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Lifestyle | Tax yellow light on a real estate bequest project

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Spouses Victor* and Aline*, 73 years old, live their lives as healthy seniors and are financially comfortable. They want to get rid of an apartment building whose market value ($400,000) is equivalent to about a quarter of their joint assets of $1.56 million in net worth of financial and real estate assets.

The situation

Also, the net rental income ($20,000 per year) is equivalent to 18% of their total income of $116,000 in public pensions (Québec Pension Plan – QPP and Old Age Security Pension – PSV), in benefits from a pension plan and withdrawals from their respective Registered Retirement Income Fund (RRIF).

But instead of simply reselling this eight-unit building, and thus cashing in on a good taxable capital gain, Victor and Aline plan to donate it as a pre-estate bequest to their three grandchildren, aged 19, 15 and 13 years old (from the same family).

This couple of grandparents is seeking advice to validate this pre-estate bequest project to their grandchildren based on its fiscal and financial impact on their own financial planning until the end of their lives.

Also, how would this compare to a resale of the apartment building at a total debt-free price that would be at least four times the original purchase price of $100,000?

Numbers

Victor*, 73 years old

Financial assets

  • Registered Retirement Income Fund (RRIF): $508,000
  • Tax-Free Savings Account (TFSA): $77,000

Aline*, 73 years old

Financial assets

  • Registered Retirement Income Fund (RRIF): $293,000
  • Tax-Free Savings Account (TFSA): $93,000

Joint income: $116,000 per year

RRIF withdrawals: $43,000

Public pensions (QPP, PSV): $31,000

Benefit from a pension plan: $22,000

Net income from apartment building: $20,000

Lifestyle budget: $80,000 per year

Moreover, if their plan to donate this real estate asset proves to be suitable, Victor and Aline are trying to find out the best way to organize such a pre-successional bequest to their three grandchildren. While considering the fact that two are minors for a few years and that the 19-year-old eldest is starting university and thus plans to be a “partial dependent” of his parents, already at ease financially.

Victor and Alice’s situation and questions were submitted for analysis and advice to François Bernier, a notary by training, who is director of tax and estate planning for Eastern Canada at Sun Life Financial.

Advice

François Bernier’s first observation regarding the project of seniors Victor and Aline is probably not what they would have liked to hear.


PHOTO FRANÇOIS ROY, LA PRESSE ARCHIVES

François Bernier, Director of Tax and Estate Planning for Eastern Canada at Sun Life Financial

“Despite the attraction of such a gift during their lifetime, it is not a good idea for Victor and Aline to give a building to their grandchildren, because of the fiscal and budgetary consequences of such a transaction on their financial situation until the end of its life”, warns Mr. Bernier from the outset.

First, the tax consequences?

“Even if they give their building to their grandchildren, Victor and Aline would still not be sheltered from tax on the capital gain resulting from the disposal of this real estate asset, points out François Bernier.

In our tax system, such a gift of income assets between related parties is considered a transaction at the fair market value of the asset, and the capital gain is taxable for the taxpayers who disposed of this asset.

François Bernier, Director of Tax and Estate Planning for Eastern Canada at Sun Life Financial

In the case of grandparents Victor and Aline, assuming a market value of their apartment building of $400,000, this implies a taxable capital gain of around $300,000 that would be added to their income tax return. of the year of this building donation.

“Taking into account their other taxable income, I estimate that Victor and Aline would end up with a tax bill of around $65,000 for the fiscal year of their gift of the building,” explains François Bernier.

“This is a considerable sum which, in the absence of a ‘reimbursement’ agreement with the parents or other relatives of their grandchildren, would have to be paid by Victor and Aline by making special withdrawals from their TFSA [compte d’épargne libre d’impôt] respective. »

Moreover, adds Mr. Bernier, if they donate the building while their beneficiary grandchildren are still minors, and because it is an income-producing asset, Victor and Aline would remain responsible for the tax bill of each grandchild’s share of the net income from the apartment building until they reach majority.

“It is thus a question of the application of the “rules of attribution” concerning the taxation of income from an asset bequeathed or given to a relative of minor age. These rules aim to counter intra-family tax avoidance by means of a gift of assets with taxable income to his children who are still at a very low tax rate”, summarizes François Bernier.

“Yellow light”

In the end, it is the addition of the fiscal and budgetary consequences on the current and future financial situation of grandparents Victor and Aline that lights a “yellow light” towards their project of donating a building to their three grandparents. children.

“When I add the loss of rental income to Victor and Aline’s budget to the tax bills they will have to pay until their three grandchildren come of age, their financial planning is so altered that they could run out of funds in twenty years to maintain their lifestyle,” warns Mr. Bernier.

That said, what other solution is offered to Victor and Aline so that they can fulfill their wish to donate “during their lifetime” to their grandchildren?

“If they want to get rid of their apartment building, I suggest that they sell it at the best possible price rather than giving it to their grandchildren,” says François Bernier.

“Assuming that this sale is made at $400,000, and that they would have to pay approximately $65,000 in tax on their capital gain, in addition to the real estate transaction fees, I estimate that Victor and Aline would add close to $330,000 to their capital in retirement savings,” he continues.

“This capital injection would allow them to consolidate their financial planning until the end of their life. Also, if they wish, Victor and Aline could make donations “during their lifetime” to their grandchildren in the form of financial contributions to their personal projects and to their living expenses over the years. »

* Although the case highlighted in this section is real, the first names used are fictitious.

Are you planning a project that requires a wise use of your money? Do you have financial problems?



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