Mortgage Broker

CMB MAGAZINE cmba-achc.ca summer 2018 | 21 schooltax W hen you look up the phrase "thin edge of the wedge" in the online Cambridge Dictionary it simply says this: "e beginning of harmful development." at would be a great place to start a newsletter on the new school tax that was introduced in the last British Columbia provincial budget. Many of our readers are already aware of the details, but a short summary is below: n e school tax is a percentage-based tax on B.C. homeowners whose annual assessment of the value of their home exceeds $3 million at 0.2% annually up to $4 million and then 0.4% on any amount above that. n If one owns a home worth $6 million then the additional tax will be $10,000 per year. n is new tax plus the additional "speculation tax" on B.C. homes (primarily recreational properties) is expected to increase provincial revenue from property tax over three years by about 35%. At the same time the provincial economy (which has to fund all taxes) is expected to grow by about 12% over the same three years in nominal terms. e tax increase is about three times the rate of growth of the province overall. Proponents of this tax make their case for its being reasonable and fair based on the following: n is tax only impacts wealthy families who own homes worth more than $3 million. n In most cases these homes have seen their assessed value increase by almost 400% since 2007 and for most homeowners that is a tax- free capital gain when the home is sold. n People over the age of 55 can defer taxes at very low interest rates if they cannot afford to pay the tax on a current basis (presumably those under 55 can do what Marie Antoinette suggested and eat cake). In most developed countries there are three fundamental types of taxes: n Taxes on income for individuals and companies. Typically these taxes are progressive for companies and individuals (more progressive for individuals) and peak out at about 50% in Canada. n Taxes on consumption (both services and goods) including sales taxes, tariffs, royalties etc. n Taxes on capital such as property taxes and sometimes the capital of large corporations. It is my own opinion that capital gains taxes are not a tax on capital; they are a tax on the profits earned when an asset has been sold, and so the gain is really just another form of income. e key issue here is that no tax is due until a profit on the asset is realized as a result of the sale of the asset. One exception to this is the capital gains tax payable by estates when someone dies, any unrealized gains on assets owned by the deceased are then subject to capital gains tax, even though the assets have not been sold. It should be noted that capital gains taxes apply to all assets except one's personal residence. e new school tax is specifically a tax on one type of asset and in many cases does not represent any objective tax based on the wealth of the individual or couple who own that home. Many of our readers are outraged by a tax that the government purports to be a reasonable tax on wealth, but that is arbitrary and unaccountable in terms of where the revenue is going (it goes into general revenues and not specifically for schools) and in terms of ensuring that a progressive tax such as this is being borne by those most able to pay. Below we outline all of our own observations for why this tax is a poor way to raise revenue for the government. n e last provincial budget estimates are that the School Tax will generate about $200 million in revenue within three years. At that time, the annual provincial budget is expected to be $58 billion. is tax is expected to be about one third of 1% of revenue and will make little difference in the services the government wants to offer. n Property taxes in Vancouver, specifically, are already the highest in the country and that is before this new tax comes into effect as Elizabeth Murphy pointed out recently in the Vancouver Sun. n is tax is only on residential homes. It does not apply to commercial, industrial, retail or multi-family residential real estate. To use an example, Fred and Margaret own a home worth $6 million and will have to pay $10,000 more in property tax. In their case, the tax is not deductible so it must come out of their aer-tax income. If their tax rate is 50% at the margin, then they need $20,000 of pre-tax income to first pay $10,000 in income taxes (a third of that would go to the B.C. government) and then another $10,000 in new property taxes. Bob owns a home worth $2.5 million, but also owns a small apartment building worth $20 million. He has far more wealth and real estate than Fred and Margaret, but he will pay no additional tax. If he had to pay an additional $10,000 of tax on his apartment building that would have been tax deductible to him and cost him half as much as it would Fred and Margaret. n is tax applies regardless of the actual equity that someone has in their home. Earl and May rebuilt their $3-million home and spent $2 million to do it. e home is now assessed at $5 million and they have a $3-million mortgage. ey will now pay $6,000 per year in additional tax even though the equity they have in their home is $2 million. Meanwhile, their neighbour's house is worth $3 million, and since they have no mortgage they have more equity in their home than Earl and May and they will pay no additional tax. n Capital taxes are oen regressive and unfair since they are taxing capital before there is a realized profit that has been converted to cash. Is it the intention of the government to rebate If their tax rate is 50% at the margin, then they need $20,000 of pre-tax income to first pay $10,000 in income taxes and then another $10,000 in new property taxes.

• Cover