortgage and borrow $100,000 at 6%. Interest-only payments run $500 a month, or $6,000 a year, and the HELOC calculator shows the figure for your own rate. Whether that $6,000 helps at tax time depends only on where the $100,000 went.
Mixed use is where people get tangled. If $60,000 of that draw bought dividend-paying investments and $40,000 went on a new deck, only the investment share of the interest is a candidate for a claim. That’s 60% of $6,000, or $3,600. The other $2,400 is a personal cost, full stop. Rent from a property you buy with the money is a similar story: interest on money borrowed to buy a rental is generally claimed against the rent it earns, not on the line above.
Does borrowing against your home create taxable income?
No. A loan isn’t income, so the cash you draw from a HELOC or a refinance isn’t taxed when you receive it. You owe it back, with interest. Tax only shows up later, if you use the money for something that produces taxable income or if you sell something at a gain. That’s the part people forget when a lender’s ad makes the money sound like a windfall.
How much equity can you actually borrow?
| Item | Example figure |
|---|---|
| Home value | $900,000 |
| Mortgage balance | $400,000 |
| HELOC cap at 65% of value | $585,000 |
| 80% of value minus the mortgage | $320,000 |
| Most a lender would usually allow | $320,000 |
| Interest only on $100,000 at 6% | $500 a month |
The 65% cap on a HELOC is confirmed by the Financial Consumer Agency of Canada. The 80% combined limit is what the calculator applies, and no official page was found to back it up, so ask your lender for its rule. A lender’s own offer is the figure that counts, and it may be lower.
What happens to the gain when you sell?
A home you’ve lived in for every year you owned it is normally exempt. The principal residence exemption applies for each year the property is designated as your principal residence, so a home that qualified for all your years of ownership has its whole gain exempt.
You still report the sale. On your return you give the acquisition date, the sale proceeds and a description of the property on Schedule 3, and Form T2091 goes in if the home wasn’t your principal residence for every year. Forget the designation and the CRA can charge a penalty of the lesser of $8,000 or $100 for each full month it’s late. That’s a painful bill for missing a form.
A rental, a cottage you designate elsewhere or an investment property has no such shelter for the years it doesn’t qualify. Try a sale of $395,000 on a property you bought for $300,000. The gain is $95,000 and half of it is added to your income. With $85,000 of other income in Ontario, the extra tax is $16,762.85, so you keep $78,237.15. With no other income the tax is only $6,539.53. The capital gains tax calculator runs your own numbers. The half rule is what the tool uses for 2026. No CRA page printing the 50% figure was found, so check it before a real sale.
Where the cash from a sale really goes
A gain isn’t what you receive. Commission, legal fees, a mortgage penalty and repairs come off first. The home sale proceeds calculator shows a $950,000 sale with a $380,000 mortgage leaving $511,325 once the costs are paid. Refinancing instead of selling is a different route, and the mortgage refinance calculator compares it against your current loan.
If you’re buying a rental with the equity, the rental income tax calculator shows the tax on the rent that comes back.
Mistakes that catch homeowners
- Deducting HELOC interest that paid for personal spending.
- Mixing personal and investment use in one line of credit. Keep the investment draws separate so you can show the purpose.
- Selling a home without reporting it, on the theory that it’s exempt anyway.
- Counting the full gain as taxable. Half is added to income, not all of it.
Not sure your case counts? The CRA publishes an Income Tax Folio on interest deductibility, and a tax preparer can read it against your loan statements in an hour. Do that before you claim anything large.
Where this information comes from
Interest and residence rules come from Canada Revenue Agency pages, read on 30 September 2026. Borrowing limits follow Financial Consumer Agency of Canada guidance and our calculators. This is an independent site, and no government body is behind it.
Frequently asked questions
Is home equity loan interest tax deductible in Canada?
Only when the borrowed money is used to earn income, such as interest or dividends. Interest on money spent on personal things is not deductible.
Is the gain on my home taxed?
Not on a principal residence for the years it qualified. You still report the sale on Schedule 3.
What if I forget to report the sale of my home?
The CRA may charge a penalty of the lesser of $8,000 or $100 for each complete month it is late.
How much can I borrow against my home?
A HELOC is capped at 65% of the home value. On a $900,000 home with a $400,000 mortgage our calculator shows $320,000 under its 80% combined limit.
How much tax is due on a $95,000 gain on a rental?
With $85,000 of other income in Ontario the extra tax is $16,762.85, and you keep $78,237.15.
- Property and tax in Canada: buying, owning and selling
How property tax and transfer tax apply when you buy, own, rent out or sell a home in Canada, with the calculators for each step