Commercial Mortgage Tax Deductions Canada: What You Can Write Off

One of the most powerful advantages of owning commercial real estate in Canada is the tax treatment. The Canada Revenue Agency allows commercial property owners to deduct a wide range of expenses directly related to earning rental income, and many of those deductions stem from the mortgage itself.

But the tax rules for commercial properties are not always straightforward. What you can deduct, when you can deduct it, and how you structure your ownership all affect your actual after-tax returns. Getting this right can save you tens of thousands of dollars per year. Getting it wrong can trigger reassessments, penalties, or missed opportunities.

This guide covers every major tax deduction available to commercial mortgage holders in Canada, the structuring strategies that maximize those deductions, and the common mistakes that cost investors money.

Important: This article provides general tax information for educational purposes. Tax laws are complex and change frequently. Always consult a qualified accountant or tax professional before making tax-related decisions about your commercial real estate investments.

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Mortgage Interest Deduction

The single largest tax deduction for most commercial property owners is the interest paid on the mortgage. The CRA allows you to deduct interest expenses incurred to earn income from property, as long as the borrowed funds are used for income-producing purposes.

How It Works

If you have a $2,000,000 commercial mortgage at 5.5%, your annual interest in the first year is approximately $109,000. That entire amount is deductible against your rental income.

Here is what makes this deduction particularly valuable for commercial investors:

• Interest is deductible in the year it is paid or accrued, depending on your accounting method
• The deduction applies regardless of whether the property generates a profit, though you cannot create or increase a rental loss solely through CCA (more on this below)
• Interest on refinanced mortgages is deductible to the extent the refinanced amount relates to the original income-producing purpose

Interest Deductibility on Refinancing

This is where many investors get tripped up. When you refinance a commercial mortgage, the interest on the refinanced amount remains deductible only if the funds continue to be used for income-producing purposes.

For example, if your original mortgage was $1,500,000 and you refinance to $2,000,000, pulling out $500,000 in equity:

• Interest on the $1,500,000 (original purpose) remains fully deductible
• Interest on the $500,000 cash-out is deductible only if those funds are reinvested into income-producing assets (another rental property, business investment, etc.)
• If you use the $500,000 for personal expenses, the interest on that portion is not deductible

The CRA tracks the use of borrowed funds carefully. This is known as the “tracing” principle: the deductibility of interest depends on the current use of the borrowed money, not the security pledged for the loan. Keep meticulous records of where refinance proceeds are deployed.

Mortgage Arrangement and Broker Fees

The fees you pay to arrange a commercial mortgage are deductible, but the timing of the deduction depends on the type of fee.

Fees Deductible Over the Loan Term

The following fees must be amortized (spread) over the term of the mortgage, not deducted in full in the year they are incurred:

• Lender commitment fees (often 0.5% to 1.5% of the loan amount on commercial deals)
• Mortgage broker fees paid to arrange the financing
• CMHC insurance premiums (if you finance through CMHC’s multi-unit program)
• Loan application fees
• Standby charges

For a 5-year mortgage term, a $30,000 lender fee would be deducted at $6,000 per year over the five years. If the mortgage is repaid early, the remaining unamortized balance can be deducted in the year of repayment.

Fees Deductible in the Year Incurred

Some costs associated with obtaining financing are deductible in the year paid:

• Appraisal fees required by the lender
• Environmental assessment fees (Phase I and Phase II reports)
• Property inspection fees related to the mortgage application
• Credit report fees

These are considered costs of earning income and are deductible as current expenses in the year they are incurred.

Mortgage rules change frequently, so what worked last year might not apply today — book a free strategy call with LendCity to get current, personalized guidance.

Legal Fees

Legal costs related to your commercial mortgage and property acquisition have different tax treatments depending on their nature.

Deductible Legal Fees

• Legal fees for mortgage registration, discharge, and related documentation
• Legal fees for lease preparation and tenant-related matters
• Legal fees to collect overdue rent or enforce lease terms

Non-Deductible Legal Fees (Added to Adjusted Cost Base)

• Legal fees for property acquisition (these are added to the property’s adjusted cost base, reducing future capital gains)
• Legal fees for property disposition (deducted from proceeds of sale)
• Legal fees for zoning changes or development applications (may be added to adjusted cost base or deducted depending on the nature)

The distinction matters because fees added to the adjusted cost base reduce your capital gain when you eventually sell, while deductible fees reduce your current year’s taxable income.

Capital Cost Allowance (CCA)

Capital Cost Allowance is the Canadian tax system’s version of depreciation. It allows you to deduct a portion of the building’s value each year as a non-cash expense, recognizing that buildings lose value over time due to wear and tear.

CCA Classes for Commercial Properties

Commercial buildings fall into specific CCA classes with prescribed rates:

How CCA Is Calculated

CCA is calculated on the building’s capital cost, which excludes the land value. You must separate the purchase price into land and building components based on fair market value at the time of acquisition.

For example, if you purchase a commercial property for $3,000,000 and the land is valued at $800,000, the building’s capital cost is $2,200,000. At a 4% declining balance rate:

*Half-year rule applies in the year of acquisition, limiting the first year’s CCA to 50% of the normal amount.

The Rental Loss Rule

CCA on rental properties cannot be used to create or increase a rental loss. If your rental income after deducting all other expenses is $50,000, you can claim up to $50,000 in CCA but not more. You cannot use CCA to push your rental income into a loss that offsets other sources of income.

This rule does not apply to corporations that have rental property as their principal business, which is one of several reasons many commercial investors hold properties through corporations.

Accelerated Investment Incentive

For commercial properties acquired after November 20, 2018 and before 2028, the Accelerated Investment Incentive Property (AIIP) rules provide an enhanced first-year CCA deduction. Instead of the half-year rule reducing the first year’s CCA by 50%, the enhanced rate provides a larger first-year deduction. The specifics vary by class and acquisition date, so consult with your accountant on the current rules.

CCA Recapture on Sale

When you sell a commercial property, any CCA previously claimed may be “recaptured” and added back to your income. If you sell the building component for more than its undepreciated capital cost (UCC), the difference between the UCC and the lesser of the original cost or sale price is recaptured as income and taxed at your full marginal rate.

This is not a reason to avoid claiming CCA. The time value of money means deducting CCA now and paying recapture later is almost always financially advantageous. You receive the tax benefit today and defer the tax cost to the future, potentially decades later.

Choosing the wrong lender or term can quietly erode your returns — schedule a free strategy session with us and we’ll walk you through the numbers.

Property Tax Deduction

Property taxes paid on commercial investment properties are fully deductible as an operating expense. This includes:

• Municipal property taxes
• Provincial education taxes (where applicable)
• Local improvement levies (may be deductible or added to adjusted cost base depending on the nature)
• Business improvement area (BIA) levies

Property taxes are often one of the largest operating expenses on a commercial property. They are deducted in the year they relate to, regardless of when they are actually paid.

Insurance Deduction

Insurance premiums for commercial investment properties are fully deductible, including:

• Property insurance (fire, flood, windstorm, etc.)
• Liability insurance
• Rental income insurance (loss of rents coverage)
• Boiler and machinery insurance
• Umbrella/excess liability policies

Premiums are deductible in the period they cover. If you prepay a multi-year policy, you deduct only the portion applicable to the current tax year.

Operating Expense Deductions

All reasonable expenses incurred to earn rental income from a commercial property are deductible. Common deductions include:

• Property management fees (typically 3% to 8% of gross rents for commercial properties)
• Maintenance and repairs (routine maintenance that does not improve or extend the property’s life)
• Utilities paid by the landlord (heat, hydro, water, common area electricity)
• Snow removal and landscaping
• Elevator maintenance
• Security services
• Cleaning and janitorial services
• Advertising for tenants
• Office expenses related to managing the property
• Travel expenses for property visits (within CRA guidelines)
• Professional fees (accounting, property tax appeals, etc.)

Repairs vs Capital Improvements

The CRA distinguishes between current expenses (repairs) and capital expenditures (improvements). This distinction is critical because it determines whether you deduct the full cost now or spread it over many years through CCA.

Current expenses (fully deductible):

• Repainting
• Fixing broken plumbing or electrical
• Replacing a few roof shingles
• Patching parking lot potholes
• Replacing worn carpet with similar carpet

Capital expenditures (added to CCA class):

• Full roof replacement
• HVAC system replacement
• Structural modifications
• Adding a new parking lot
• Converting units from one use to another
• Major renovations that extend the building’s useful life

The general test is whether the expenditure maintains the property in its current condition (repair, deductible now) or improves or extends its life beyond the original state (capital, depreciated over time). When in doubt, consult your accountant.

HST/GST Considerations

Commercial real estate transactions in Canada are generally subject to HST/GST (the rate varies by province). This affects both the purchase and the ongoing operation of the property.

HST on Commercial Property Purchases

The purchase of a commercial property is generally subject to HST/GST. However, if the property is being sold as a going concern (existing tenants, ongoing business), the transaction may be exempt under the going concern provision.

If HST is charged on the purchase, you can claim an input tax credit (ITC) to recover the HST paid, provided you are registered for HST and the property is used for commercial (taxable) purposes.

