Delayed Taxification

Isn’t it nice when you can get one government to pay the other government’s taxes?

Most people know about the option to defer your property taxes if you are over 55 in BC.  That program is more or less a no brainer (shockingly, only 2.5% of BC’s seniors take advantage of this).  Why pay several thousand dollars a year in taxes when you can borrow the money essentially for free and then stick your heirs with the bill?   It works like this:

  1. Apply for the deferral before your taxes are due (one time $60 fee).
  2. When approved, the province will pay your municipal taxes on your behalf, charging you 0.7% simple interest on the loan.
  3. They put a restrictive lien on your house which means you have to pay the balance of the loan when you sell.
  4. Every year you apply to renew the deferral.

Easy peasy. Apply here.

But what if you’re one of those rare people in Victoria not over 55 years old?  Well turns out you can also avoid those pesky taxes as long as you have kids.

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The last month of records?

We got a little distracted there with the mortgage rules and the distinct possibility that you will have to pay capital gains tax on your suite, but before the numbers become ancient history let’s take a look at September.

While the VREB is trying to convince regulators there’s nothing to see here with their headline, September was another extremely active month.   September inventory was the lowest ever recorded (since 1996), while sales were second highest on record.

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Court case indicates capital gains tax is due on suites

For those that don’t know and haven’t read the 340 comments on the last post: In general you have to pay capital gains tax on capital property when you sell it.   The “gain” is the difference between the sale price and the purchase price (assuming it went up in value).   For your principal residence, there is a capital gains exemption which means you don’t need to pay capital gains tax.   However, if you are using property to produce revenue (i.e. rentals) then the exemption doesn’t apply and you have to pay capital gains tax again.

The issue under contention is that if you have a suite in your home, you are using part of the home to produce revenue which may trigger paying capital gains tax on the suite portion when you sell the home.   We can safely say that the vast majority of Victoria owners have not historically paid capital gains when selling, but is that just because the CRA didn’t have the data to pursue them?

HHV reader CuriousCat analyzed historical CRA rulings and found a case that is relevant.  CuriousCat is an accountant with 15 years experience and writes the following explanation:

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What is the impact of the new mortgage rules?

September monthly numbers are out.  Sales are second only to September 1992 while residential months of inventory and inventory as a whole are both at record lows.   More on this later in the week but there wasn’t anything groundbreaking here we weren’t already expecting.   The only strange thing is that the VREB headline reads “Victoria Housing Market Chills Out For Fall” which is an odd way to describe a market so strongly tilted towards sellers.

More importantly, as predicted the feds have issued more regulatory changes to try and halt the runaway markets.   Coming as they do on top of the provincial changes, these regulations are all piling on without any waiting period to gauge the effect of the first.  While probably positive in restoring some sanity to the markets, this is the mark of panicked regulators more than a measured, coordinated approach.

The changes are primarily three-fold:

  1. Forcing the reporting of the sales of real estate that is being claimed as a principal residence to the CRA.  This will crack down on fraud where foreign and domestic speculators claimed principal residence status to avoid the capital gains tax.  While another nail in the coffin of Vancouver, this will have minimal effect on Victoria.
  2. Requiring all new insured mortgages (less than 20% down) to qualify under the benchmark rate (currently 4.64%) rather than the discounted rates you will actually pay that are some 2% lower.
  3. Drastically limiting bulk insurance for lenders.   Only mortgages under $1 million that are owner occupied and with amortizations 25 years or less will be insurable.  According to the industry, currently about half of bulk insurance loans have amortizations longer than that.    Will drive up rates for conventional mortgages.

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