BC Property Tax Deferment Program
November 1, 2018
Is the BC Property Tax Deferment Program Right For You?
Before we examine whether it’s a good idea to take advantage of the program, let us first examine some of the finer details.
The regular program is for individuals that are either:
a) 55 years or older during the current year,
b) A surviving spouse of any age, or
c) A person with a disability.
You must be up to date on your current property taxes to apply. Keep in mind that once you begin to defer, the program doesn’t automatically renew every year. You must apply for each year that you want to defer.
For the regular program, you need to have a minimum 25% equity in your home, based on the property’s assessed value. For example, on a property valued at $500,000, you need at least $125,000 in equity. Without fire insurance, only the land value of your assessment will be considered as part of your equity.
An Important Note About Liens
Since the BC government is lending you money against a secured asset, your home, they will register a restrictive lien against the property. This will show at the land title office and on your credit profile once you begin to defer your tax. It could also affect your future borrowing capability, especially when refinancing an existing home loan. It could also impact your ability to make changes to title. If you plan on making any title changes, it would be wise to do so before applying for the program.
For instance, you would not be able to do the following without first paying off the loan;
Selling the property
Adding someone on title who isn’t your spouse
Removing someone from title who isn’t deceased
We recommend you speak with a lending specialist prior to applying, even if you don’t have any debt at the moment.
A lien can slightly increase the cost of your home insurance. Check with your home insurance provider.
Simple vs. Compound Interest
One of the great features of the deferment program is that the interest charged is simple interest.
Simple interest means that interest cannot be charged on previous interest, so there is no compounding of interest. Compounding is good for our investment returns and not so good for our debt.
The current interest rate is very attractive at 2% below prime. The best rate most borrowers can get on a home equity line of credit is 0.5% above the prime rate with compound interest, so the offer is indeed very competitive.
See below for a comparison between borrowing $5,000 per year for 31 years (age 55 to 85) at 1.7% simple interest, and a traditional HELOC rate of 4.2% compound interest. Over a 30-year period the total amount of total debt would be double in the second scenario.
*table below for illustration purposes only
Frequently Asked Questions
Can I repay the loan amount at any time?
Yes, you can. There is no restriction or penalty, you simply request the outstanding balance, and either pay in full or make a partial payment.
Can interest rates go up?
Yes, the interest rates can go up or go down, as they are linked to the prime rate. Rates are historically locked for a certain period of time and adjusted to prime at regular intervals.
How do I apply?
See links at the end of this post.
Can I apply if I am 55 but the joint property owner is not 55?
Yes, you can, only one of the owners needs to qualify.
I already paid my property taxes for this year; can I defer this year?
No, you must wait until the following year.
Is the Program Right for Me?
If you’re comfortable taking on a little debt against your home, it could be a good fit.
If you’re risk averse, don’t like debt, and paying the bills is not a problem, then perhaps it’s not for you.
If you want to pass your home on to your beneficiaries without requiring them to pay off debt on the property, then you probably shouldn’t use the program either.
Ideas For Taking Advantage of the Strategy
This strategy is particularly useful for our pre-retirees who are just hitting 55 and want to begin building a buffer. Take the funds you save from deferring and invest them in a low-risk, emergency liquidity fund for the next 5 to 10 years approaching retirement. These are traditionally the highest income earning years so its a great time to take advantage.
The Registered Plans Approach
If you already have an emergency fund, you may want to invest the saved property tax into a portfolio with greater growth potential.
The Tax-Free Savings Account is the greatest thing since sliced bread (from the perspective of a Canadian investor), allowing you to compound investment growth tax free. You pay no taxes in years when you make a gain, and no taxes on withdrawals. Are you having a hard time filling up your TFSA? Be diligent, take the money you would normally pay towards your property taxes, and invest it within your TFSA. Borrowing funds at 1.7% simple interest and earning 5-6% compound returns on those funds is an attractive proposition.
If you are still working and subject to higher tax brackets, you may want to take the savings from deferring your tax bill and invest in your RRSPs. You can then take the RRSP refund from the contribution to invest in your TFSA; now you’re really amplifying the inherent power of borrowing at a low rate to earn tax deferred gains.
Want to guarantee an inheritance to your heirs? Do you need to fund a new health and dental plan in retirement because you’re losing your employer plan upon retirement? Maybe you want a long-term care insurance plan to help with care costs in later life? The tax deferment program may provide a few thousand dollars a year of extra cash flow to satisfy those needs.
The Bottom Line:
The government introduced the plan to help out property owners who were on a fixed income or in a difficult financial situation due to death or disability. The program is not income tested and is available to everyone. If you’re comfortable taking on a little debt and understand the rules of the program, you may want to take the government up on their ultra-low interest rates. We recommend first speaking with a financial planner and potentially a lending professional if you have an existing loan or mortgage, or if you think you may want a home loan in the future.
Eligibility questionnaire to see if you would qualify for the program: https://forms.gov.bc.ca/taxes/property-tax-regular-deferment-eligibility/
Comprehensive list of steps to guide you through the application process: https://www2.gov.bc.ca/gov/content/taxes/property-taxes/annual-property-tax/defer-taxes#cannot-defer
Application: Make sure to submit the application to your local property tax office at the address shown on your tax notice, not to the Government of BC. See: https://www2.gov.bc.ca/assets/gov/taxes/property-taxes/forms/fin-51-property-tax-deferment-program-application.pdf
For information on liens and title changes, see the BC Government’s website:https://www2.gov.bc.ca/gov/content/taxes/property-taxes/annual-property-tax/defer-taxes/property-title-changes
Lorenzo Pederzani, CFA, CFP®, FCSI® | Director, Private Client Group & Portfolio Manager
HollisWealth®, a division of Industrial Alliance Securities Inc.
This information has been prepared by Lorenzo Pederzani and Matthew Evans who are Investment Advisors/Portfolio Managers for HollisWealth® and does not necessarily reflect the opinion of HollisWealth. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Investment Advisors/Portfolio Managers can open accounts only in the provinces in which they are registered.
HollisWealth® is a division of Industrial Alliance Securities Inc., a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada.