17 August 1998 Ministerial Letter 9817558 - REVERSE MORTGAGES AND ANNUITY PAYMENTS

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: whether annuity obtained with proceeds of reverse mortgage subject to tax

Position: annuity subject to tax but simple interest accruing on reverse mortgage deductible from income therefore should be no net increase in taxable income

Reasons: 12.2 and 20(1)(c)

Signed on July 28, 1998

XXXXXXXXXX

Dear XXXXXXXXXX:

The Honourable Herb Dhaliwal, Minister of National Revenue, has asked me to respond to your letter to your Member of Parliament, XXXXXXXXXX, concerning the income tax treatment of amounts received under a reverse mortgage. XXXXXXXXXX sent Mr. Dhaliwal a copy of your letter on June 18, 1998.

I understand from a telephone conversation you had with a departmental official, Mr. Wayne Douglas of the Rulings Directorate, that your 1997 tax return has recently been reassessed to include an annuity amount as reported on a T4A form issued by your mortgage company. Since this was apparently the first T4A you received with respect to your reverse mortgage transactions which you entered into in 1994, and you understood from your mortgage company that reverse mortgages do not give rise to taxable income, you concluded that the Department has recently adopted a new interpretation which will cause an unwarranted financial burden to you and other seniors who have entered into such transactions.

I assure you that there has been no change in the Department’s practices with respect to reverse mortgages. As you discussed with Mr. Douglas, although the principal amount of any payment received from a reverse mortgage is not subject to tax, it is and has always been the Department’s view that the Income Tax Act requires that the income portion of any annuity acquired with the proceeds of a reverse mortgage be included in income. However, as also discussed below, it is the Department’s view that generally the simple interest amount accruing on the mortgage payable will be deductible from income with the result that there would usually be no net increase in taxable income originating from the reverse mortgage arrangement.

The term "reverse mortgages" refers to a plan which allows homeowners to convert the equity in their homes into income. Under a reverse mortgage plan arrangement with a financial institution, a homeowner can use his mortgage-free or low-mortgage house as security to receive a loan of cash. The cash would be loaned to the homeowner in either a lump sum, a series of periodic payments or a combination of a lump sum and a series of periodic payments. Such arrangements can be structured in a variety of ways. In some reverse mortgage plans, the homeowner or the mortgage company on the homeowner’s behalf would use the proceeds of the loan to acquire an annuity contract from an insurance company and the principal and accrued interest on the cash advanced as a mortgage loan would become due and payable only when the homeowner died or the house was sold.

Where the homeowner acquires an annuity contract, the Income Tax Act provides that the amount of accrual income on the annuity must be included in his or her income. However, the Act also provides a deduction for interest paid or payable on money borrowed to acquire the annuity contract. Once the annuity payments have commenced, the amount of interest otherwise deductible in any year is limited to the amount of income from the annuity contract that is included in income. Any compound interest on borrowed money used to acquire the annuity contract is not deductible until such time as it is actually paid, provided the other requirements of the Act are met at that time.

I understand that you will be requesting information from your mortgage holder as to the amount of simple interest that accrued on the reverse mortgage in 1997 and will then request the Department, through the XXXXXXXXXX Taxation Services Office in XXXXXXXXXX, to reassess your 1997 return to allow a deduction for the interest. I have therefore forwarded a copy of this letter to the Assistant Director of Client Services in that office, to be placed in your file. Should you require further information, I invite you to contact Mr. Douglas at (613)957-8957.

I appreciate the opportunity to address your concerns.

		Yours sincerely,

		Bill McCloskey
		Assistant Deputy Minister
		Policy and Legislation Branch
W. Douglas
July 10, 1998
957-8957