What You Need to Know

Have you ever wondered if that home you've been paying off for decades could help fund your retirement? If you're an Ontario homeowner over 55, you might have heard whispers about reverse mortgages. But like that mystery novel on your bedside table, the plot thickens when we start talking about taxes.

I remember chatting with my neighbour George last summer. At 72, he was asset-rich but cash-poor—living in a fully paid Toronto home worth nearly a million dollars, but struggling to cover rising property taxes and unexpected home repairs. "What good is all this equity if I can't use it?" he asked, gesturing around his beautiful home of 40 years.

That's where reverse mortgages enter the picture. But before you sign on the dotted line, let's unpack the tax implications that might affect your decision—and your wallet.

What Exactly Is a Reverse Mortgage?

A reverse mortgage allows homeowners aged 55 and older to access up to 55% of their home's value without selling. Unlike traditional mortgages, you don't make regular payments. Instead, the loan amount and accumulated interest are repaid when you sell your home, move out, or pass away.

Think of it as your home paying you back for all those years of mortgage payments and upkeep.

The Tax Implications: Good News First

Here's something that might brighten your day: the money you receive from a reverse mortgage is not considered taxable income in Ontario.

Yes, you read that correctly. The Canada Revenue Agency (CRA) views these funds as a loan, not income. This means Ontario seniors won't see their Old Age Security (OAS) benefits clawed back or jump into a higher tax bracket when they receive a lump sum or regular payments from a reverse mortgage.

For many Ontario seniors living on fixed incomes, this tax-free aspect is perhaps the most attractive feature of reverse mortgages.

Is a Reverse Mortgage Really Tax-Free? The Details Matter

While the loan proceeds themselves aren't taxable, what you do with that money might have tax implications. Let me explain:

Investment Considerations

If you invest the money from your reverse mortgage, any investment income you earn will be taxable. For example:

• Interest earned in non-registered accounts
• Dividends from stocks
• Capital gains from selling investments

This might seem obvious, but I've seen clients surprised when their tax bill increases after they've invested their reverse mortgage funds.

Property Tax Deferral Programs in Ontario

Ontario offers property tax relief programs for seniors that vary by municipality. If you're using reverse mortgage funds to pay property taxes that could be reduced or deferred, you might be missing an opportunity to optimize your financial situation.

In Toronto, for instance, the Property Tax Increase Cancellation and Deferral Programs offer eligible seniors property tax relief options. The Deferral Program allows qualifying low-income seniors and persons with disabilities to defer annual property tax increases. Combining these municipal programs with a reverse mortgage strategy might be more advantageous than using reverse mortgage funds (which typically have higher interest rates) to pay full property taxes.

Comparing Tax Implications: Reverse Mortgages vs. Other Options

To help you understand how reverse mortgages stack up against alternatives from a tax perspective, I've created this comparison table:

Who Benefits Most from the Tax Advantages of Reverse Mortgages in Ontario?

Understanding who might benefit most from the tax implications of reverse mortgages can help you determine if it's right for your situation in Ontario:

• Ontario seniors receiving income-tested benefits like GIS who need additional cash flow without affecting their benefits
• Homeowners in high-value Ontario properties (particularly in the Greater Toronto Area) with limited retirement income
• Those wanting to help family members financially in Ontario's expensive housing market without triggering tax implications
• Ontario residents who want to age in place without tax consequences from accessing home equity, particularly important given the province's high housing costs

What Really Happens with a Reverse Mortgage from a Tax Perspective?

Let's walk through a practical example to illustrate the tax implications:

Meet Martha: An Ontario Reverse Mortgage Case Study

Martha is 70, widowed, and owns a home in Toronto valued at $1,200,000 with no mortgage. She receives $1,600 monthly from CPP and OAS combined, plus a small pension of $900 per month. Her home needs significant repairs, and she's considering her options while navigating Ontario's tax system.

If Martha takes a reverse mortgage of $200,000:

• The $200,000 is not added to her taxable income
• Her CPP, OAS, and GIS benefits remain unchanged
• She can use the funds for home repairs without tax consequences
• Any interest accumulating on the reverse mortgage is not tax-deductible

If instead, Martha sold her home and invested the proceeds:

• She might face capital gains tax if she buys a less expensive home
• Investment income would be taxable
• Her GIS benefits might be reduced due to increased income
• She would lose the emotional security of remaining in her home

What Is the 95% Rule on a Reverse Mortgage and Its Tax Implications?

A common question I hear is about the "95% rule" with reverse mortgages. This refers to the fact that most reverse mortgage lenders in Canada will only lend up to an amount that ensures the total debt doesn't exceed 95% of the home's value.

