Background
Sara and Marc are in their mid-60s. Their net worth between their financial assets and real estate is approximately $6 Million. They have two adult daughters, Julie and Annalise, and a grandchild on the way. Marc and Sara own a home in Toronto they purchased for $700,000 in 2014 and it’s now worth $1.4 Million. Sara inherited a cottage from her parents a few years ago and it has been renovated extensively. The cottage property is worth $1 Million, but this price can fluctuate significantly. Recently Marc inherited a property that is worth 500,000 Euros from an uncle in France.
Discovery
Given Marc and Sara’s multiple properties and evolving multi-generational considerations, we wanted to understand their family intentions, in addition to their vision for retirement.
Through a focused discovery conversation that considered both short- and long-term goals, we also learned Marc and Sara:
- Plan to sell their home in Toronto in a few years and purchase a two-bedroom condo, so they can spend more time at the cottage during their retirement.
- Want to leave the cottage to their two daughters upon their passing, but they worry about the best way to transition it to both of them.
- Would like to sell the property in France as soon as possible. But in the meantime, they are considering renting the property in France to a family friend.
How we helped Sara and Marc with their IG Living Plan
Plan for tax obligations in different countries
- Sara and Marc needed to understand the tax implications of all the scenarios they’re considering – not only the impacts on their financial plan, but also for their daughters’ inheritance.
- Canadian reporting obligations if they rent out the property in France and when they sell it. The clients did not realize that the rental income and capital gain from the French property would be subject to tax in both France and in Canada.
- Tax consequences on the sale of each property if it was sold today. We explained that the inherited French property was received from Marc’s uncle’s estate with a cost base equal to the fair market value of the property at that time – so a copy of a market appraisal should be obtained and when improvements are being made to any of the properties, detailed receipts should be kept documenting the cost base for the property.
Determine which property to shelter with the principal residence exemption
- To take full advantage of the principal residence exemption, the exemption should be used to shelter the property with the largest average gain per year and that the average gain per year can fluctuate with the market.
- Given values today, we determined that the principal residence exemption should probably be claimed on the home – not the cottage. However, this should be confirmed when the first property is sold.
- When Sara and Marc sell any of the properties, the disposition must be reported on their tax returns even if the capital gain can be sheltered fully using the principal residence exemption, otherwise they could be subject to penalties.
Recommend the most equitable way for their daughters to inherit the cottage
- We reviewed their current wills and provided recommendations to ensure their estate plan properly reflected their wish to leave the cottage to Julie and Annalise in the most equitable way.
- Discussed considerations around a co-ownership agreement between the sisters and how life insurance could be used to preserve their estate.
Analyze different market scenarios to plan for the sale of properties
- Model the sale of the properties in their IG Living Plan to show how the sale of the French property next year and their Toronto home in a few years would impact their cash flows, taxes and overall net estate.
Ultimately, we helped Sara and Marc create a comprehensive plan and take key steps toward selling their real estate. We also included Julie and Annalise in conversations so they understood their parents’ intentions and could plan accordingly for themselves.
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DISCLAIMER: For illustrative purposes only. All situations described above are hypothetical and based on various client situations. Any similarity to any one individual person(s) is purely coincidental.
Written and published by IG Wealth Management as a general source of information only. Not intended as a solicitation to buy or sell specific investments, or to provide tax, legal or investment advice. Seek advice on your specific circumstances from an IG Wealth Management Consultant. Insurance products and services distributed through I.G. Insurance Services Inc. (in Québec, a Financial Services Firm). Insurance license sponsored by The Canada Life Assurance Company (outside of Québec).