Quite often I get asked what the implications are for taxes and Government benefits on taking out a reverse mortgage in Canada.
The basic overview of this – and one of key advantages of reverse mortgages in Canada – is that the borrowed funds are not considered taxable income.
Unlike other sources of income, such as employment earnings or investment profits, the money received from a reverse mortgage is not subject to federal or provincial income taxes. This feature makes reverse mortgages an attractive option for retirees looking to supplement their retirement income without triggering additional tax liabilities.
In this article, I’ll briefly walk through all the various taxes and Government benefits so you can rest assured knowing exactly how they are impacted.
Important note: that tax regulations and programs can change over time, so it’s advisable to consult with a qualified tax professional or financial advisor to understand the most up-to-date tax implications related to reverse mortgages in Canada. They can provide personalized advice based on your specific circumstances and location.
You can watch the video version or read the article in full, both are below.
Taxes And Reverse Mortgages
The good news is that since a reverse mortgage is considered a loan, there is almost no tax impact.
Here are the most common questions and taxes you pay that you might be wondering how they’re impacted.
Reverse mortgage borrowers are still responsible for paying property taxes on their homes.
Failure to keep up with property tax payments can lead to legal complications, including potential foreclosure.
The key thing to note is that a reverse mortgage doesn’t impact or change this: if you don’t pay your property taxes, you’re going to get in trouble whether you have zero mortgages, a regular mortgage, a HELOC, a reverse mortgage or 100 mortgages – it doesn’t really matter.
It’s a good idea for borrowers to allocate a portion of their reverse mortgage funds to cover property taxes.
Deferred Property Taxes in British Columbia (BC)
(If you’re not in BC or using the deferred property tax program, you can skip this)
In British Columbia, homeowners aged 55 and older can defer their property taxes through the Property Tax Deferment Program.
This program allows eligible homeowners to defer their property taxes, including any property taxes owed on a reverse mortgage.
The good news? You can still use the deferral program with a reverse mortgage.
However, you would need to get the property taxes paid up to date at the time of funding the reverse mortgage – then go back on to the deferred taxes list. You should also contact your particular city to ensure it’s fine for them to do so, but from the lenders perspective it is fine.
Also it’s worth noting that the deferred property taxes are considered a loan from the BC Government. In fact, the deferred property taxes program is very similar to a reverse mortgage in this way – interest is added to the balance owed rather than being repaid.
Deferred Taxes in Alberta (AB)
(If you’re not in AB or using the deferred property tax program, you can skip this)
In Alberta, the Seniors Property Tax Deferral Program allows eligible homeowners aged 65 and older to defer all or a portion of their property taxes.
The bad news is that you cannot use this deferral program with a reverse mortgage. This is a Province wide rule set by the Provincial Government.
In addition to this, if you’re already on the program you’ll need to exit it and get the property taxes back up to date before you can take a reverse mortgage out.
Again, it’s worth noting that the deferred property taxes are considered a loan from the Alberta Government. In fact, it is very similar to a reverse mortgage in this way – the interest is added to the balance owed rather than repaid.
Land Transfer Tax
Land transfer tax is not directly related to reverse mortgages and they will have no impact on them. It is a tax that homeowners should be aware of when considering their financial implications.
When a property changes hands, either through sale or inheritance, land transfer tax may apply. The specific rates and regulations vary by province.
As previously mentioned, the funds received from a reverse mortgage are not subject to income tax as they are considered a loan, not income.
Reverse mortgages can impact estate planning and potential estate taxes – largely in that they will reduce any potential estate tax bill.
Estate taxes are usually applied on any ‘profit’ when selling a home – any existing mortgage would have to be repaid and thus reduces the amount subject to estate tax.
Can Reverse Mortgage Interest Be Tax Deductible?
The Canada Revenue Agency (CRA) does not consider reverse mortgage interest as an eligible deduction for personal income tax purposes. This means that borrowers cannot claim a tax deduction for the interest payments made on their reverse mortgage.
However, there may be certain situations where the interest on a reverse mortgage could be partially tax-deductible.
One such scenario is if the funds obtained from the reverse mortgage are used for investment purposes. If the borrowed funds are invested in income-generating assets such as stocks, bonds, or rental properties, the interest paid on the reverse mortgage loan may be deductible as an investment expense.
To potentially make the interest on a reverse mortgage tax-deductible, it is crucial to consult with a qualified tax professional or financial advisor who can assess your specific situation and provide appropriate guidance. They can consider various factors such as your overall financial picture, investment strategies, and the specific tax laws and regulations in effect at the time.
Government Benefits And Reverse Mortgages
Here are some considerations regarding the impact of reverse mortgages on these benefits:
Old Age Security (OAS)
The Old Age Security program provides a basic pension to eligible Canadians aged 65 and older.
The amount of OAS pension received is based on several factors, including the number of years residing in Canada.
The funds obtained from a reverse mortgage are not considered income and, therefore, do not directly affect eligibility or the amount of OAS pension received.
Guaranteed Income Supplement (GIS):
The Guaranteed Income Supplement is a monthly benefit provided to low-income seniors in addition to the Old Age Security pension.
The GIS is income-tested, meaning that the amount received is based on income and other factors.
Since the funds from a reverse mortgage are not considered income, they generally do not affect GIS eligibility or payment amounts.
Canada Pension Plan (CPP)
The Canada Pension Plan provides retirement benefits based on contributions made during a person’s working years.
Reverse mortgages do not affect CPP payments directly since they are not considered income.
CPP benefits are calculated based on the individual’s earnings history and contributions, rather than their assets or sources of income during retirement.
Provincial Social Assistance Programs
Provincial social assistance programs, such as welfare or income support, typically consider a person’s total income and assets when determining eligibility and benefit amounts.
The funds received from a reverse mortgage are unlikely to affect these programs – but the fact that you own a home probably will.
If you are receiving these benefits, it’s worth taking the time to have a quick check with the specific provincial social assistance agency to understand the impact of a reverse mortgage on these benefits.
Property Tax Rebates:
Some provinces and territories offer property tax rebate programs for low-income individuals and seniors. These programs are typically based on income and assets.
Funds obtained from a reverse mortgage once again should not impact these, as this is considered a loan. But once again if you are receiving these benefits, it’s worth taking the time to have a quick check with the administrators of such programs in your specific province or territory.
In Summary – Taxes, Government Benefits & Reverse Mortgages In Canada
As you can see from the above article, the good news is that reverse mortgages have almost no impact on almost all taxes and Government benefits in Canada.
This is because a mortgage (whether it’s a reverse mortgage or another kind of mortgage) is considered a loan not income.
It’s worth going through the list above and just making sure that you understand everything though.
If you have any specific questions you can leave them in the comments below.
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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.