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Personal Finance

Contrary to popular opinion, drawing extra to minimize high after-death taxes might not make financial sense

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By Julie Cazzin with Allan Norman

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Q: I’ve always believed it’s best to draw down one’s registered retirement income fund (RRIF) or life income fund (LIF) to zero by about age 85 to 90 to minimize the end-of-life tax bill. But I recently wondered what the result would be if I just did the minimum withdrawal each year, let the funds grow tax free and paid the very high tax bill upon the passing of the last surviving spouse.

I was surprised. My numbers showed that the best approach is to just do the minimum withdrawals and pay the higher tax at life’s end. You’ll end up with more after-tax dollars that way. What do your numbers tell you about the two fundamentally different approaches to maximize one’s after-tax position on RRIF/LIFs? — Regards, John in Calgary

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FP Answers: John, a lot of people tell me they want to get their money out of their RRIF before they die. Often, they’ve either had a parent die and the estate paid a huge amount of tax, or they’ve been told they’ll lose 50 per cent of their RRIF to taxes when they die.

While it’s not quite 50 per cent, depending on your province, the maximum lost to tax will range from 40 per cent to 47 per cent. Still, working your whole life to save that much money, only to potentially lose almost half when you die is painful.

People focus on the final tax bill, and I understand why. We’re taxed throughout our lives: on our income, when we purchase goods and services, when we sell a second property, and so on. Tax, tax, tax — it’s everywhere. And then when we die, boom, another 40 per cent to 47 per cent is potentially gone. But is drawing more money than you need from your RRIF to support your lifestyle goals really the right thing to do?

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Drawing extra money from your RRIF, which is a tax shelter available to every working Canadian, means you have to put it somewhere if you’re not spending it. You can add it to a tax-free savings account (TFSA), which is another tax shelter, and in most cases is the usual thing to do if you don’t have non-registered investments available to top up your TFSA. You’re likely better off topping up your TFSA with non-registered money, which is not sheltered from tax, then to take it out of your RRIF.

But what if you have more than enough money to last your lifetime, your TFSA is maximized, you have non-registered investments, and you want to maximize the amount you leave to children? Then the question becomes: will paying a little extra tax today save me tax when I die, thus allowing me to leave more money to my kids?

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Let’s think about this. If you have $10,000 in a RRIF, it will compound tax sheltered until the day you die or draw it out, at which time it’s 100-per-cent taxable. Drawing $10,000 from your RRIF means being taxed at your marginal tax rate. A marginal tax rate of 30 per cent leaves you with $7,000 to invest in a non-registered account. Projecting ahead, $7,000 invested will grow to a smaller amount than $10,000 would.

In addition, you must pay tax on any ongoing earned interest, dividends or capital gains on non-registered investments, and that income may also push you into the next tax bracket or impact government benefits or credits, such as the Old Age Security (OAS) or age credit. Finally, you’ll be paying capital gains tax on the growth of your investments when you die. The taxable amount on capital gains is currently 50 per cent as opposed to 100 per cent on RRIFs.

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Taking those three items into account — a smaller investment, annual taxation and the capital gains tax at death — does it make sense to draw extra from a RRIF and invest it in a non-registered account?

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In most cases, the answer is no. The higher your marginal tax rate is, the less likely it makes sense to draw extra money from your RRIF and invest it in a non-registered account. And the more conservative your investment approach (if you invest for interest or dividend income, say), the less likely it is that drawing extra from your RRIF makes sense.

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Of course, every person’s situation is different, and we need to be careful with generalizations. John, congratulations for doing a preliminary run on the numbers yourself and not being led astray by focusing solely on RRIF taxation at death.

But do me a favour. If you have children, let them know you purposely left money in your RRIF so you could leave them more money. If you don’t, they’ll only see the tax bill and may wonder, why would dad, or his financial planner, do such a dumb thing and leave all that money in a RRIF? Seeing how thoughtful your approach was to your RRIF will leave them confident you got the most for your money — and your estate.

Allan Norman, M.Sc., CFP, CIM, RWM, provides fee-only certified financial planning services through Atlantis Financial Inc.  Allan is also registered as an investment adviser with Aligned Capital Partners Inc. He can be reached at www.atlantisfinancial.ca or alnorman@atlantisfinancial.ca. This commentary is provided as a general source of information and is not intended to be personalized investment advice.

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Jamie Golombek: Plan gives first-time homebuyers the ability to save $40,000 tax-free towards the purchase of a home

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The federal government this week moved one step closer to launching the new Tax-Free First Home Savings Account (FHSA) with the introduction of draft legislation and a request for comments.

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The FHSA is expected to launch at some point in 2023, so here’s a guide to what we know so far to help get you prepared.

The basics

This new registered plan gives prospective first-time homebuyers the ability to save $40,000 on a tax-free basis towards the purchase of a first home in Canada. Like a registered retirement savings plan (RRSP), contributions to an FHSA will be tax deductible, but withdrawals to purchase a first home, including from any investment income or growth earned in the account, would be non-taxable, like a tax-free savings account (TFSA).

To open an FHSA, an individual must be a resident of Canada and at least 18 years of age. You must also be a first-time homebuyer, meaning you have not owned a principal residence in which you lived at any time during the part of the calendar year before the account is opened, or at any time in the preceding four calendar years.

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The FHSA can remain open for up to 15 years or until the end of the year when you turn 71 years old. Any savings in the FHSA not used to buy a qualifying home by this time could be transferred on a tax-free basis into an RRSP or registered retirement income fund (RRIF), or withdrawn on a taxable basis.

