Save money, defer taxes

BC Assessment recently sent out their annual assessment notices and your annual property tax bill will be arriving soon.

When your tax notice arrives, take a few minutes to consider deferring your property taxes if you qualify for this program.

A BC resident can qualify for property tax deferment via one of three criteria:

• Families with Children Program
• the Persons with Disabilities Program
• 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).

For the sake of this article, however, I’m focusing solely on the standard program for those over 55.

So why should you consider deferring your property taxes?

Primarily because it’s very cheap.

The set rate for those that qualify is prime -2 per cent, which means the current interest rate is only 1.45 per cent (set using the prime rate of last October). Even better news is that the interest charged is not compounded year over year.

If you chose to invest the money you save and earn interest on those investments, that interest would compound each year and it would put you that much farther ahead.

Let me explain with a basic example.

I’m going to assume that you and your spouse are both age 60 and you have a property tax bill of $1,500 per year. With no plan, you pay the $1,500 each year for 25 years until the second spouse passes away at age 85.

You would have paid a total of $37,500 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 $74,439 in your investment account at age 85.

You would owe $44,569 to the BC government for all the deferred taxes (the $37,500 plus $7,069 of interest based at 1.45 per cent), and you would have an extra $29,870 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.

For those that are still reasonably healthy, there’s an even better option to consider. If the same 60 year old couple bought a “joint last to die” life insurance policy with a $50,000 face value it would cost them approximately $898 per year.

If that couple took $898 from the $1,500 of tax money to pay for this policy, they would have their future tax liability fully covered and be left with an extra $602 per year to spend on whatever they choose.

With a projected total tax bill of $42,375, the $50,000 policy builds in quite a bit of safety net in case interest rates go up higher than expected. If the couple didn’t need the extra $602 for spending money, they could again invest it in a TFSA and have an extra $29,775 in their account at age 85.

Basically, the same amount as the investment only example above but this strategy takes a lot of the risk out of the equation.

So which strategy is best?

In simple terms, you can assume that if the couple passes before age 85 (which is, unfortunately, still more likely), the insurance option becomes even more beneficial as the tax bill is smaller, but the insurance still pays out the full $50,000.

If the couple expects to live to 100, the investment only option may be the better way to go. For some, the best option may be to create a blend of the two strategies to utilize the advantages of both.

Everyone’s financial situation is different, and the pros and cons of any potential plan should be discussed with a certified financial planner. But you owe it to yourself to take some time to consider the property tax deferral program and see how it may benefit you.         

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.