HST on Commercial Rents

Commercial rents are subject to HST/GST. As a landlord, you must:

• Register for HST/GST if your total revenues exceed $30,000 in any four consecutive quarters
• Charge HST/GST on commercial rents
• Remit the collected HST to the CRA
• Claim ITCs for HST paid on operating expenses, mortgage fees, and capital costs

Residential rental properties are exempt from HST/GST, which means you cannot claim ITCs on expenses for residential units. For mixed-use commercial/residential properties, you must allocate expenses between taxable (commercial) and exempt (residential) uses.

HST on Mortgage-Related Costs

Many mortgage-related fees are subject to HST, including appraisal fees, legal fees, and broker fees. If these fees relate to a property used for taxable (commercial) purposes, the HST on these fees can be recovered through ITCs.

Land Transfer Tax

Land transfer tax is paid when you acquire a commercial property. It is not deductible as a current expense. Instead, it is added to the property’s adjusted cost base, which reduces the capital gain when you eventually sell.

Land transfer tax rates vary by province and can be substantial on commercial transactions:

• Ontario: Graduated rates up to 2.5%, plus municipal land transfer tax in Toronto
• British Columbia: Graduated rates up to 5% for foreign buyers, 3% for domestic
• Quebec: Graduated rates (called “welcome tax”) up to 3%
• Other provinces: Various rates and structures

While not immediately deductible, adding land transfer tax to your adjusted cost base provides a future tax benefit by reducing your capital gain on disposition.

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Ownership Structuring for Tax Efficiency

How you hold your commercial property significantly affects your tax position. The three most common structures in Canada are personal ownership, corporate ownership, and partnership/joint venture.

Personal Ownership

Rental income from a personally owned commercial property is reported on your personal tax return (Form T776). The income is taxed at your marginal rate, which can exceed 50% in most provinces for high-income earners.

Advantages:

• Simplicity — no corporate filings or additional compliance costs
• Capital gains on sale receive the 50% inclusion rate (first $250,000 of capital gains) and 66.67% inclusion rate on amounts above $250,000
• Losses can offset other personal income (except CCA-created losses)

Disadvantages:

• Highest tax rate on rental income
• No ability to split income with family members (attribution rules apply)
• Personal liability exposure

Corporate Ownership (Holdco/Opco)

Many commercial real estate investors hold properties through corporations. The most common approach is a holding company (holdco) structure.

Advantages:

• Lower initial tax rate on rental income — the small business corporate rate (approximately 12% to 15% depending on province) applies if the corporation’s passive income is below the threshold and it qualifies
• Note: Passive income (including rental income) in a corporation is typically taxed at the higher general corporate rate (approximately 50% combined federal/provincial) unless certain conditions are met, and is subject to additional refundable tax mechanisms (RDTOH)
• Ability to retain after-tax earnings in the corporation for reinvestment
• Limited liability protection
• Estate planning flexibility
• Potential income splitting opportunities through prescribed rate loans to family members (within CRA rules)

Disadvantages:

• Higher compliance costs (annual corporate filings, separate accounting)
• Integration — when corporate income is eventually distributed as dividends, the combined corporate + personal tax is designed to approximate the personal tax rate
• CCA recapture and capital gains on sale are taxed at corporate rates

Holdco/Opco Structure

A common two-corporation structure separates the property ownership (holdco) from the operations (opco). The holdco owns the building and leases it to the opco, which manages the business operations.

This structure offers:

• Asset protection: The property is held separately from the operating business, protecting it from operational creditors
• Tax deferral: Rental income flows to the holdco at corporate rates, with dividends paid to the individual only when needed
• Succession planning: Shares of the holdco can be transferred or frozen for estate planning

Partnership/Joint Venture

For larger commercial deals involving multiple investors, partnerships and joint ventures are common. Each partner reports their share of the income, deductions, and CCA on their own tax return.

Partnerships do not pay tax at the partnership level — income flows through to the partners. This makes partnerships tax-neutral vehicles that allow each partner to apply their own tax characteristics to the income.

Common Tax Mistakes Commercial Property Owners Make

1. Not Separating Land and Building Values

The CRA requires you to allocate the purchase price between land and building. CCA can only be claimed on the building portion. Many investors use arbitrary allocations rather than obtaining a proper appraisal at the time of purchase, which can lead to problems if the CRA audits the file.

2. Claiming CCA Without Understanding Recapture

Some investors aggressively claim CCA without planning for the recapture on eventual sale. While the time value of money makes CCA claiming almost always advantageous, the recapture should be modeled into your exit strategy.

3. Failing to Track Refinance Proceeds

Interest deductibility depends on the use of funds, not the security. If you pull equity out of a commercial property through refinancing and use it for non-income-producing purposes, the interest on that portion is not deductible. Maintain a clear paper trail of where every dollar of refinance proceeds is deployed.