Eligible individuals will be able to contribute $8,000 annually, up to a $40,000 lifetime contribution limit. There’s a one-per-cent per-month penalty tax for any overcontributions. The annual contribution limit will apply to those made within a particular calendar year. Unlike RRSPs, contributions made within the first 60 days of a subsequent year can’t be deducted in the current tax year.

Eligible individuals will be able to contribute $8,000 annually, up to a $40,000 lifetime contribution limit.
Eligible individuals will be able to contribute $8,000 annually, up to a $40,000 lifetime contribution limit. Photo by Getty Images/iStockphoto

The draft legislation also increased the flexibility of FHSA contributions by allowing an individual to carry forward unused portions of their annual contribution limit up to a maximum of $8,000. This means that if you contribute less than $8,000 in a given year, you can then contribute any unused amount in a future year, in addition to your annual contribution limit of $8,000 (subject to the $40,000 lifetime limit).

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For example, if you only contribute $5,000 to an FHSA in 2023, you’ll be able to contribute $11,000 in 2024 ($8,000 plus the unused $3,000 of room from 2023). Note that carry-forward amounts only start accumulating after an individual opens an FHSA for the first time.

You can have more than one FHSA, but the total amount you contribute to all your FHSAs can’t exceed your annual and lifetime contribution limits.

Like RRSP contributions, you won’t be required to claim the FHSA deduction in the tax year in which a contribution is made. The amount can be carried forward indefinitely and deducted in a later tax year, which may make sense if you expect to be in a higher tax bracket in a future year.

An FHSA is permitted to hold the same types of qualified investments that are currently allowed in a TFSA and RRSP, including mutual funds, publicly traded securities, government and corporate bonds, and guaranteed investment certificates.

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Withdrawals

To withdraw funds from an FHSA on a non-taxable basis, certain conditions must be met. First, you must be a first-time homebuyer at the time of withdrawal, as discussed above. You must also have a written agreement to buy or build a qualifying home before Oct. 1 of the year following the year of withdrawal, and you must intend to occupy that home as your principal place. The home must be in Canada.

If you meet the conditions, the entire balance in the FHSA can be withdrawn on a tax-free basis in a single withdrawal or a series of withdrawals. The FHSA must be closed by the end of the year following the first qualifying withdrawal and you are not permitted to have another FHSA in your lifetime.

Individuals will be able to transfer funds from one FHSA to another FHSA, or to an RRSP or a RRIF, all on a tax-free basis.

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If funds are transferred to an RRSP or RRIF, they will be taxed upon ultimate withdrawal. These transfers won’t affect RRSP contribution room, nor would they reinstate an individual’s $40,000 FHSA lifetime contribution limit.

Individuals will also be permitted to transfer funds from an RRSP to an FHSA on a tax-free basis, subject to the FHSA annual and lifetime contribution limits. These transfers would not be tax deductible and will not reinstate an individual’s RRSP contribution room.

Unlike the RRSP, the FHSA holder is the only taxpayer permitted to claim deductions for contributions made to their FHSA. In other words, you can’t contribute to your spouse’s or partner’s FHSA and claim a deduction. That said, the government will permit you to give your spouse or partner the funds to make their own FHSA contribution without the normal spousal attribution rules applying.

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Death, taxes and other matters

As with TFSAs, you’ll be able to designate your spouse or common-law partner as the successor account holder, in which case, the account can maintain its tax-exempt status after death. The surviving spouse or partner would then become the new holder of the FHSA following the death of the original holder.

Inheriting an FHSA in this way won’t affect the surviving spouse’s FHSA contribution limits. If the beneficiary of an FHSA is not the deceased account holder’s spouse or partner, the funds would need to be withdrawn, paid to the beneficiary and be taxable to them.

  1. A sign outside the Canada Revenue Agency is seen Monday May 10, 2021 in Ottawa. The Canada Revenue Agency says it will be sending e-notifications about uncashed checks to 25,000 Canadians this month.THE CANADIAN PRESS/Adrian Wyld

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Like RRSPs and TFSAs, interest on money borrowed to invest in an FHSA won’t be tax deductible, and you won’t be able to pledge FHSA assets as collateral for a loan. In addition, FHSAs will not be given creditor protection under the Bankruptcy and Insolvency Act.

As a final note, the Home Buyers’ Plan, which allows first-time homebuyers to withdraw up to $35,000 from an RRSP to buy a first home, will continue to be available, but you won’t be permitted to make both an FHSA withdrawal and an HBP withdrawal for the same home purchase.

Taxpayers with comments or suggestions about the FHSA proposals are encouraged to send them to Consultation-Legislation@fin.gc.ca by Sept. 30, 2022.

Jamie Golombek, CPA, CA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto. Jamie.Golombek@cibc.com

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Jamie Golombek: Looking for some extra cash this summer? You may need to look no further than the CRA’s website

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Looking for some extra cash this summer? You may need to look no further than the Canada Revenue Agency’s website.

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On Monday, the government revealed it has approximately $1.4-billion worth of cheques that have gone uncashed over the years. As of May 2022, there were an estimated 8.9 million uncashed cheques with the CRA.

You may wonder how is this possible? And what can I do to get my money?

Each year, the CRA issues millions of payments in the form of tax refunds and various government benefits. Most of these payments are issued via direct deposit, but some are still issued by cheque. Over time, some of these cheques remain uncashed for a variety of reasons, such as the taxpayer misplacing them or, perhaps, the cheque was never delivered to its recipient due to a change of address.

