Invest well. Living Well: Should I Defer Property Taxes?
The Canadian real estate market has been buzzing lately. As property values increase, municipal assessments often increase, which can mean more property taxes. As our grandfather used to say, “Sometimes it’s like that.
The Canadian real estate market has been buzzing lately.
As property values increase, municipal assessments often increase, which can mean more property taxes. As our grandfather used to say, “Sometimes it’s like that.”
With property taxes soon due, we were recently asked the question, “Should I defer my property taxes?” As is often the case, the answer is, “It depends.
In summary, the province of British Columbia allows property owners to defer their property taxes if the following criteria are met:
• You are a Canadian citizen or permanent resident (as defined by the Government of Canada);
• You lived in British Columbia for at least one year before applying for the property tax deferral;
• You currently live in the house for which you pay property taxes;
• You are aged 55 or over or a surviving spouse or disabled person;
• You have a minimum of 25% equity in your home based on BC assessment values.
If you meet all of these criteria and meet the application deadlines (see gov.bc.ca for details), you can defer property taxes on your home. Interest is charged at a nominal rate set every six months by the Minister of Finance. As of June 1, 2022, it was only 0.45%.
• You’re short on cash: Many seniors have limited income and tax deferral can ease the financial strain and allow you to redirect funds elsewhere.
• You are depleting retirement assets faster than expected to pay property taxes. By deferring taxes, it can extend the potential life of a retirement portfolio.
• Better CPP returns: If you were to dip into the Canada Pension Plan early to cover your taxes, the reduction is 7.2% per year compared to the cost of tax deferral currently at 0.45%. Based on this scenario, it might make sense to defer taxes.
• You want to invest: Deferring taxes and transferring these funds to a tax-free savings account can generate higher returns and avoid probate fees and income taxes. Technically, this is a form of borrowing for investing, which is considered higher risk and should make sense for your personal circumstances.
Another example: Using the city’s online property tax estimator (kamloops.ca), the average property value is $631,670 and the average property tax is $3,750 before grants . Let’s say a 65-year-old male non-smoker takes this and applies for a $200,000 term life insurance policy. A quick internet search using winquote.net yields an approximate annual cost of $3,432. He could use this freed up money to pay for the cost of the policy. Assuming he lives to age 85, a tax-free payment of $200,000 could go to his wife, children, etc. This translates to an after-tax return of $131,360.
• You want access to some of the equity in your home without selling or applying for a line of credit. Keep in mind that you are releasing your existing money and not receiving any additional money.
Why not defer?
• You are not in debt: The province will register a lien on your home and ensure that it is repaid later. Some agree with this, some don’t.
• You have sufficient cash flow and don’t plan to spend it: why defer taxes only to let it sit in your bank account and earn little or nothing? Arguably, if you are deferring taxes, you should be using it in some ways.
• Keep it simple. Not just for yourself, but the extra paperwork, time and effort an executor might need to deal with this can be worth considering.
• Leave more to your estate: By paying taxes annually, you keep the value of your home intact, which could benefit your estate and your heirs.
These are just a few quick points on both sides of the argument. As always, the best course of action will depend on your own situation.
Until next time, invest well. Live well.
Opinions expressed are those of Eric Davis, Senior Portfolio Manager and Principal Investment Advisor, and Keith Davis, Associate Investment Advisor, Private Investment Advice, TD Wealth Management, as of June 15, 2022, and are likely to change based on market and other conditions. The Davis Wealth Management team is part of Private Investment Advice, TD Wealth Management, a division of TD Waterhouse Canada Inc., which is a subsidiary of The Toronto-Dominion Bank.