4. Misclassifying Repairs vs Capital Expenditures

Deducting a roof replacement as a repair rather than a capital expenditure is a common audit trigger. The CRA has extensive guidance on the repair vs capital distinction, and getting it wrong can lead to reassessments with interest and penalties.

5. Ignoring HST Implications

Commercial property owners who fail to register for HST or properly claim ITCs leave significant money on the table. The HST paid on commercial property operating expenses, renovations, and professional fees can be substantial, and failure to claim ITCs is essentially paying tax you do not owe.

6. Personal Use of Corporate Property

If you personally use a property held in your corporation (even occasionally), the CRA can impute a shareholder benefit. Ensure clean boundaries between personal and corporate property use.

When to Consult a Tax Professional

While general knowledge of commercial property tax deductions helps you make better financing and investment decisions, specific tax planning should always involve a qualified professional. Consult a tax accountant or tax lawyer when:

• Structuring a new commercial property acquisition (personal vs corporate vs partnership)
• Refinancing and deploying equity proceeds
• Planning a sale and evaluating capital gains, CCA recapture, and rollover options
• Considering a reorganization of existing property holdings
• Evaluating the tax implications of qualifying for a commercial mortgage at different structures
• Dealing with cross-border investments or foreign-owned entities

The cost of professional tax advice on a commercial real estate transaction is itself tax-deductible and typically pays for itself many times over through optimized structuring.

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Frequently Asked Questions

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LendCity

Published

July 11, 2026

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Commercial Mortgage Tax Strategy Commercial Lending Investment Property Tax Deductions

Key Terms

Adjusted Cost Base

Adjusted Cost Base

The original purchase price of a property plus qualifying capital improvements and acquisition costs, minus any CCA claimed. The adjusted cost base is subtracted from the sale price to determine the taxable capital gain.

ADU

ADU

Accessory Dwelling Unit - a secondary residential unit on a single-family property, such as a basement suite, laneway house, garden suite, or in-law suite. ADUs increase rental income and property value while leveraging existing land and infrastructure.

Appraisal

Appraisal

A professional assessment of a property's market value, required by lenders to ensure the property is worth the loan amount.

Broker Fees

Broker Fees

Broker fees are the commissions or charges paid to a mortgage broker for arranging financing on behalf of a borrower, typically ranging from 0.5% to 2% of the loan amount in Canada, though they may be higher for complex or private lending arrangements. For real estate investors, these fees are a tax-deductible financing cost and are especially common when securing non-traditional mortgages for investment properties that may not qualify through standard lender channels.

Capital Expenditures

Capital Expenditures

Major one-time expenses for property improvements that extend the useful life of the asset, such as roof replacement, foundation repairs, or new HVAC systems. CapEx differs from regular maintenance and is typically budgeted separately in investment property analysis.

Capital Cost Allowance

Capital Cost Allowance

The Canadian tax deduction that allows property owners to write off the depreciation of a building over time, reducing taxable rental income. CCA cannot be used to create a rental loss and must be recaptured upon sale of the property.

Capital Gains Tax

Capital Gains Tax

Tax owed on the profit from selling an investment property, calculated as the difference between the sale price and the adjusted cost base. In Canada, 50% of capital gains are currently included in taxable income. A 2024 federal budget proposal to raise the inclusion rate to 66.67% on gains above $250,000 was deferred and has not been enacted; the 50% rate remains in effect. Tax outcomes depend on your specific situation — consult a Chartered Professional Accountant.

CMHC Insurance Premium

CMHC Insurance Premium

The cost of mortgage insurance provided by Canada Mortgage and Housing Corporation (CMHC), expressed as a percentage of the mortgage amount. Premium rates vary based on LTV, property type, and transaction type. For multifamily standard rental housing under the current schedule (as of July 14, 2025), term premiums range from 5.35% at ≤85% LTV to 6.15% at ≤95% LTV, with higher rates for construction financing and other housing types (student, seniors, SRO/supportive). MLI Select points tiers can reduce the premium by 10%–30%. Premiums are typically added to the mortgage balance and paid over the life of the loan.

CMHC Insurance

CMHC Insurance

Mortgage default insurance from Canada Mortgage and Housing Corporation. For 1-4 unit investment properties, investors must put 20%+ down (no insurance available). However, CMHC offers MLI Select for 5+ unit multifamily properties, and house hackers can access insured mortgages with 5-10% down.

CMHC

CMHC

CMHC (Canada Mortgage and Housing Corporation) is a federal Crown corporation that provides mortgage loan insurance to lenders when borrowers have less than a 20% down payment, enabling Canadians to purchase homes with as little as 5% down. For real estate investors, CMHC insurance is available on owner-occupied properties of up to four units, but is generally not available for non-owner-occupied investment properties, meaning investors typically need at least 20% down and must seek conventional financing.

Hover over terms to see definitions. View the full glossary for all terms.