It’s property tax time again

By Dave Ellis - Vernon Morning Star Published: June 06, 2009 12:00 PM

It’s property tax time and your notice is in the mail. It’s an interesting time, as I often hear people complain that the assessment notice is too low, and that their home is worth more. Keep in mind that your property tax is based on what the province thinks it should be assessed at. So a lower valuation is better. On my notice, I see $2.10 per $1,000 of value for the school tax portion of the property tax. Other charges are levied the same way, as dollar or cents per $1,000 of appraised value. B.C. uses an ad valorem (“based on value”) system of property taxation. Only real property value (land and buildings) is taxed. The value of personal property such as cars, jewelry and furniture is not taxed. The property assessment and taxation system in B.C. is a two-step process involving B.C. Assessment and the various tax authorities. B.C. Assessment determines the classification, value and exemption status of property.

Tax authorities then apply their tax rates to assessments. This determines how the tax burden will be shared among all property owners — residential, commercial, industrial, farm, etc. Property tax provides approximately 40 per cent of local government revenue in Canada and is the major source of revenue controlled by local government. This market value is determined by following generally accepted appraisal principles. Each year the assessor takes into account location, size, topography, shape, replacement cost, age, condition, rental income and sales of comparable properties in the area, as well as any other factors that might affect the property’s value, to determine what the property would sell for. The market value of property is recorded on the annual assessment roll. Market value for assessment purposes is the price an unencumbered property would sell for on July 1 of the preceding year if a reasonable amount of time is allowed to find a purchaser. On the flip side of the notice is information on payment options — how to appeal (if you think the valuation is too high) and a rather short paragraph entitled tax deferment.

Let’s look at that just a little closer. If you are age 55 or over in 2008, you can apply to defer the taxation of your property tax. It essentially becomes a loan from the province at a rate that is never more than two per cent less than the prime rate that the province borrows money at. Today that borrowing rate is pegged at 3.5 per cent( which makes this years deferment interest rate 1.50 per cent). You can’t borrow anywhere else at that rate. So, if you are 55 years old or over, you need to consider this offer. If you have an outstanding loan, credit card, mortgage or even a line of credit, it makes more sense to pay down those loans, and defer your property tax. New this year is the financial hardship rules which allow homeowners experiencing cash flow problems caused by the recession or unemployment issues to apply for the program as well, regardless of age.

If you don’t have any loans, it can still be used where the source of your funds is highly taxable. Let’s say you make a habit of withdrawing $5,000 a year from your RRSP to pay the property tax. By the time you pay tax on the $5000, you are left with $3,500 to pay the property tax. Why not let your RRSP continue to compound? If you have investments that you count on to earn the $3,500 (after income tax), to pay the property tax, you would need a capital account of approx $200,000 to earn that from current interest rates. From a number of different perspectives ,it makes sense to take up the offer. Yes, the province puts a lien on your property, and they want you to have at least 25 per cent equity in the home’s assessed value (and only 15 per cent equity under the financial hardship rules).

Lets say you have a home you think is valued at $500,000 and have a line of credit with the bank for $200,000. Whether you have written cheques against that $200,000 borrowing power or not, the $200,000 LOC is a registered lien. Now, lets also suppose that the assessment notice arrives for a value of $430,000. The province will look at your current loan, the $200,000 and the current assessed value of $430,000, and see that you still have $230,000 of equity value, or 53 per cent. So you qualify for the tax deferment.

What’s the downside? When you eventually sell your home, the province must be paid back the tax deferred, plus any simple interest charges. You have in effect lowered the net you receive. You have lowered the estate value of the property. If estate valuation is your concern , you might consider how much life insurance you can buy for $3,500 a year. Once you sign up and are accepted for the deferment program, you don’t have to defer every year, and can pay back whenever you feel like it. At two per cent below the B.C. prime rate, I think they will find a few takers. For more information, both the website and toll free telephone numbers are on your property tax notice.

Dave Ellis is a certified financial planner and a fellow of the Canadian Securities Institute. He is a vice-president at RBC Dominion Securities in Vernon.