On March 2, 2010, Colin Hansen, the provincial finance minister announced the new 2010 British Columbia budget.
One of the big announcements was the new property tax deferral program for families with children living under the age of 18. They were hoping to implement this as soon as June 2010. The provincial government was hoping that families would utilize this if one parent lost a job temporarily, or families will use the extra money they saved from having to pay property taxes to pay off their car loans or credit card debt instead.
Colin Hansen says in his budget to The Speaker:
The point is, it’s their choice. The option is available to help them enhance their quality of life in whatever way they choose.
So you might be instantly thinking “Score! Time to make me some babies! I’m all for enhancing my quality of life!”
But note the key word, DEFERRAL.
That means that expenses of $200-$500 a month are deferred and paid later, when the home is sold. The deferred tax must be paid back to “The Best Place on Earth” province in full + interest when the home is sold. It’s plus interest! So the government is loaning you money.
What does this mean?
This could mean that when you sell your house, a big chunk of your home equity could be slashed off. If you don’t pay your property taxes (let’s say average $350 a month) for seven years (the average time before a home owner usually sells their home), then the government might be holding out their hand asking for $29,400 and this is NOT including the compounding interest that will be added on. If you add compound interest of a measly and super reasonable 3%, after 7 years it won’t be $29,400, it’ll be $38,313.28. Either you should budget that into your expenses (which defeats the purpose of deferring your property taxes IMHO) or you hope that real estate prices will be booming when you sell!
Of course, Mr. Speaker, property taxes are only part of the housing equation. For countless families, owning a home is still just a dream because, in some communities and neighbourhoods, prices are simply out of reach.
No, Colin, REALLY? Vancouver is listed as the most unaffordable place in the western world, pretty much (out of 300 cities studied)!
I’m not really sure if it’s such a good idea to encourage people to borrow more money from the government. In my opinion, they seem to be encouraging young people to continue to live the lavish lifestyle they currently lead. Also, they haven’t released the rates they plan to charge you yet.
What should one do?
I think that staying away from utilizing this “incentive” every single year is a good idea. Otherwise, like any debt it’ll surprise you and kick you in the rear later on down the road.
If it’s necessary then might as well budget for this on a month to month basis, and invest the money you sock away for the monthly property taxes so it’ll grow…instead of buying that home entertainment system.
I think it’s a good idea for emergency situations, like if one parent lost their job or became ill, though (knock on wood!).
On a brighter note, you can now follow the Federal Finance Minister Jim Flaherty on Twitter @FinanceCanada. He’s planning to tweet his Federal Budget 2010 live. Is it a good sign or is it slightly disturbing that our government is hopping on the social media bandwagon?
So what do you think of this new budget idea for young families from the BC government? Good idea? Bad idea?
Any other interesting budgets from other provinces (or territories!) out there?
This is a guest post from Young and Thrifty. If you liked this post, please consider subscribing to her RSS feed and following her on Twitter!
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For seniors the property tax deferral is at prime minus 2 and the interest is simple, not compounded interest. If you took the property tax amount and put into a tfsa over 25 at 7%, you would have $311,000. The property tax liability would be $156,000, based on 300 per month indexed at 2% and an average interest rate of 3%. If people are smart they could turn this into an excellent opportunity. I have all the necessary calculators if anyone needs help working out their personal numbers.
Excellent point Shaun. I might add that one could use the defered property taxes to make extra payments on their mortgage.
Good points Farly and Shaun! This could be an excellent opportunity if used wisely.
Is the property tax deferral for families with children under 18 also prime -2%? I wasn’t able to find this information on the government website.
I agree in that it would be a good idea to utilize this in the advent of an emergency situation, because I would hate to sell my principal residence only to see a chunk of change evaporate! That would really suck.
Nice post.
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Actually, there is another benefit to deferred tax. If you pay your tax annually, you will be paying it out of after-tax earnings (after income taxes). So, if you pay $3600 muni tax on your home every year, you would have to earn around $4800 at a 33% tax rate. Effectively, your tax payment is charged to you at a premium of $1200 per annum as a consequence. That is a loss of 33% per year. If you defer your property taxes, sell your house after 7 years, you will have accrued a tax debt of 7×3600=25200 plus simple interest of say prime = 3500. Tot approx cost 28700. Compare to: you pay every year, your tot approx cost is 7×4800=33600. Savings of 4900! Plus if you invest your deferral at an average return of prime in a tax-free account, you will have earned another (not cpd) $3500. You will be ahead approximately $8400 over 7 years.
“Interest on deferred taxes will be charged at the prime lending rate of interest. The rate
will be set twice annually”
http://www.bcbudget.gov.bc.ca/2010/backgrounders/2010_Backgrounder_2_Families.pdf