Home equity tax in Canada

In 2019 and 2020, some media outlets reported on the possibility that the government might introduce a Canada home equity tax on people’s primary residences. These reports came about after the Canadian Mortgage and Housing Corporation (CMHC) commissioned research from the University of British Columbia looking into the possibility of a home equity tax proposal in Canada.

The CMHC denied that it was planning on introducing a Canadian home equity tax for people’s primary residences. Nonetheless, the issue of a home equity tax in Canada came up again in 2021.

We shed some light on the issue of Canadian home equity tax and answer some typical questions: what is the federal home equity tax in Canada; do you have to pay taxes on home equity; how does home equity tax work; what impact would a principal residence Canadian home equity tax have on homeowners; how would a tax on home equity in Canada affect the economy?

How home equity tax works in Canada

Taxing home equity in Canada stems from the tax laws on capital gains. Capital gains are profits from selling an asset, such as a property or financial investments.

Do you have to pay taxes on home equity? The confusing answer is yes… and no. You do have to pay taxes on home equity when you sell a property that is not your primary residence (where you live most of the time) and it has increased in value since the time you bought it. The amount of taxes on home equity payouts of this type will depend on your other income that year and your tax bracket.

You do also have to pay taxes on home equity increases when you sell an investment property at a profit (for example, a home that you have been renting out), or a second home, such as a cottage.

What is home equity tax in Canada for your primary residence? Currently, there is no tax on home equity when you sell the home you live in. No matter how much profit you make (or capital gains) you will pay no taxes on the home equity payout.

The impact of the current tax on home equity to homeowners

The current situation of taxes on home equity payouts in Canada for second or investment properties is of no surprise to homeowners, as it has been around for some time. Half of the increase in the property’s value would be subject to income tax.

But as we’ve seen, some people fear that there may be a home equity tax proposal in Canada for primary residences, in part fueled by the media. Also the government recently considered an “anti-flipping tax”.

This would be a law that would effectively impose a home equity tax on anyone who sells their home within one year of buying it. This new law would be an attempt to try and cool off the overheated real estate market. As a result, people who flip homes within a year of buying them would be taxed on the capital gains. Homeowners who plan on living in their home for over a year would not be affected. If a law were introduced that brought in taxes on home equity payouts from primary residences, who would be affected?

The potential impact of taxing home equity in Canada on primary residences

If the government were to introduce a home equity tax proposal in Canada, whereby homeowners had to pay taxes on a home equity payout from their primary residence, the fallout could be considerable.

Homeowners would be far more reluctant to sell their homes, given that they would have to pay a considerable amount of money in capital gains tax. This would mean that they would have less money to buy their next home, which could make upsizing unrealistic.

What is a home equity tax in Canada likely to do to retirees? Many Canadians rely on their home equity to help fund their retirement, either by selling it and downsizing, or cashing in the home equity in the form of a reverse mortgage. If primary residences were suddenly subject to capital gains tax, retirees might either have to hold onto their home forever and not remortgage it, or be forced to live off less money because of the home equity tax they would have to pay. It could reduce their options and/or their income.

Taxing home equity in Canada could also have an impact on the economy. People would be less willing to sell their home (in order to avoid paying the home equity tax) which could have a big impact on the real estate market. However, this could also lead to an increase in new home developments, to fill the gap left by unsold homes.

How Canadians are relying on their home equity to help fund their retirement

If you’re a Canadian homeowner aged 55-plus, you can take out a CHIP Reverse Mortgage from HomeEquity Bank, which allows you to cash in some of your home’s equity. You can borrow up to 55% of your home’s appraised value, with the amount dependent on your age, your home’s value and condition, and where you live. Because the qualification process does not take into account income or credit score, a reverse mortgage can be much easier to obtain than a regular mortgage or home equity loan.

Canadian retirees are increasingly turning to reverse mortgages to help fund their retirement because the tax-free money can be used for any reason, including paying for monthly expenses, home renovations or even vacations. Most importantly, you don’t have to pay back what you owe until you sell your home or move out, so a reverse mortgage boosts your retirement income.

Call us toll-free at 1-866-522-2447 and find out how much tax-free cash you could borrow to cash in some of your home equity.