When structured properly, a mortgage can be used to unlock substantial tax-free liquidity—without selling the property or triggering capital gains.
This approach is widely used by experienced investors and corporations, and it is legal under Canadian tax law when implemented correctly.
The Key Principle: Borrowed Funds Are Not Taxable
Under Canadian tax rules, money received from a legitimate loan—such as a mortgage, refinance, or home equity loan—is not classified as income because it must be repaid.
As a result:
Mortgage proceeds
Refinancing funds
Equity take-outs
Second mortgages
are not subject to income tax when properly documented as debt.
Strategy 1: Cash-Out Refinance on an Investment Property
A cash-out refinance allows you to replace an existing mortgage with a larger one and receive the difference in cash.
Example:
Property value: $1,200,000
Existing mortgage: $500,000
New mortgage at 70% loan-to-value: $840,000
Equity released: $340,000
The $340,000 is not taxable, as it represents borrowed funds—not income—and ownership of the property remains unchanged.
Strategy 2: Second Mortgage or Equity Loan
Rather than refinancing the first mortgage, investors may register a second mortgage against the property.
This approach is often used when:
Breaking an existing mortgage is costly
Speed and flexibility are important
Additional capital is needed without disturbing the first lender
Second mortgages are commonly used for reinvestment, property improvements, or portfolio expansion. The funds received are still non-taxable loan proceeds.
Strategy 3: Leveraging Equity for Reinvestment (Advanced Planning)
Some investors borrow against property equity to invest in income-producing assets or additional real estate. When structured correctly, the interest on borrowed funds may be tax-deductible, subject to CRA rules regarding use of funds and proper tracing.
This type of planning requires disciplined record-keeping and professional tax guidance.
Strategy 4: Accessing Equity Without Triggering Capital Gains
Selling an investment property can result in:
Capital gains tax
Potential depreciation recapture
Many investors choose to refinance instead of selling, allowing them to:
Access property equity
Defer capital gains
Maintain rental income
Continue long-term ownership
This is a form of tax deferral, not tax avoidance, and is common in long-term real estate planning.
When Mortgage Interest May Be Deductible
Mortgage interest may be deductible when borrowed funds are used for:
Earning rental income
Acquiring income-producing assets
Improving or maintaining an investment property
Interest is generally not deductible when funds are used for personal expenses. Clear documentation and tracing of funds are essential.
Why Some Investors Use Alternative or Private Lenders
Traditional lenders may decline refinances due to income ratios, property count limits, or self-employment income. Alternative and private lenders often focus on:
Property value
Loan-to-value
Exit strategy
This can provide flexibility for investors pursuing equity-based strategies.
Important Disclaimer (Please Read)
This content is provided for general educational and informational purposes only and does not constitute tax, legal, or financial advice.
Tax treatment depends on individual circumstances, property use, and how borrowed funds are applied. Improper structuring or documentation may result in adverse tax consequences or CRA reassessment.
Before implementing any mortgage or tax-planning strategy, you should consult with:
A licensed CPA (Chartered Professional Accountant)
A qualified tax lawyer
Your own professional advisors
Lendworth does not provide tax or legal advice and does not represent or warrant the tax outcomes of any strategy discussed.
In Ontario, experienced real estate investors often use mortgages strategically to access liquidity while preserving ownership. When structured correctly—and supported by professional advice—borrowing against an investment property can be a powerful financial planning tool.