Beginning this month, the CRA will start notifying, via e-mail, some recipients of the Canada child benefit and its related provincial/territorial programs, GST/HST credit and Alberta Energy Tax Refund recipients of any uncashed cheques they may have.

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The average amount per uncashed cheque is $158. Approximately 25,000 e-notifications will be issued in August and another 25,000 in November, followed by another 25,000 in May 2023.

Since the CRA first launched this initiative back in 2020, it said approximately two million uncashed cheques, valued at a total of $802 million, were cashed by Canadians between Feb. 10, 2020, and May 31, 2022.

To see if you’ve got any uncashed cheques waiting for you, simply log into the CRA’s My Account where you’ll be able to see if you have any uncashed cheques dating back as far as 1998.

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Once logged in, you’ll see an option under “related services” entitled “uncashed cheques.” As government cheques never expire or become stale dated, the CRA cannot void the original cheque and reissue a new one unless you request it. The upcoming e-notifications are meant to encourage taxpayers to cash any cheques they may have in their possession.

“This money belongs to Canadians and we want to help them reclaim these funds,” Breanne Stephenson, a CRA spokesperson, said.

Of course, to ensure you never miss another payment from the CRA, it’s best to sign up for direct deposit so that your government tax refunds and benefit payments are directly deposited into your bank account. This can also be easily done through My Account.

Taxpayers who are not currently signed up for My Account or email notifications can find out if they have any uncashed cheques by calling 1-800-959-8281.

Jamie Golombek, CPA, CA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto. Jamie.Golombek@cibc.com

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Jamie Golombek: Here’s what you should be doing in anticipation of the looming interest rate increase

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Interest rates continue to rise. As a result, this week the Department of Finance confirmed that the prescribed interest rate will rise to three per cent for the fourth quarter of 2022. This rate increase will have a variety of implications, both for taxpayers who owe money to the Canada Revenue Agency, and for those contemplating a prescribed-rate loan strategy to split investment income with a spouse, common-law partner or the kids or grandkids. Let’s review how the prescribed rate is determined, and then, what you should be doing in anticipation of this looming rate increase.

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What is the prescribed rate?

The prescribed rate is set quarterly and is tied directly to the yield on Government of Canada three-month Treasury Bills, with a lag. The calculation is based on a formula in the Income Tax Regulations, which takes the simple average of three-month Treasury Bills for the first month of the preceding quarter rounded up to the next highest whole percentage point (if not already a whole number).

To calculate the rate for the upcoming quarter (Oct. 1 through Dec. 31, 2022), we look at the first month of the current quarter (July) and take the average of the three-month T-Bill yields, which were 2.1962 per cent (July 7, 2022) and 2.6959 per cent (July 21, 2022).  That average is 2.44605 per cent but when rounded up to the nearest whole percentage point, we get three per cent for the new prescribed rate for the fourth quarter of 2022.

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This upcoming increase marks the second time the prescribed rate has gone up since the previous historic low of one per cent between July 1, 2020 and June 30, 2022.

In reality, however, there are actually three prescribed rates: the base rate, the rate paid for tax refunds, and the rate charged for taxes owing. The base rate, which is increasing to three per cent on Oct. 1, applies to taxable benefits for employees and shareholders, low-interest loans and other related-party transactions. The rate for tax refunds is two percentage points higher than the base rate, meaning that if the CRA owes you money, it will start paying interest at five per cent come Oct. 1. Not a bad deal! If, on the other hand, however, you owe the CRA money, that rate is four percentage points higher than the base rate. This puts the interest rate which applies to all tax debts, penalties, insufficient instalments and unpaid income tax, Canada Pension Plan contributions and Employment Insurance premiums at a whopping seven per cent, starting on Oct. 1.

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Tax debts

This looming seven per cent CRA prescribed rate is punitive and, to make matters worse, interest charged on tax amounts owing is not tax deductible. For someone in a top tax bracket of, say, 54 per cent, that means you’d have to find an investment that earns a guaranteed, pre-tax rate of return exceeding 15 per cent to be better off than paying down your tax debt!

So, the advice is plain and simple — if you owe CRA money, pay up as soon as possible. You should do so even if your tax amount is in dispute and you plan to formally object and even, ultimately, take the matter to court. If you’re ultimately successful, you will be entitled to (taxable) refund interest at five per cent (from Oct. 1). And, if you’re not, at least you’ll save yourself hundreds, if not thousands, of dollars in non-deductible, usurious interest.

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Set up income splitting strategies before Oct. 1, 2022

The upcoming increase in the base prescribed rate means that the window for locking-in an income splitting loan at the current prescribed rate of two per cent is quickly coming to an end. If you act now, however, and before Sept. 30, 2022, you can take advantage of the current prescribed rate of two per cent to split income for the duration of the loan, even once the rate increases to three per cent (or higher) in the future.

Here’s a quick recap of how the income splitting strategy works, using an example of Harold, who pays tax at the highest marginal rate, and his wife Marian, who pays tax at the lowest marginal rate. Harold loans Marian $500,000 at the current prescribed rate of two per cent secured by a written promissory note. Marian invests the money in a portfolio of Canadian dividend paying stocks with a current yield of four per cent.

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Each year, Marian takes $10,000 of the $20,000 in dividends she receives to pay the per cent interest on the loan to Harold. She makes sure to do this by Jan. 30 of each year following the year after the loan was made, as required under the tax rules.

