Capital Gains Tax & Reverse Mortgages – What You Need To Know

Many folks have sent me messages worried about the new capital gains tax rules introduced in 2024 and any potential impacts on a reverse mortgage in Canada.

So I thought I’d write a short article (and video) to explain these rules, how they impact your home and what they mean for reverse mortgages – so that you can put your mind at ease.

I’ll walk you through the new capital gains rules, explain who they impact, what they mean for reverse mortgages – then finish by giving you some real-life example calculations to show you that these aren’t actually as big a deal as many in the media have been making out…

You can watch the video version or read the article in full, both are below.

New Capital Gains Tax Rules Impact On Reverse Mortgages

Reverse mortgages are currently only available on a home that is your principal residence (your main home that you live in).

There have never been capital gains taxes on principal residences and the new rules do not change this at all.

In short: there is absolutely nothing to be worried about with capital gains taxes on your principal residence – therefore there is also no impact to reverse mortgages at all.

If this answers your question and puts your mind at ease, you can stop here.  If you want more information, then you can keep reading to learn more about who exactly these new capital gains taxes impact and by how much.

Who Does Capital Gains Tax Impact Then?

Capital gains taxes only apply on the sale of homes that are not your primary residence that you live in.

For example: investment properties, cottages, any other property that you don’t live in (second or third or fourth homes – if you’re lucky enough to have 4+ houses!).

In addition to this, it’s also worth noting that having a mortgage on the property makes no difference to the capital gains tax calculation – it is the same whether or not you have a mortgage.

I’ll explain where mortgages fit in with the example calculations below.

What Has Changed With The New 2024 Rules?

Capital gains taxes always applied to homes that were not your primary residence in Canada – this has not changed at all.  The changes were to existing tax rules, not the creation of new tax rules and taxes.

What the the 2024 changes do is effectively increase the tax payable by increasing the ‘inclusion’ rate – examples are given of this below, but I don’t want to go into too much detail on tax calculations as this isn’t an article about tax calculations but more a general overview of this one particular tax.

(Incidentally, if you’re interested in how other taxes and Government benefits are impacted by reverse mortgages, then make sure and check out this article: Taxes, Government Benefits & Reverse Mortgages In Canada)

There were also increases to capital gains taxes for Corporations – mainly targeting businesses which were using the previous rules for tax avoidance (to hide money from being taxed).  This is who are the most impacted by these taxes – folks who used Corporation to (legally) hide money from the Government by exploiting this loophole in the previous Corporation tax rules.

Examples Of Where Capital Gains Tax Apply & Calculations

I’ll now walk you through some examples of capital gains taxes in Canada.

To make things easy, I’ve assumed your personal tax rate is 30%.

I’ve included the capital gains taxes under the old rules, as well as the new rules.

Also just to be clear – capital gains taxes only apply at the point you sell your home, of course – you can’t pay taxes on a home before it has been sold.

Example 1

• You own a home that you’ve lived in for 30 years
• You bought it for $100,000 and sell it for $1M
  Capital gains taxes are zero under both the old rules and new rules – there are no capital gains taxes on a home that you live in
• You keep the full $1M – this money would then be used to pay off any existing mortgage – whether that’s a regular mortgage or a reverse mortgage

Example 2

• You own a cottage (2nd home) in addition to your main house
• You bought it for $750,000 and sell it for $1M
• Capital gains taxes will apply to the $250,000 gain ($1M you sold it for less the $750,000 you paid for it) and are calculated as follows:
  • Old rules = $250,000 x 50% (inclusion rate) x 30% (tax rate) = $37,500 (3.75% of the sale price)
  • New rules = $250,000 x 50% (inclusion rate) x 30% (tax rate) = $37,500 (3.75% of the sale price)
• You keep $962,500 under the old rules and new rules  – this money would then be used to pay off any mortgage.  In this situation it would have to be a regular mortgage being paid off, as you can’t get a reverse mortgage solely on a property that isn’t your primary residence that you live in.

Example 3

• You own a cottage (2nd home) in addition to your main house
• You bought it for $500,000 and sell it for $1M
• Capital gains taxes will apply to the $500,000 gain ($1M you sold it for less the $500,000 you paid for it) and are calculated as follows:
  • Old rules = First $250,000 is the same as Example 2 plus $500,000 less $250,000 x 50% (inclusion rate) x 30% (tax rate) = $75,000 (7.5% of the sale price)
  • New rules = First $250,000 is the same as Example 2 plus $500,000 less $250,000 x 66% (inclusion rate) x 30% (tax rate) = $87,000 (8.7% of the sale price)
• You’d have kept $925,000 (under the old rules) but now you keep keep $913,000 (under the new rules) – this money would be used to pay off any mortgage.  Again, it would have to be a regular mortgage being paid off, as you can’t get a reverse mortgage solely on a property that isn’t your primary residence that you live in.

Example 4

• You own a cottage (2nd home) in addition to your main house
• You bought it for $1M and sell it for $1M
• There is no capital gains tax under the new rules or the old rules – you sold it for what you paid for it – so there is no gain to tax anyway
• You keep the full $1M – this money would then be used to pay off any mortgage.  Once more, it would have to be a regular mortgage being paid off, as you can’t get a reverse mortgage solely on a property that isn’t your primary residence that you live in.

Example 5

• You own a cottage (2nd home) in addition to your main house – and an investment property (3rd home) as well
• This year, you sell your cottage (that you bought for $750,000) for $1M.  Next year, you sell your investment property (that you bought for $750,000) for $1M.
• The capital gains are the same under the old rules and new rules, as they are applied on an annual basis and for both properties you’d pay capital gains taxes of $37,500 (see Example 2 for calculation).
• You keep $1,925,000 from both property sales – this money would then be used to pay off any mortgages on either of the properties after they’re sold.

Summary – Capital Gains Tax & Reverse Mortgages

Capital gains taxes do not apply to your primary residence where you live – so do not impact reverse mortgages.

So, for example, when you run calculations using my free reverse mortgage calculator, you don’t need to worry about capital gains taxes.

Where you own multiple homes, you may have to pay capital gains taxes on any home you sell that isn’t the one you live in.

The rule changes were very minor and slightly increase the tax you’d pay – but only where you have gains (profits) over $250,000.

In the example above, you can see that the effective tax rate on the $1M sale price went from 7.5% to 8.7% – around a 1% increase (and only really matters if your gain is over $250,000).

Aside from impacting a tiny percentage of people (only those who have more than 1 home, who sell the home and who have a gain of over $250,000 in the home), the actual impact itself is relatively minor.  That is why the media reaction to this new tax has been quite surprising, in my opinion.

Get A Free Reverse Mortgage Assessment In 90 Seconds

I hope you found the above information on capital gains taxes useful.

If you’re considering a reverse mortgage, you should know that you can get a free professional reverse mortgage assessment – from a Chartered Accountant – who’ll then advise you if this is a good solution for you, or if something better works.

All it takes is 90 seconds – click here to get started.

Mich Sneddon, CPA, CA

A Canadian Chartered Accountant and licensed Mortgage Professional – creator of Reverse Mortgage Pros – the #1 reverse mortgage specialists in Canada.  I make it my mission to educate Canadians about how reverse mortgages work so that you can make an informed and educated decision that’s right for you and your family.