At issue

Real estate values have been rising at rates beyond historical norms over the last few years, especially in some major urban centres. Whether purchasers are seeking home ownership or investment opportunity, the usual need for mortgage financing is accentuated when property values rise so rapidly.

This is generally good news for financiers, but obviously the competition for borrowers can be stiff. The marketing minds at these institutions have come up with some innovative ways to attract the attention of purchasers, along with novel product features.

No doubt borrowers are appreciative of the competition that keeps interest rates in check, and for the perks they appear to be receiving. Appearance, however, is not necessarily reality, and a closer look at the tax implications of mortgage incentives will allow borrowers to better evaluate a given proposition.

Income Tax Act (ITA) sections

A few ITA sections have bearing on the discussion here, beginning with the basic rule of income in s.9, followed by some broad categories of income inclusions in s.12:

9. (1) Subject to this Part, a taxpayer’s income for a taxation year from a business or property is the taxpayer’s profit from that business or property for the year.

…

12. (1) There shall be included in computing the income of a taxpayer for a taxation year as income from a business or property such of the following amounts as are applicable …

Among the forty or so categories in s.12, two paragraphs are of particular note: (c) interest, and (x) inducements and reimbursements.

2016-0681271E5 – Cash back amounts on renewed mortgages – March 21, 2017

In the situation brought before the CRA, a corporation receives cashback amounts from a bank at the time it renews mortgages relating to its rental properties. The cashbacks are subject to payback if certain events occur within 3 to 5 years. The questions posed are whether the cashback is taxable to the borrower, and whether any payback can be claimed as a deduction.

The CRA writer begins by ruling out the possibility of the cashback being an interest payment to the borrower. She then touches on the general rule under s.9(1), which may alone suffice, but rests the determination mainly on being an inducement pursuant to para.12(1)(x). The amount of the inducement would be treated as income for the tax year in which it is received.

As to any payback, if an inducement is included in income pursuant to para.12(1)(x), a related payback in a later tax year would entitle the taxpayer to claim a deduction under para.20(1)(hh) in that later time.

CRA Views 2015-0609071E5: Mortgage incentive – February 22, 2017

A credit union offered its members a bonus on deposits to a particular type of savings account, conditional on the funds being used as a down payment for a property purchase, with the mortgage being placed with the credit union. The credit union’s position is that, as there is already a flat interest rate on the account, the bonus should not be considered interest to the borrower.

As above, the CRA writer here also addresses whether the bonus may be interest, but does not come to a conclusion, and instead states that if the bonus does not meet that requirement then it may still be taxable under another ITA provision.

Both s.9(1) and s.12(1)(x) are dependent upon the taxpayer having income from “a business or property.” That is a question of fact, and “without a detailed review of the relevant facts and documentation, we are unable to provide a definitive response.”

Practice points

• The upfront rate on a mortgage is usually the main cost to a borrower, but other fees or concessions could increase or decrease that. An inducement in the form of an incentive is one such amount that can reduce the effective cost.
• Where an incentive is received by a borrower/taxpayer in the course of earning income from a business or property, such as a rental unit, the amount is likely a taxable amount.
• Where the borrower is not trying to earn income from the property, for example a family home, it is not clear whether the amount is taxable. While this leaves such individuals uncertain, at the same time it is conceivable that such amounts could be received non-taxable if the incentive program is carefully designed.