For a lot of people it makes really good financial sense to defer your property taxes. This is especially true of seniors who have lived in their home for many years, are mortgage-free, and now see their property values (and taxes) increasing at the same time as their income declines.
Low Interest Financing
An important note here is that your municipality continues to get all their full taxes – paid on your behalf by the provincial government, and financed at a very low interest rate (currently only 0.7% per year, not compounded). You don’t have to pay the taxes – and the small interest – until your home is sold.
Because the interest rate on the deferred property taxes is so low, even a tiny increase in your home’s value will easily offset it. The chart below shows a couple of scenarios for a 20 year deferral (say, someone who is 65 and planning to defer taxes until age 85 when ready to sell their home).
In the meantime, for the 20 years or so, you will have access to additional cash every year for your own use instead of the government’s. If you don’t need the extra money, lucky you, then you can invest it and easily earn more than enough to pay the taxes when they finally become due on the sale of your home.
Or you might want to put the equivalent amount in a tax-protected RESP for your grandchildren?
Tax Deferral Analysis
|
Scenario 1 |
Scenario 2 |
|
|
Assessed Value today |
$2,000,000 |
$2,000,000 |
|
Annual Property Taxes |
$8,000 |
$12,000 |
|
Number of years deferred |
20 |
20 |
|
Annual interest rate |
0.70% |
3.00% |
|
Annual interest amount |
$56 |
$360 |
|
Total interest |
$1,120 |
$7,200 |
|
Back Taxes Payable after 20 years* |
$161,120 |
$247,200 |
|
Annual Rate of Increase in Value |
2% |
1% |
|
20-year Increase in Value |
$913,622 |
$416,218 |
|
* Or whenever the home is sold or ownership is transferred |
||
Scenario 2 is more pessimistic, with higher annual property taxes, significantly higher annual interest on the deferred amounts, and an exceptionally low annual increase in value in the property.
Even then, the lift in value on the property is much higher than the total amount of deferred taxes plus interest.
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