Benefits & Taxes

Reverse Mortgages in Canada: How They Affect Pension Benefits and Taxes

For many Canadian seniors, a reverse mortgage can be a powerful tool to unlock home equity without selling their home. But one of the most common questions people have is: How does a reverse mortgage affect government benefits and taxes? The good news is that, in most cases, the impact is minimal, if any. Below, we’ll break down how reverse mortgages interact with Old Age Security (OAS), Guaranteed Income Supplement (GIS), Canada Pension Plan (CPP), provincial programs, and various taxes.

Government Benefits and Reverse Mortgages

Old Age Security (OAS)

The Old Age Security program provides a monthly pension to Canadians aged 65 and older, based on residency. Since reverse mortgage funds are considered a loan and not income, taking out a reverse mortgage does not reduce OAS eligibility or the amount you receive.

Canada Pension Plan (CPP)

The CPP is based entirely on past contributions during your working years. A reverse mortgage has no impact on CPP benefits, since they are not income-driven.

Guaranteed Income Supplement (GIS)

The GIS is income-tested, meaning payments are based on reported income. Again, because reverse mortgage proceeds are not considered taxable income, they do not generally affect GIS benefits. This makes a reverse mortgage an attractive option for seniors relying on GIS who want additional cash flow.

Provincial Social Assistance Programs

Some provinces offer income support or social assistance programs. While reverse mortgage funds themselves are not considered income, homeownership and total assets may already affect your eligibility. If you do rely on these programs, it’s a good idea to check with your provincial agency before proceeding.

Property Tax Rebates

Many provinces offer property tax rebate programs for seniors or low-income households. Once again, because reverse mortgage proceeds are considered a loan, they should not impact eligibility. Still, it’s always wise to confirm with your local municipality.

Taxes and Reverse Mortgages

Property Taxes

One common misconception is that a reverse mortgage will cover your property taxes automatically. This certainly is not the case. Homeowners remain fully responsible for paying property taxes, just like with any other mortgage. Failing to pay can still lead to legal issues, including foreclosure. Many borrowers set aside part of their reverse mortgage funds to cover this expense.

Land Transfer Tax

A reverse mortgage has no effect on land transfer tax, which only applies when a property is bought or inherited.

Income Tax

Reverse mortgage funds are not taxable, as they are classified as loan advances. This means they do not increase your taxable income or push you into a higher tax bracket.

Estate Taxes

Reverse mortgages can reduce potential estate taxes, since the loan balance must be repaid when the home is sold or inherited. This repayment reduces the taxable estate value.

Tax Deductibility of Interest

Normally, reverse mortgage interest is not tax-deductible. However, if the borrowed funds are invested in income-generating assets (e.g., stocks, bonds, rental property), there may be limited opportunities to deduct the interest with a proper paper trail. Always consult a tax professional for advice tailored to your situation.

Key Takeaways: Reverse Mortgages, Benefits, and Taxes

• Reverse mortgage funds are considered a loan, not income, and as such there is no impact on OAS, GIS, or CPP.

• Seniors must continue paying property taxes, same as any other mortgage.

• There is no income tax on reverse mortgage proceeds.

• Estate planning should account for the repayment of the reverse mortgage upon sale or death.

• Interest is generally not deductible, except in certain investment cases.

Final Thoughts

Reverse mortgages in Canada provide seniors with a flexible way to access their home equity while continuing to live in their home. The major advantage is that reverse mortgages have minimal impact on both government benefits and taxes. Still, every financial situation is unique. If you are considering a reverse mortgage, it’s wise to speak with both a financial advisor and a tax professional to ensure the strategy aligns with your retirement goals.

By understanding how reverse mortgages work with government benefits and taxes, Canadian seniors can make more confident, informed decisions about their financial future.

Free Professional Consultation

If you have any unanswered questions, uncertainties or would like to go over your specific financial needs and goals, please contact me at mike.a@reversemortgageportal.ca to set up a call. As a CPA, Chartered Professional Accountant, of over 20 years, I know the importance of understanding the full picture before making recommendations. I look forward to learning more about you and your financial needs so I can help you make the best decision.

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