The net tax savings to the couple would be having the dividends taxed in Marian’s hands at the lowest rate instead of in Harold’s hands at the highest rate. The savings are offset slightly by having the $10,000 of interest on the promissory note taxable to Harold at the highest rate for interest income. This interest paid, however, is tax deductible to Marian at her low tax rate as the interest was paid for the purpose of earning income, namely the dividends.

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The rush to beat the Sept. 30 deadline is that in order to avoid the attribution rules from applying to a spousal loan such as this one, you need only pay interest at the prescribed rate in effect at the time the loan was originally extended. In other words, if you establish the loan during a quarter in which the prescribed rate is two per cent, as it currently is, you can use that rate for the duration of the loan, even if the prescribed rate rises in the future. Note that there need not be an end date to the loan, which could be simply repayable upon demand.

If Harold procrastinates and delays implementing the spousal loan until Oct. 1 (or later), Marian would have to pay $15,000 ($500,000 times three per cent) back to Harold to be taxed at the highest rate, instead of $10,000.

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This strategy can also be used to help fund kids’ or grandkids’ expenses, such as private school and extracurricular activities, by making a prescribed-rate loan to a family trust. The trust then invests the money and pays the net investment income, after the interest on the loan, to the kids either directly or indirectly by paying their expenses. If the kids have zero or little other income, this investment income can be received perhaps entirely tax-free.

Jamie.Golombek@cibc.com

Jamie Golombek, CPA, CA, CFP, CLU, TEP is the Managing Director, Tax & Estate Planning with CIBC Private Wealth in Toronto.

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Jamie Golombek: Recently amended rules relax definition of a first-time homebuyer for some separated couples

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With residential real estate sales slowing in recent weeks and market values dropping in some of Canada’s hotter urban markets, some first-time homebuyers are taking a closer look at their finances to determine if now is the right time to jump into homeownership. For many, the determinative factor may very well be the amount they’ve saved for a down payment.

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While we continue to await details of the planned launch of the Tax-Free First Home Savings Account in 2023, many first-time homebuyers are currently turning to their Tax-Free Savings Accounts (TFSA) and, in some cases, to their Registered Retirement Savings Plans (RRSP) via the Home Buyers’ Plan (HBP), to come up with a lump sum for a down payment.

A recent technical interpretation letter from the Canada Revenue Agency sheds some positive light on how the recently amended HBP rules can help some separated or divorced couples use their RRSPs to buy a home. But before jumping into the new rules, let’s review the basics of the HBP.

As a reminder, the HBP allows a “first-time homebuyer” to withdraw up to $35,000 from an RRSP to purchase or build a first home without having to pay tax on the withdrawal. Amounts withdrawn under the HBP must be repaid to an RRSP over a period not exceeding 15 years, starting the second year following the year of the withdrawal. Amounts not repaid in a particular year, as required, must be included in income.

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So, what exactly is a first-time homebuyer? You’re considered a first-time homebuyer if, in the four-year period prior to purchasing a home, you did not occupy a home that you owned, or one that your current spouse or common-law partner owned. That four year period begins on Jan. 1 of the fourth calendar year before the year you withdraw funds from your RRSP under the HBP, and ends 31 days before the date you withdraw the funds. For example, if you are withdrawing the funds under the HBP on July 31, 2022, the period is from Jan. 1, 2018 to June 30, 2022.

The good news for taxpayers who are separated, divorced or experienced a common-law partnership breakdown, is that the definition of first-time homebuyer was relaxed as of 2020. Under the new rules, the Income Tax Act now permits an individual who would not otherwise be considered a first-time homebuyer under the HBP at the time of the withdrawal to be considered a first-time homebuyer if, at the time of withdrawal, they are living separate and apart from their spouse or common-law partner because of a breakdown of their marriage or common-law partnership for a period of at least 90 days, and they began living separate and apart in the year of HBP withdrawal or in the four preceding calendar years.

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In a recent technical interpretation released last month, the CRA was asked about the application of this rule in a specific scenario, as follows. Mr. X and Ms. Y were common-law partners for the past six years. The family home they live in is owned solely by Mr. X. Mr. X and Ms. Y decided to separate, but continue to both live in the family home, although they now consider themselves “separated” as of June 1. In particular, they sleep in separate rooms, they do not have shared social activities, and they do not identify themselves as a couple. Thus, although they live under the same roof, they considered themselves to be roommates. They live together “solely to minimize the financial impact of their separation and to allow Ms. Y the time to find a new residence that she will purchase and occupy as sole owner.”

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Ms. Y wishes to participate in the HBP by withdrawing $35,000 from her RRSP in September (more than 90 days after the date of separation) to purchase a new property in respect of which she has made an accepted offer to purchase. The CRA was asked if it would confirm that she is eligible to participate in the HBP.

The CRA responded that it’s the Agency’s long-standing position that two individuals can live apart while remaining under the same roof. That being the case, each scenario will come down to a question of fact that can only be determined by looking at all circumstances. Assuming they have been living separate and apart for 90 days, the CRA confirmed that Ms. Y would, indeed, be eligible to participate in the HBP.

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The CRA was then asked whether its answer would be different if the couple was legally married (versus living as common law partners), but not legally divorced, yet no longer considered themselves to be a couple, while still living under the same roof for the reasons above. The CRA confirmed that the answer would be the same, and that Ms. Y could participate in the HBP.

Finally, the CRA was asked to consider the situation where Mr. X and Ms. Y were co-owners of the family residence, and Ms. Y wished to participate in the HBP to either acquire a new residence of her own or buy out Mr. X’s share of the current residence. Once again, in each of these scenarios, the CRA confirmed that Ms. Y could access the HBP to either buy a new home or buy out her partner’s share of the family home.

