Reverse mortgages are often advertised as “tax-free cash” for homeowners. That phrase can be confusing.
In most cases, the money you receive from a reverse mortgage is not taxable, because it’s a loan, not income. But there can still be financial and tax-related consequences depending on what you do with the money—and there are important implications for children and heirs.
This post explains the basics in simple terms for Toronto homeowners and their families.
Tax implications for the homeowner (Toronto/Ontario)
1) Is the money you receive taxable?
Usually, no. A reverse mortgage is borrowed money. Borrowed money is generally not treated as income, so it’s typically not something you “report as income” on your tax return.
It also generally doesn’t reduce government benefits like Old Age Security (OAS) or Guaranteed Income Supplement (GIS) simply because you borrowed the funds.
2) Does a reverse mortgage trigger capital gains tax?
A reverse mortgage does not trigger capital gains tax by itself, because you are not selling the home—you’re borrowing against it.
Capital gains issues usually arise when:
- the home is sold, or
- the homeowner passes away (because there can be a deemed disposition at death)
If the home is the homeowner’s principal residence, the Principal Residence Exemption may shelter some or all of the gain—but it still needs to be handled properly in the final tax filings.
3) Is the interest on a reverse mortgage tax-deductible?
For most people using a reverse mortgage on their primary residence, the interest is not tax-deductible.
In Canada, interest may be deductible in some situations when borrowed money is used to earn income from a business or investment (and you can clearly trace the use of funds). But this is very fact-specific, and reverse mortgage interest is often added to the balance rather than paid monthly, which can make the tax treatment more complicated.
If someone is taking a reverse mortgage specifically to invest the proceeds, it’s smart to get advice from a tax professional before moving forward.
4) Can the reverse mortgage create taxable income indirectly?
Yes—depending on what you do with the funds.
Examples:
- If you invest the proceeds in a non-registered account, any interest, dividends, or capital gains may be taxable.
- If investment income increases your taxable income, it could cause OAS clawback or affect other income-tested benefits (even though the reverse mortgage advance itself isn’t taxable).
Implications for children and heirs
1) There may be less inheritance
Even if the home value increases, the reverse mortgage balance usually grows too because interest is added over time.
That often means:
- less equity left in the home, and
- less value in the estate for children/beneficiaries.
2) The estate usually must repay the reverse mortgage after death
When the last borrower dies (or moves out permanently), the reverse mortgage generally becomes due.
This can matter for children because estates don’t always settle quickly. The family may need a plan to repay the loan within the timeline set out in the mortgage contract.
3) If children want to keep the home, they usually need financing
If the goal is for children to keep the property, they typically need one of these options:
- Sell the home and repay the reverse mortgage from the sale proceeds
- Refinance with a traditional mortgage or HELOC (if they qualify)
- Pay out the reverse mortgage using other family/estate funds
Without a plan, families can feel pressured into a fast sale.
4) “No Negative Equity” protection helps, but there are conditions
Many Canadian reverse mortgages include a version of a No Negative Equity Guarantee (also called non-recourse protection). In general, this means the amount owed should not exceed the home’s value at sale.
However, these protections usually require the homeowner to meet obligations such as:
- paying property taxes
- maintaining insurance
- keeping the home in reasonable repair
5) Estate administration can be more complicated
Because a reverse mortgage is registered on title, it typically must be paid out before the estate can distribute proceeds to beneficiaries.
Families may also need to coordinate:
- legal steps (estate administration)
- the property sale process
- timing pressure from the lender repayment deadline
Quick checklist before taking a reverse mortgage
Before signing anything, ask for these items in writing:
- A projected loan balance after 5, 10, and 15 years (based on the rate offered)
- A list of all upfront fees and whether they’re added to the loan
- The prepayment penalty schedule (cost to exit early)
- Repayment rules and timelines upon death or moving out
- Ongoing homeowner obligations (taxes, insurance, maintenance)
- If investing the proceeds: what records you should keep, and whether interest deductibility is realistic
Final thoughts
A reverse mortgage can help some homeowners stay in their home and access cash flow. But it’s important to understand that the costs are often delayed and the biggest long-term impact is usually on home equity and the estate.
If your family’s plan involves children inheriting the home—or helping you later in life—talking it through early can prevent stressful decisions later.
If you’re deciding between a reverse mortgage, a HELOC, downsizing, or a sale-leaseback strategy, consider getting a written comparison with real numbers (fees, rates, and 5–15 year projections).
General information only. Get legal and tax advice for your specific situation.
Pro Action Finance 
Leave a comment