Archive for 2018

How can this couple owning five rental apartments arrange a tax-efficient future for heirs?

July 20th, 2018

The Globe and Mail – By Dianne Maley

At the age of 67, Ed and Alexa are reaping the rewards of years of saving and investing: Rising income and the prospect of big capital gains down the road. They are retired with three grown children.

They have amassed a nice-sized real estate portfolio comprising five rental apartments in Vancouver in addition to their own principal residence. They also have substantial financial investments. As the mortgages on the rental properties are paid down over time, Alexa and Ed’s income has been rising – and so has their tax bill.

“We’ll soon have to convert our RRSPs to registered retirement income funds (RRIFs), resulting in even more taxable income,” Alexa writes in an e-mail. They’re worried about having their Old Age Security (OAS) benefits clawed back if their income is too high.

“We have three children and we intend to pass down our assets to all three equally,” Alexa adds. “We’d like to avoid as much tax as possible and organize our affairs so that our beneficiaries inherit the maximum amount.

What can we do about our rental property capital gains?”

We asked Brinsley Saleken, a fee-only financial planner and portfolio manager at Macdonald Shymko & Co. Ltd. in Vancouver, to look at Alexa and Ed’s situation.

Click here to read the rest of the article

Should you give your children their inheritance now?

March 9th, 2018

Morningstar – Personal Finance Article By Gail Bebee

The baby boomers, that great swell of Canadians born in the first 20 or so years after the Second World War, are retiring, and judging from Statistics Canada data they are retiring in decent financial shape. In 2016, the median net worth for a family with the major income recipient aged 55 to 64 was $669,500. For a senior family (eldest partner is 65 or more), this figure was $762,900. These numbers are set to rise substantially as this cohort will inherit an estimated $750 billion over the next decade according to a 2016 CIBC Capital Markets report. It’s a question many parents are considering, especially in cities such as Toronto or Vancouver where a teardown can sell for upward of a million dollars.

Not surprisingly, some seniors and pre-retirees are giving their children at least some of their inheritance now. The money has a positive impact on their children’s lives. It can allow them to buy a home, and the parent(s) can witness their children enjoying the money. However, careful evaluation of the pros and cons of such a gift is essential before any assets change hands. A living inheritance will not suit all family circumstances.

“If you are considering a living inheritance, you must first make sure your own financial house is in order before you start giving your wealth away,” says Ian Black, a fee-only financial advisor and portfolio manager at Macdonald, Shymko & Co. Ltd. in Vancouver.

Retirees must be certain that they retain sufficient assets to enjoy the retirement lifestyle they desire and avoid running out of money. Pre-retirees must consider how the gift will affect their planned retirement date and lifestyle. Will the gift mean delaying retirement to earn additional funds? If so, will your health allow you to work the extra years? Will there be suitable work available?

“When assessing the feasibility of a living inheritance, we like to stress-test a client’s financial plans by asking the question: If your net worth decreased by 20 to 30%, would you still be able to afford the gift?” says Black.

Another crucial consideration is how the planned gift will affect your child. Clearly, your intent is for the gift to have a positive impact, but will it? Is she mature enough to avoid squandering the money? Will the gift destroy her ambition? Does she have sufficient financial literacy to make sensible decisions about the inheritance?

Gifts that address specific needs of a child such as paying off student loans or help with a down payment for a home are generally well received.

There are ways to address at least some parental concerns about the negative impact of a living inheritance:

  • Delay the gift until the child reaches a certain age or milestone such as college graduation;
  • Arrange for training in financial management before giving the money;
  • Give a small sum initially and monitor how the child handles it;
  • Place conditions on the gift, such as limiting the use to the down payment on a home;
  • If the gift is intended to establish a business, require the child to provide a detailed business plan and match any gifted money.

The impact of a living inheritance on the siblings of the recipient must also be taken into account before any funds are dispersed. For the sake of family harmony, fairness in giving to all children is vital. If one child receives funds toward a home purchase, their siblings should receive an equivalent gift, even if they do not intend to buy homes.

The tax implications of a living inheritance can be considerable for both parent and child, and merit investigation before any decision regarding a gift is made.

There may be tax savings if you give money or property to your children while you are alive. No probate fees are payable. If your child is legally an adult, profits generated by the gift money will be taxed in her hands, possibly at a lower tax rate.

If you need to sell investments to raise money for the gift, capital-gains tax will be payable on any profits. If you plan to give real estate, consulting an accountant is crucial, since the tax treatment can be complex.

Canada has no gift tax, but large gifts of money and property will pique the interest of the Canada Revenue Agency, according to the income-tax consulting firm FBC.

Given the complexities of Canada’s tax rules, seeking the advice of a tax professional when considering a living inheritance is likely money well spent.  Click here to read the rest of this article

Helping children up the property ladder can harm your retirement

January 19th, 2018

The Globe and Mail – Retirement Planning Article by Diane Jermyn

Should you help your children buy their first house?

It’s a question many parents are considering, especially in cities such as Toronto or Vancouver where a teardown can sell for upward of a million dollars.

According to a 2017 national survey conducted by Leger on behalf of the Financial Planning Standards Council, 37 per cent of Canadian parents intend to assist their children with the purchase of their first home …

The biggest question financial advisors would ask the parents in this situation is this: Can you afford it? Making a decision to help your children buy a house now could impact your own standard of living down the road.

Ian Black, a fee-only financial planner and portfolio manager at Macdonald, Shymko & Co. Ltd. in Vancouver, is seeing a lot of parents helping their children get a footing in the overheated Vancouver market.

But he warns that giving $50,000 or $100,000 to your children for a downpayment could push parents onto the negative side later if the markets turn and your net worth falls.

“It’s most common for parents to give to the kids when they’re trading down themselves to a condo or retirement home and have cash because they’ve just sold their house for $3-million,” Mr. Black says.

“First, you need to do some analysis to see if you can really afford to give some away. You still want to have a cushion in case you need a higher level of care later and may have to move into a more expensive medical facility.”

He also says it’s pretty rare that a downpayment loan from parents ever gets paid back. He suggests that clients structure it as a loan, but that’s more as a protection in case of divorce.

“If you register a mortgage on the property, and your son or daughter gets divorced and the house is sold, the money would come back to you because that mortgage has to be repaid at the time of the sale,” Mr. Black explains. “It’s a bit tricky because the kids likely aren’t actually paying that second mortgage back. It’s just to protect the parents in case the kids divorce.”

While emotions and guilt often come into the decision, he says parents need to help their children put it into perspective and be realistic about how much they can buy. That may mean the children have to move further afield, say to Langley, B.C., southwest of Vancouver, or buy a townhouse instead of a single-family home.

“At some point, it has to be tough love,” Mr. Black says. “Set the limits on what you can give and have that discussion, disclosing what you’re comfortable with. Or say, we’re not going to be able to help you out. We’re just not in a position to do that.” Click here to read the rest of this article

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