Jamie.Golombek@cibc.com

Jamie Golombek, CPA, CA, CFP, CLU, TEP is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto.

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Top three affordable regions in Canada where homes go for below $300,000

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In an increasingly complex world, the Financial Post should be the first place you look for answers. Our FP Answers initiative puts readers in the driver’s seat: you submit questions and our reporters find answers not just for you, but for all our readers. Today, we answer a question from Brian about real estate.

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Canadian real estate has soared in value since 2020, with the pandemic, low interest rates and fear of missing out (FOMO) propelling home prices to record levels and pricing many potential home buyers out of the market.

Although the Canadian Real Estate Association (CREA) reported home sales fell by 5.6 per cent in June from the month before, the national average home price was only down 1.8 per cent to $665,580 from the same month last year, despite rising interest rates and tighter borrowing conditions today.

Elevated prices in Toronto and Vancouver continue to drive the high national average, but many smaller neighbouring cities offer more affordable prices. You can still find value in real estate if you know exactly where to look.

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Zoocasa Realty Inc. analyzed 25 regional housing markets and ranked every market by its annual rate of growth in average home prices. The online broker then determined where the average price stood compared to the national average, and identified the 10 most affordable regions and homes you can buy there.

The Saguenay, Que., region tops the list for most affordable housing, with an average home price of $267,353 and annual price growth of 6.6 per cent from last June. Newfoundland and Labrador, where the average regional home price is $280,200 with an annual growth of 10.8 per cent , came second. Saint John, N.B., holds third spot, with an average home cost of $294,900 and an annual growth rate of 30.1 per cent.

Zoocasa spokesperson Patti Cosgarea said she was surprised by how many markets are below the national average. Canadians should continue to see prices decline as the Bank of Canada raises rates.

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Some people may choose to wait on the sidelines as the market slows in the face of rising rates, CREA chair Jill Oudil said in the association’s June statistics report.

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But should potential home buyers wait for prices to drop even further in case a dramatic decline in the housing market plays out?

Not according to Prof. Jill Grant who researches housing and cities at Dalhousie University’s School of Planning in Halifax. Grant predicts that housing will not return to pre-pandemic levels soon because of a lack of supply.

Canadians are forming more households as families get smaller and more people live alone, and housing supply in Canada has not kept up with that demand, Grant said.

No one can predict how high interest rates may rise nor the resulting decline in home prices. But since prices have fallen from their February highs, and supply remains tight, now may be as good a time as any to buy a new home.

• Email: rshelton@postmedia.com | Twitter:

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Development fees and charges only escalate home prices

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The higher tiers of Canadian governments may be spending billions of dollars on improving housing affordability, but municipal governments undo some of that effort by imposing hundreds of millions of dollars in development fees and charges that only escalate home prices.

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The municipal regulatory burden imposes direct costs on new home construction as well as indirect costs because it lengthens the time it takes to obtain regulatory approvals. The direct regulatory charges for a typical new residential dwelling alone can add up to $180,000 per dwelling in construction costs in places such as Markham, Ont.

recent report by Canada Mortgage and Housing Corp. (CMHC) explored the regulatory burden on housing costs in three large metropolitan areas and found that, in some cases, “government charges can represent more than 20 per cent of the cost of building a home in major Canadian cities.”

Furthermore, the regulatory burden in dollars and time was the highest in Canada’s most expensive housing markets, Toronto and Vancouver, compared to Montreal, where housing prices have been relatively and historically lower.

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The authors of the CMHC report — Eric Bond, Frances Cortellino, Taylor Pardy and Christopher Zakher — relied on data and models developed by the Altus Group Ltd. to determine the extent of development charges for various housing types and tenure. They also differentiated government-imposed costs by fee types.

The report found that despite municipal governments’ stated preference for high-density developments, they imposed more significant development charges and density bonuses on high-density construction relative to low-density construction.

By comparison, single-detached housing is “subject to the lowest government fees,” the report found. In addition, “single-detached houses tend to be the subject of the fewest government charges,” averaging between three and seven charges. High-density construction can be subjected to 10 different government charges, ultimately contributing to longer approval times.

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How much lower would housing construction costs per dwelling unit be if government charges were eliminated? In Toronto, row housing could be almost 25 per cent cheaper to build, while costs could be 16 per cent lower for low-rise rental and condominiums.

If municipal governments are serious about promoting the missing middle type of housing, they can make a difference by reducing the regulatory burden on the construction of such housing types.

The report also highlighted some progressive policies to improve housing affordability. For example, municipalities in Vancouver do not impose density payments on purpose-built rental (PBR) housing. Furthermore, government charges for PBR in Vancouver are one-third of those for condominiums. Similarly, municipalities in Montreal reported the shortest approval times with the fewest government charges.

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With PBR construction lagging for the past five decades, municipalities could adopt policies to encourage such construction by significantly reducing the regulatory burden. Montreal and Vancouver offer examples of best practices.

Markham stands out for high development fees in absolute and per-square-foot terms. Construction costs for row housing in the city could be 34 per cent lower without government charges. Furthermore, Markham imposes 160 per cent higher development charges for low-rise rental construction than for single-detached housing.

Again, if the supply of PBR is a priority, that should be reflected in lower development charges for PBR construction than other dwelling types.

