What is a Vendor Take Back (VTB) Mortgage in Canada?
A Vendor Take Back (VTB) mortgage is when the seller of a property acts as the lender. Instead of the buyer borrowing entirely from a bank, they make regular mortgage payments directly to the seller. The mortgage is secured on title, just like a bank loan, which means the seller retains legal protection.
This strategy is especially powerful when selling investment properties, farmland, or commercial real estate in Canada.
What are the benefits of VTB for a seller?
1. Capital Gains Tax Deferral
Selling for all cash means your entire capital gain is taxed in the year of sale. With a VTB, you only pay tax on the portion you receive each year, potentially spreading the gain over up to 5 years (sometimes longer with CRA approval). This keeps more money working for you. (Please see below Example Of capital gains savings)
2. Steady Retirement Income
Instead of a lump sum you must reinvest, a VTB produces predictable, secured monthly payments—similar to an annuity or pension. The interest rate is typically competitive with banks, meaning you can earn 5–8% annually, backed by real estate you know well.
3. Estate Planning Made Easier
For heirs, inheriting a mortgage note can be simpler than inheriting a property. Instead of tenants and repairs, they receive scheduled cash flow—turning a management burden into passive income. It may also be simpler and more affordable from a tax standpoint to transfer a mortgage note to an Heir than a property.
4. Attract More Buyers
By offering financing, you expand the buyer pool beyond those who qualify for strict bank lending. This often leads to faster sales and sometimes even a better price.
5. Security You Control
The VTB mortgage is registered on title, giving you the same remedies as a bank in the event of default (such as power of sale or foreclosure)
Everything you need to know about vendor take back mortgages (VTB)
Example: Selling a $1,000,000 Property
Let’s compare an all-cash sale with a VTB sale using realistic terms:
This is assuming your original cost basis or amount invested in the property is $400,000, and you are selling it today for $1,000,000. This also assumes a 50% tax bracket. Please see the outline below and note that everyone's tax situation is different, but the goal of this case study is to show how beneficial VTb can be when selling a property:
Assumptions
Sale Price: $1,000,000
Buyer Down Payment: 15% ($150,000)
VTB: $850,000 mortgage, 25-year amortization, 5-year term, 6% interest
Seller’s Tax Bracket: 50%
Cost Basis Since Seller's Original PURCHASE: $400,000
Capital Gain: $400,000 - $1,000,000 = $600,000
Scenario 1: All-Cash Sale
Capital Gain: $600,000
Taxable Portion (50%): $300,000
Tax Payable in Year 1: ~$150,000
Net After Tax: ~$850,000 lump sum
Scenario 2: VTB with 15% Down
Year 1 Tax Impact
A $150,000 down payment is received at closing
Gain Recognized: $600,000 × 15% = $90,000
Taxable Portion (50%): $45,000
Tax Payable in Year 1: ~$22,500 (vs. $150,000 on a cash sale)
Mortgage Income Stream
Monthly Payment (P&I): ≈ $5,471
Over 5 years: $328,260 collected
Interest Earned: ≈ $246,500
Principal Repaid: ≈ $81,760
End of Term Balloon Principal Payment
Remaining Balance Due at Year 5: ≈ $768,240
Total Collected Over 5 Years
Down Payment: $150,000
Mortgage Payments: $328,260
Balloon Payment: $768,240
Total: ≈ $1,246,500
Side-by-Side Comparison
Why This Matters
Tax Deferral: You keep more in your pocket each year instead of losing a lump sum to CRA.
Extra Income: $246,500 in interest over 5 years—on top of your principal.
Flexibility: You decide the terms, not the bank.
Retirement Ready: Monthly payments create reliable cash flow.
Estate Friendly: Easier for heirs to inherit an income stream rather than a rental property.
✅ Bottom Line: Selling with a Vendor Take Back mortgage turns your property sale into a tax-efficient, income-generating, and estate-friendly strategy—while still keeping your wealth secured by Canadian real estate.
Please note this is not financial advise. Everyone's tax situation is different and you should review your specific situation with your accountant and confirm what you are doing is compliant with current tax codes.
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