Deferring Property Taxes May Help
I have written about deferring property taxes before but wanted to discuss this topic again in light of the COVID-19 pandemic. This might be a great idea to reconsider if you’re worried about your cash flow or pulling too much out of your investment portfolio while the markets are down.
A BC resident can qualify for property tax deferment via one of three criteria: Families with Children Program, the Persons with Disabilities Program or the standard Property Tax Deferment Program for those over age 55. Full information on how to qualify can be found on the BC Government’s website (just search “BC property tax deferment”).
Property tax notices should be in the mail in the next couple of weeks and when they arrive, you can start the deferral process.
So how does it work? The set interest rate for those that qualify is prime -2 per cent for seniors and persons with disabilities and prime for the families with children program qualifiers. Though it should be noted that the BC government uses the prime rate of “their principal banker” and not the government of Canada prime rate. Either way, this is very cheap lending considering all of the interest rate cuts we’ve seen this year.
Even better news is that the interest charged is not compounded year over year like a normal loan! If you had to chose between taking on this or other debt with compounding interest, that makes a big difference.
Let me explain with a basic example. I’m going to assume that you and your spouse are both age 65 and you have a property tax bill of $1,500 per year. With no plan, you pay the $1,500 each year for 20 years until the second spouse passes away at age 85. You would have paid a total of $30,000 in taxes during that time.
Let’s see what happens if you decide to defer the taxes instead and invest the $1,500 per year into a TFSA. Assuming an average of a five per cent annual rate of return (and no taxes on the growth since it’s in a TFSA), you would have $51,254 in your investment account at age 85.
You would owe $35,557 to the BC government for all the deferred taxes (the $30,000 plus $5,557 of interest based on average interest of 1.95 per cent), and you would have an extra $15,697 leftover to leave behind to your children or grandchildren! If you decide to sell your home, your deferred taxes can be paid back at anytime with no penalty and you could take the money leftover and spend it as you wish.
If the interest rates climbed all the way to seven per cent tomorrow (so you would pay five per cent) and you earned the same as you paid, the difference of the compounding growth would still put you $6,442 ahead.
Even at the higher “prime” rate, those families that qualify that are struggling financially right now are still getting a great deal and may want to also consider this program. To qualify under the “Families with Children Deferment Program”, you need to be financially supporting children under the age of 18 in your primary residence or a child of any age attending post-secondary school.
There are a few other basic requirements listed on the BC government’s website, but they will not exclude too many people. You must however not be still owing any property taxes from previous years.
Everyone’s financial situation is different, and the pros and cons of any potential plan should be discussed with a professional financial planner to make sure they make sense. But you owe it to yourself to take some time to consider the property tax deferral program and see how it may benefit you during these difficult times.
And a reminder that if you’re not sure who to talk to and struggling financially right now, we have a pro-bono financial advice program in place – feel free to email me and I can connect you with someone!