The CMHC report recommends that municipal governments consider “increasing certainty around the number, timing and magnitude of government fees” to lower construction costs. In addition, it recommends “eliminating density payments payable upon spot rezoning” because they increase complexity and uncertainty.

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Despite the recent decline in housing prices, median-income homebuyers still find housing way out of their reach. There is an opportunity for local governments to make a meaningful contribution to housing affordability by lowering the regulatory burden on the construction of new housing in places where demand has outstripped supply for decades.

But will the municipal governments listen? The evidence from Toronto suggests they won’t. Instead of reducing development charges, the city has approved a proposal to increase development charges by 46 per cent. This will increase dwelling construction costs by tens of thousands of dollars.

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Cities need financial help from their province and the feds to build additional infrastructure to accommodate growth and maintain the current infrastructure in a state of good repair. Cities can’t do this without raising local fees and taxes given their limited own-source revenues.

The provincial and federal governments can pick up the tab for such costs and, in exchange, require municipal governments to reduce or eliminate the regulatory burden on new housing construction.

Murtaza Haider is a professor of real estate management and director of the Urban Analytics Institute at Toronto Metropolitan University. Stephen Moranis is a real estate industry veteran. They can be reached at the Haider-Moranis Bulletin website, www.hmbulletin.com.

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Expert says their retirement plans are as complex as their family budget

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In Alberta, a couple we’ll call Larry and Sally, ages 56 and 52, respectively, have three children. Two have graduated from university.  A third is disabled and lives independently with the assistance of government funded caregivers. Their goal — $10,000 monthly post-tax retirement income.

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The family’s monthly income consists of $15,000 from Larry’s job and $3,750 from Sally’s work plus $1,500 per month from government assistance plans for their disabled daughter, for a total of $20,250 monthly.

Email andrew.allentuck@gmail.com for a free family Finance analysis.

Financial outlook

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Their retirement plans are as complex as their family budget. Larry would like to retire in nine years at age 65. Sally would like to retire in five, at 57, when she can expect a pension from her provincial government employer. But that timeline for Sally is wishful thinking, as their mortgage will still have several more years to run before it is extinguished.

Both will be eligible for full Old Age Security, $667 monthly at present. Both will also be eligible for full CPP at 65, when Larry can receive $1,254 per month and Sally $667. Their assets, including their $1.8 million home, a $250,000 rental, $1.265 million in RRSPs, $80,000 in TFSAs, their disabled child’s $26,500 Registered Disability Savings Plan, her $220,000 condo and two cars worth $65,000 add up to $3,706,500. Debts including a $630,000 home mortgage and HELOC and mortgages totalling $345,000 for the rental and daughter’s condo, add up to $975,000, leaving net worth of $2,731,500. Their disabled child will benefit from a discretionary trust that allows her to receive provincial financial assistance indefinitely.

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Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with Larry and Sally. “The challenge is to avoid taking on too many costs,” he explains.

They have one grandson now. They are putting in $1,200 per year into his Registered Education Savings Plan, which attracts an additional $240 in Canada Education Savings Grants. Assuming a return of six per cent less three per cent inflation, the RESP account, maintained by the grandson’s parents, will have $32,275 in 2022 dollars in 17 years when post-secondary education looms. They may have to supplement this sum, for it will be barely sufficient for four years of post-secondary education if the child lives at home. If they have more grandchildren, the parents will have to pick up the slack, Moran explains.

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Financial engineering of their total assets including their home will help. Their $500,000 home mortgage has ten years amortization left. Its present 2.15 per cent interest rate will rise when the mortgage note is renewed. To generate a higher after-tax return on savings and thus ease the pain of rising mortgage payments, Larry can make a spousal loan to Sally, let her make investments in her name and pay a lower tax rate. He must charge her the prescribed rate, which recently rose to two per cent per year, and use the returns to pay down their daughter’s $165,000 condo mortgage.

Funding retirement

Sally has a defined contribution pension, effectively an RRSP, with a $65,000 market value. Employer contributions are $5,300 per year. Assuming six per cent growth including three per cent annual inflation, the RRSP will have a value of $104,335 at her age 57. If she then spends the money in the four years before Larry has started to draw down his retirement accounts, she can take out $26,084 per year as a boost to income for the period. Doing this with income splits would allow withdrawal at a low tax rate compared to drawdown after Larry’s RRIFs have started.

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Larry will get $15,043 annual CPP per year, at 65. Sally can expect $8,000 in CPP. Both will get full OAS, currently $8,004 per year. Larry has $80,000 in his TFSA. He should move $45,000 to his RRSP, leaving a balance of $35,000 that could fund gifts to children, Moran notes.

Larry’s RRSP holds $1.2 million to which he adds $2,000 per month. If he puts another $45,000 in from his TFSA, as suggested, the balance will rise to $1,245,000. The $45,000 contribution will generate a tax refund of 48 per cent, which is $21,600, and that can go back to the TFSA. If he continues to add $2,000 per month from his cash flow for eight more years to his age 65, the RRSP with three per cent growth after inflation will have a balance of $1,797,000 in 2022 dollars. That capital will support spending of $91,680 per year to Sally’s age 90.

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At age 65

When their $53,496 of annual house mortgage payments end in about nine years at Larry’s age 65 and they end $24,000 annual RRSP contributions, they will relieve their budget of $77,496 of annual expenses. If the $500 monthly present annual cost HELOC loan is paid off in nine years with additional contributions of $900 per month from non-registered savings — total $16,800 per year, total annual savings will be $94,296 per year. Reducing spending further with $21,960 per year for paid up vehicle loans and the total of all cuts, $116,256 in retirement, would reduce present spending of $243,000 per year to $126,744 per year or $10,562 per month. They could also sell one car to save perhaps $700 monthly fuel and repairs to drop spending to about $9,862 per month, not including government support for their daughter.

