In Canada, the proceeds from a cash-out refinance are not taxable. This means that if you refinance your mortgage to pay off other debts or to make home renovations, you will not have to pay tax on the money you borrow.
Cash Out Refinancing Explained
Cash-out refinancing, also known as a mortgage refinance, allows homeowners to borrow money against the equity in their home to use for various purposes, such as consolidating debt, doing home renovations, investing, or paying for education or medical expenses.
The process involves applying for a new mortgage for a higher amount than you’re existing mortgage and, once approved, using the new mortgage funds to pay off your existing mortgage with the additional money being yours to keep as tax-free cash.
Typically the leftover money is deposited into the bank account of your choice.
Capital Gains Taxes on Primary Residences vs Investment Properties in Canada
In Canada, capital gains tax is a tax on the profit made from selling an asset, such as a home or an investment property. If you sell your primary residence, you may be eligible for the principal residence exemption, which means that you do not have to pay capital gains tax on the sale of your home. To qualify for the exemption, the property must be designated as your principal residence for every year you owned it and you must be a Canadian resident at the time of the sale.
On the other hand, if you sell a second home or an investment property, you may be subject to capital gains tax. The amount of tax you owe will depend on the profit you make from the sale and your marginal tax rate. If you own a property that you use both as a rental property and as a second home, you may be eligible for the principal residence exemption for a portion of the gain, based on the percentage of time the property was used as a principal residence.
If you own an investment property, a cash-out refinance may be a better option than selling it because you can access the equity tax-free. You can use cash-out refinance funds for a variety of purposes, including debt consolidation, home renovations, or investing, when you borrow money against the equity in your property. Since mortgage refinancing funds are not taxable in Canada, you do not have to pay any tax on the money borrowed through a cash-out refinance.