There’s one piece of good news about mortgage prepayment penalties: The cost of the penalty can be used as a tax deduction if you are breaking your mortgage to move 40 km or more to be closer to work..
The Canada Revenue Agency has a provision that allows you to deduct the costs of moving, if you are doing so to for a job or for full-time study at a university, college or other type of course at a post-secondary level. You can claim other costs associated with selling your old residence as well: advertising, notary or legal fees, real estate commission as well as that dratted mortgage penalty “when the mortgage is paid off before maturity.”
Keep the receipts and fill out form T1-M Moving Expenses Deduction. For tax purposes, the mortgage penalties get lumped under “other selling costs, specify” on Line 16 of the T1-M form.
Keith Brooks in media relations with the CRA says the earlier in the year you move, the better, since you can only claim deductions from the employment or self-employment income you earned at your new work location.
Related: Paying off your mortgage early could cost you
How much might you see for this eduction? Gena Katz, Executive Director at Ernst & Young LLP, says a rule of thumb is: “For someone with taxable income of about $50,000 to $60,0000 (after deductions including RRSP) the moving expense deduction provides a benefit of about 31 per cent of the cost. For someone with taxable income between $90,000 and $100,000 it’s about 43 per cent. . For income of $30,000 to $35,000 it’s about 20 per cent.”
That’s a pretty good return. For those dinged by the Interest Rate Differential (IRD) but who moved over 40km away for a new job or to pursue higher education, take solace that some of that money will be returned when you fill out your 2011 income tax return.
Read also: Why mortgage penalties are so hard to understand
My $3,900 mortgage penalty: How do they figure?
Follow Peggy Mackenzie on her new blog: www.peggymackenzie.com or on Twitter:@PeggyMackenzie