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When Larry is 65 and Sally is 61, they will have RRSP income of $91,680 per year, Larry’s CPP of $15,048, and his $8,004 OAS and Sally’s $45,000 pre-tax salary for total income of $159,732. With splits of income, each partner will have $79,866 taxable income, a negligible amount over the OAS clawback start point of $79,845, and pay tax at an average 20 per cent rate, so that disposable income will be $127,548 per year or $10,648 per month excluding funding for their daughter. That is more than projected retirement spending.

When both are 65, they will not have Sally’s income but can add her $8,000 CPP and her $8,404 OAS for total income of $130,740. After 18 per cent average tax, they will have $107,060 per year or just under $9,000 per month to spend. That’s below their $10,000 target but sustainable, Moran suggests.

Retirement stars: 4 **** out of 5

Email andrew.allentuck@gmail.com for a free Family Finance analysis.

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What happens if your place of employment is both your home and various work sites of your employer?

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As a general rule, the Canada Revenue Agency considers the cost of driving back and forth between home and work as a personal expense. But what if your place of employment is both your home and various work sites of your employer? This issue came up most recently in a tax case involving a taxpayer’s claim for automobile expenses. Before delving into the facts of the case, let’s review the general rule surrounding the deductibility of automobile expenses by employees.

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The general rule

If you’re an employee who uses your car for work, you may be able to deduct some of your automobile expenses on your tax return, assuming you meet certain conditions. First, you must normally be required to work away from your employer’s place of business or in different places. Second, under your contract of employment, you must be required to pay your own automobile expenses and this must be certified by your employer on a signed copy of the CRA’s Form T2200, Declaration of Conditions of Employment. Finally, to claim vehicle expenses, you must not be the recipient of a “non-taxable” allowance for motor vehicle expenses.

The case

The recent case involved a taxpayer who was employed as a construction foreman. On his 2017 personal tax return, he claimed an employment expense deduction for motor vehicle expenses totalling $9,853, representing 90 per cent of the total expenses of $10,948 that he incurred using his personal vehicle, a Ford F350 truck, during that year.

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The CRA initially allowed a deduction for motor vehicle expenses totaling only $7,175, disallowing the remaining $2,678 of the total vehicle expenses, which, according to the Agency, represented expenses that the taxpayer incurred while travelling from his home to his employer’s various construction sites (and vice versa), on the basis that they were “personal expenses and therefore were not deductible.”

At trial, the taxpayer reduced his claim to 85 per cent of his total vehicle expenses, and the CRA conceded a further $489 of expenses, leaving a disputed total of $1,642. The sole issue in the case, therefore, was whether these remaining motor vehicle expenses which were incurred by the taxpayer while travelling from his home to various worksites of his employer (and vice versa) were properly deductible under the Income Tax Act.

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The taxpayer’s employer is involved in the construction business and builds houses and townhouses. As a foreman with the company, the taxpayer was responsible for a crew of 17 people. During 2017, the company carried on approximately 50 projects at numerous construction sites. According to the taxpayer’s testimony, tool maintenance was an important part of his employment duties as foreman because his crew needed to have the proper tools and equipment to complete work each morning. Indeed, part of the taxpayer’s employment duties was to make sure that workers were in place each workday morning at a designated construction site and ready to work with properly functioning tools, equipment and materials.

The company required the taxpayer to bring its tools, equipment and materials home with him each night to secure them in his garage (located at his home), to repair any broken tools and equipment and to deliver tools, equipment and materials to its worksites the next morning for work. The taxpayer used a designated spot in his garage to store and repair his employer’s tools, equipment and materials.

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On a typical workday morning, the taxpayer would go to his garage, load his employer’s tools, equipment and materials into his truck and determine which worksites he and his crew were required to work at that day. He would then drive to the assigned worksite and ensure that his crew was set up and organized for work. Occasionally, during the day, he would be required to transport some of his crew and tools and equipment to another worksite.

At the end of each workday, the company required the taxpayer to load up all of its tools, equipment and materials from the worksite into his truck and take them home to his garage. He would unload the tools, equipment and materials in the designated spot in his garage, clean the tools and equipment, and repair them as needed. Because tools were often broken during a workday, he had to regularly repair tools in his garage at night.

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The taxpayer also testified that there was a “big risk” that tools, equipment and materials would be stolen from worksites and that taking the tools, equipment and materials back to his garage for secured nightly storage was a solution for his employer to avoid such theft.

The judge reviewed the general rule which is that the expenses of travelling from an employee’s home to his or her place of work (and vice versa) are personal expenses and not deductible because they are not incurred in the course of the employee’s duties. Over the years, however, there have been a number of cases that have recognized exceptions to the general rule, such as when a taxpayer’s home was found to be an essential place of business, as mandated by their employer.

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In this case, the taxpayer argued that the motor vehicle expenses he incurred while travelling from his home to his employer’s various worksites (and vice versa) should be properly tax deductible because his employer required him to bring employer-owned tools, equipment and materials home with him each night for maintenance and safekeeping, and to transport those tools, equipment and materials to various worksites the next day. Therefore, logically, the travelling to and from his home should be considered “related to his employment” and not personal in nature.