From a tax perspective, this rule helps protect against the possibility of the loan exceeding the home's value, which could potentially create a tax liability for your estate. If your home sells for less than the amount owing, the lender generally absorbs the loss—not you or your estate.

How Is a Reverse Mortgage Paid Back and What Are the Tax Implications?

When it comes time to repay a reverse mortgage in Canada, here's what happens from a tax perspective:

1. Your home is sold (either by you or your estate)
2. The reverse mortgage principal and accumulated interest are paid from the sale proceeds
3. Any remaining equity goes to you or your estate
4. If the sale doesn't cover the full amount owing, the shortfall is typically absorbed by the lender

The good news: There are no tax implications on the repayment itself. However, your estate may have less value to distribute to your heirs, which could indirectly affect their inheritance.

Does Having a Reverse Mortgage Hurt Your Credit?

While not directly a tax consideration, your credit score can affect your overall financial health and ability to access other tax-efficient borrowing options.

The good news is that a reverse mortgage typically doesn't hurt your credit score because:

• You're not required to make regular payments
• The loan doesn't appear as revolving credit on your credit report
• Late payments aren't reported because, well, there are no payments due until the home is sold

This means you can maintain good credit while accessing your home equity, potentially keeping other tax-efficient borrowing options open in the future.

What Happens If You Live Too Long on a Reverse Mortgage?

I once had a client joke, "What if I live to 110? Will I owe more than my house is worth?" It's a valid concern with interesting tax implications.

If you live in your home for many years with a reverse mortgage:

• Interest compounds over time, potentially reducing the equity remaining in your home
• However, in Canada, most reverse mortgages come with a "no negative equity guarantee"
• This means you (or your estate) will never owe more than the fair market value of your home when it's sold

From a tax perspective, even if your loan balance exceeds your home's value, you won't face additional tax liabilities. The lender assumes this risk—one reason why reverse mortgage interest rates tend to be higher than conventional mortgages.

What Are the Disadvantages of a Reverse Mortgage in Canada from a Tax Perspective?

While the tax-free access to funds is appealing, there are some tax-related disadvantages to consider:

• Non-deductible interest: Unlike some investment loans, reverse mortgage interest is not tax-deductible
• Opportunity cost: Using a reverse mortgage might prevent you from utilizing other tax-efficient strategies
• Estate reduction: Less equity may be available for heirs, potentially affecting their inheritance tax planning
• Potential benefit impacts: If you invest the proceeds, the investment income could affect income-tested benefits

Is a Reverse Mortgage a Good Idea in Ontario? The Tax Angle

Whether a reverse mortgage makes tax sense depends on your specific circumstances in Ontario. Here are some considerations:

• If maintaining income-tested benefits is crucial, a reverse mortgage provides tax-free cash flow, which is especially valuable in Ontario where the cost of living continues to rise
• If you plan to invest the funds, consider the tax implications of investment income under Ontario's provincial tax rates
• If you're considering downsizing eventually, selling might be more tax-efficient than accumulating interest, particularly given Ontario's strong real estate market
• If leaving a maximum estate to heirs is important, especially in light of Ontario's estate administration tax (probate fees), other options might preserve more equity

What Is the Current Interest Rate on Reverse Mortgages and How Does It Affect Taxes?

As of 2024, reverse mortgage rates in Canada typically range between 6.5% and 8.5%, significantly higher than conventional mortgages. While the interest itself doesn't have direct tax implications since it's not tax-deductible, it does affect:

• How quickly your equity decreases
• How much remains for your estate
• Your overall financial picture, which may influence other tax decisions

Remember that interest compounds on a reverse mortgage, meaning you pay interest on the interest over time.

Conclusion: Navigating the Tax Maze of Reverse Mortgages in Ontario

A reverse mortgage can be a valuable financial tool for Ontario seniors, particularly from a tax perspective. The tax-free access to your home equity without impacting government benefits is a significant advantage for many Ontario retirees who are house-rich but cash-poor, especially in high-value markets like Toronto and the GTA.

However, like any financial decision, it's essential to consider how a reverse mortgage fits into your overall financial and tax planning within Ontario's tax framework. Before signing any paperwork, we recommend consulting with us to evaluate your specific situation.

The Government of Canada and Ontario's Ministry of Finance provide excellent resources to help you understand your options.

After all, when it comes to your Ontario home—likely your largest asset—and your comfortable retirement, you deserve advice that considers all angles, including the tax implications that might not be immediately obvious in our province's tax system.

Have you considered a reverse mortgage for your Ontario home? If you have more questions, consult with us for personalized guidance on your specific financial situation.