Once reduced to net disposable income (after taxes and Social Security contributions), the family budget leaves Marthy *and Noel* with little ability to generate long-term investment savings for retirement.
position
The couple, Martha, 43, and Noel, 45, are parents of three children, ages 11, 12 and 16.
Their family lifestyle, active but on a reasonable budget, is relatively well supported with a total family income of about $135,000 a year.
This household income is primarily made up of income from self-employment, to the tune of $115,000 per year, plus $20,000 in net income from a four-unit building.
As for the family’s balance sheet, it appears they already have assets, totaling about $1.6 million in gross value, and about $1 million in net asset value after subtracting liabilities of $610,000 in mortgages for the family home and apartment building.
The catch, however, is that most of that asset value is concentrated in two residential properties: the $600,000 family home (minus $160,000 in mortgage balance) and the $860,000 four-unit apartment building (down from $450,000 of mortgage balance).
By comparison, Marthe and Noël’s financial assets in registered savings accounts such as a Registered Retirement Savings Plan (RRSP) or Tax-Free Savings Account (TFSA) remain very thin.
While they do not have a pension plan as self-employed, their RRSP’s total assets are only $59,000, but with available contribution amounts totaling $107,000.
As for their TFSA accounts, it remains at zero with available contribution amounts of up to $88,000 for each spouse.
In contrast, the Registered Education Saving Plans (RESP) for each of the three children are well equipped. Their assets total about $70,000 thanks to the annual generosity of their grandparents.
Numbers
Martha, 43 years old
he won : $120,000
- Self-employment in the field of health: $110,000
- Net income from real estate rental: $10,000
Financial assets:
- In a Registered Retirement Savings Plan (RRSP): $45,000
- In a Tax Free Savings Account (TFSA): $0
- In a checking savings account: $10,000
Christmas, 45 years old
he won : 15,000 dollars
- Seasonal work: $5,000
- Net income from real estate rental: $10,000
Financial assets:
- In a registered retirement savings plan (RRSP): $14,000
- In a Tax Free Savings Account (TFSA): $0
Family financial assets:
- In Registered Education Saving Plans (RESP): $70,000 for three children ages 11, 15, and 16
Jointly Owned Non-Financial Assets:
- Family residence: $600,000
- In a building with four rental units: $860,000
Joint liabilities:
- Home mortgage: $160,000
- Mortgage on rental property: $450,000
questions
Marthy and Noel are concerned about the imbalance on their balance sheets between their large real estate assets and their meager assets in long-term investment savings, such as retiring in twenty years.
Martha and Noel considered two scenarios they were presented with Journalism For consulting analysis.
First, Marth explains: “Would it be financially and financially viable to use an untouched line of credit up to $300,000?” [et à taux d’intérêt variable approchant 6 %] To bail out deeply depleted RRSP and TFSA savings accounts? »
If yes, how do you do it? At what annual rate? And what is the contribution priority between the RRSP and the TFSA?
If not, what solution should be explored?
Secondly, Marthy and Noel plan to resell the family home to move into two of the four units in the rental building.
This is how Martha L Journalism “We can use the net profit from reselling the house [après les frais de transaction et le remboursement du solde hypothécaire] To replenish a large portion of the contributions available to RRSPs and TFSAs. »
“We can, Marthe adds, fund a two-in-one renovation in our rental building, which will then become a triplex with our family as the owner-occupant of the large new main residence.”
Marthe and Noël’s questions for analysis and advice were forwarded to Julie Tremblay, a financial planner and investment savings product advisor at IG Wealth Management in Quebec City.
Photo by Eric Labé, Le Soleil Archives
Julie Tremblay, financial planner and investment savings products advisor at IG Wealth Management in Quebec City
tips
Regarding Marthy and Noel’s concern about bailing out their RRSP and TFSA accounts, Julie Tremblay suggests they address it by using a technique known as “money appropriation” on personal finances.
“The technique is to use the income from their rental property to boost their personal savings, starting with Marthe’s RRSP, in order to improve tax breaks during their higher taxable income years,” explains Ms.I Tremblay.
As a counterbalance, this “cash dams” technique implies that Marthe and Noel will spend their construction expenses on a line of credit that has not yet been used, and whose interest costs will be deducted from the gross income of their building. »
According to mI Tremblay, the advantage of this technology for Marthe and Noël is the ability to speed up the renewal of unused RRSP contributions while improving taxes on their employment income and income from rental property.
By bolstering their retirement savings with tax benefits, complete with paying off the mortgage loan on the family homestead, Marthy and Noel can turn their debt on the home, free of tax benefits, into debt within a few years. Additional tax on rental property which is advantageous in terms of taxes thanks to the deduction of interest in the gross income of the building.
Julie Tremblay, financial planner and investment savings products advisor at IG Wealth Management in Quebec City
Julie Tremblay summarizes, “Provided that Marthy and Noel only use their line of credit for construction expenses, the net after-tax interest cost of that debt will actually be less than the contractual interest rate of about 6%.”
Once the contribution has been fully made to Marthe’s RRSP, and the mortgage on the family home has been paid off, it may become appropriate from a tax and financial perspective for Martha to consider contributing to her husband Noël’s RRSP.
Another solution suggested by M.I Tremblay, they could consider paying him an income at Christmas for his work maintaining and managing rental properties.
“By increasing his taxable income at Christmas in this way, it can become tax efficient for him to contribute more to his RRSP. This is not currently the case due to the lower level of taxable income.”
As for Marthe’s and Noël’s TFSAs, which remain empty with nearly $160,000 in total contributions available, Julie Tremblay finds there is no priority there “as long as the couple focus their savings efforts on RRSPs, which are useful for reducing the spouses’ taxable income.
In the meantime, advise the master.I Tremblay, Marthe, and Noël will have an interest in keeping their family home, “because it is equivalent to a ‘TFSA,’ in which the amount of profit from its eventual resale will be exempt from tax.”
Hence his latest suggestion to Marthe and Noël to reconsider their plan to resell the family home in order to move into an enlarged, renovated flat in the rental building.
“There are many financial and financial elements that must be carefully considered before implementing such a project, without neglecting the risks of impacts on the style and quality of family life afterwards,” warns Julie Tremblay.
“Among other things, the transition from an invested owner to a resident owner of a rental property involves numerous changes in taxes on income and gains in the value of the building. There is also a risk of legal complications with two of the four tenants being evicted on the basis of repossession of their residences for the personal use of the owners and residents newcomers.”
* Although the case described in this section is real, the first names used are fictitious.
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