The CRA, not surprisingly, disagreed. The Agency viewed those trips as the taxpayer “simply driving to work, like any other employee,” and therefore considered them “personal (trips) and not incurred in the course of (his) employment duties.”

Fortunately for the taxpayer, the judge concluded that, on a balance of probabilities, the taxpayer was ordinarily required to carry on his employment duties in different places, namely in his garage, located at his house, and at his employer’s various worksites, where he supervised his crew and constructed homes. Thus, the additional $1,642 in motor vehicle expenses were properly deductible.

Jamie.Golombek@cibc.com

Jamie Golombek, CPA, CA, CFP, CLU, TEP is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto.

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Expert says ‘family has achieved almost bulletproof retirement savings’

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A couple we’ll call Tom, 59, and Millie, 52, live in Toronto where they work respectively, in scientific research and accounting. They bring home $16,900 per month. They have one son heading for graduate studies.

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They have done well in financial terms and can retire comfortably, as we’ll see. Their problem is how best to use their ample income and high savings rate. Part of their good fortune — $1.8 million in property or 55 per cent of their net worth — is a result of the hot real estate market in the Greater Toronto Area. For long-term planning, more diversification is wise, especially for folks with less time to recover from a flop in their largest investment by sector.

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email andrew.allentuck@gmail.com for a free Family Finance analysis

The couple’s take-home income is more than sufficient for their modest spending, $5,484 per month. Savings, including RRSPs, TFSAs and non-registered investments total $11,416 per month. Frugal, they have no car, and travel by streetcar. They estimate their son’s costs will be $240,000 over four years, half for tuition and the remainder for living expenses on campus. Some can be paid out of his $108,000 RESP.

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Retirement goals

Tom and Millie would like to have retirement income of $9,000 per month in six years when he is 65 and she is 58.

Family Finance asked Eliott Einarson, a financial planner who heads the Winnipeg office of Ottawa-based Exponent Investment Management Inc., to work with Tom and Millie.

The couple’s current assets are their $1.2 million house, their $600,000 rental property $357,000 of RRSP investments for Millie and $69,000 of RRSP assets for Tom. They also have $263,000 in TFSAs, $589,300 in taxable investments and $108,000 in their son’s RESP. Take off the $150,000 balance on the mortgage on their rental property and they have net worth of $3,036,300.

The rental, for which they paid $410,000, brings in $1,700 per month. The current interest rate for the ten years left on their mortgage, 2.39 per cent, poses the question of whether they should pay it off with their available capital or let it ride and use cash flow for retirement savings. Retention is problematic for its costs include $417 mortgage interest, $500 in condo fees plus $300 in miscellaneous costs. That’s a total of $1,217 per month leaving a $483 net monthly return or $5,796 per year.

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Financial assets

If they keep adding $18,000 per year to their RRSPs, which have present balance of $426,000, the accounts will grow in six years when Tom retires to a balance of $628,590 assuming a rate of growth of three per cent after inflation. That balance would then support $29,932 annual income or $2,494 per month to Millie’s age 90.

Their non-registered account with a current value of $589,300 with no further additions growing at three per cent per year after inflation would rise to a value of $703,660 in the next six years and then provide $39,232 per year or $3,270 per month for the following 25 years.

Their TFSAs, with a $263,000 present balance plus combined contributions of $12,000 per year for six years to Tom’s retirement would grow to $394,000 and then pay $21,950 per year or $1,830 per month for the 25 years to Millie’s age 90, total $96,910.

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Six years from now at age 65, Tom will be entitled to a defined-benefit pension of $6,040 per month or $72,480 per year, $642 monthly/$7,707 annual OAS at present rates, and CPP of $1,200 per month or $14,400 per year. With the rental income, that adds up to $191,497.

Add Millie’s $100,000 pre-tax income and total income rises to $291,497 before tax. With no tax on TFSA cash flow, splits of eligible income and clawback of $617 of Tom’s OAS, after 22 per cent average tax, they would have $231,580 to spend each year. That’s $19,300 per month, far ahead of their $9,000 monthly income goal.

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Seven years later, Millie will retire, lose her $100,000 salary and be able to add her own CPP at an estimated rate of $8,000 per year or $666 per month and her OAS of $7,707 per year or $642 per month. Their pre-tax income would decline to $207,204. Assuming splits of eligible income that would eliminate the clawback and 20 per cent average tax, they would have $170,153 per year or $14,180 per month to spend, still well ahead of their goal.

Diversification

With such a surplus over target retirement income, should Tom and Millie keep the rental or sell? Its return on their $450,000 equity is one per cent, not much for the trouble and risk of ownership. They could do better in other assets. With their house included, they have 58 per cent of their net worth in two properties. If they sell the rental and obtain $418,500 after seven per cent costs and elimination of their mortgage, then invest at three per cent after inflation, they could have $12,560 pre-tax dollars, which is three times their current one per cent annual return from the rental.

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We have calculated retirement income with and without the rental. Either way, the couple will have a large surplus for many decades. The use for that surplus for the many years of their retirement is not a financial question. Tom and Millie can donate money to their choice of good causes, add to their estate for their son, or retire much sooner with growth of savings. The issue is both a test of portfolio management and planning and a potential opportunity of ending careers with a broad purpose of helping others. It’s the couple’s choice.

“It’s not just a question of how to make money, but preserving it and using it wisely,” Einarson explains. “This family has achieved almost bulletproof retirement savings and a large fund to help their son in med school. Few plans are this strong.”

Five retirement stars ***** out of Five

email andrew.allentuck@gmail.com for a free Family Finance analysis

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