Diane* and Claude* are de facto spouses in their early sixties who are preparing to retire in the next few years.
As a major pre-retirement project, they want to renovate and expand their chalet to make it their main residence once they retire.
The cost of this work, which Claude will be able to supervise as a building planning professional, is estimated at around $400,000.
If everything goes smoothly, such a sum could represent a significant added value on the property value of the chalet, which is listed at $400,000.
They would also enhance the value of Claude’s real estate assets, which already represent the major part of the couple’s total wealth.
On the other hand, their financial assets in registered accounts (RRSP, TFSA) which will serve as their main sources of income once they reach retirement still appear to be sparse.
Valued at just over $800,000, two-thirds of which is owned by Diane, these financial assets alone may not be enough to sustain the couple’s lifestyle — around $80,000 a year — beyond their first year. decade of retirement.
In this context, Diane and Claude are questioning their financial capacity to carry out their project to renovate and expand their chalet into their main residence.
“A few years from retirement, do we have the means for such a project? “Summarizes Claude during an interview with La Presse.
Their first concern: how to organize the financing of this work without compromising their financial planning for their retirement?
Second, while Claude is contemplating the resale of his house once the cottage has been converted into a principal residence, the expected net gain from this resale – around $500,000 after the mortgage balance and miscellaneous costs – could be used to reduce the cost of financing the work at the chalet?
And this, while allowing Charles to replenish his registered savings accounts (RRSP, TFSA) still sparse a few years from retirement?
Diane and Claude’s questions were submitted for analysis and advice to David Paré, who is a financial planner and investment advisor with Desjardins Wealth Management in Quebec.
Mr. Paré was assisted by Alice Beaubien-Leblanc, Mortgage Advisor at Desjardins.
Annual income: $82,000 ($71,000 from self-employment; $11,000 from rental condos)
Financial assets: $158,000 ($120,000 in RRSP [unused contributions: $131,000], $38,000 in TFSA [unused contributions: $50,000]
Real estate assets: 1.35 million (house: $600,000; two rental condos: $550,000; 50% of couple’s cottage: $200,000)
Liabilities: $212,000 (mortgage balances on house and rental condos)
Annual income: $71,000 (employment: $60,000; survivor’s pension: $11,000)
Financial assets: $649,000, $307,000 in RRSP, $20,300 in TFSA [unused contributions: approximately $78,000], $315,000 in non-registered investment account, $7,200 in pension plan [defined contribution]
Real estate asset: 50% of couple’s cottage: $200,000
No liabilities
Total revenue: approximately $142,000
Outgoings: approximately $80,000 per year ($25,000 principal residence, $45,000 lifestyle, $10,000 retirement savings)
From the outset, David Paré notes that Diane and Claude have a total estate “in good shape” with a net asset value of around 2 million (after subtracting debts).
However, he notes that most of this net worth is made up of Claude’s real estate properties (main residence, two rental condos and 50% of the chalet). The financial assets are overwhelmingly held by Diane.
“This imbalance in the types of assets between Claude and Diane could pose a challenge for them to access liquidity during their retirement, when their income will come mainly from their withdrawals from retirement savings and public pensions [RRQ provincial and federal PSV] ”, points out David Paré.
The approximately $400,000 in improvements to the cottage co-owned in equal shares between the two spouses could also accentuate this imbalance between Claude’s real estate assets and Diane’s financial assets.
Therefore, before considering the impact of this work at the chalet on their financial planning, David Paré recommends that Diane and Claude have a cohabitation agreement well established before a notary in order to reduce the risk of financial entanglements. during their retirement years.
That said, David Paré can then reassure Diane and Claude about the sufficiency of their combined financial assets to support a lifestyle of around $80,000 per year until a very old age.
As for the financing of the work at the chalet, and because it is already co-owned in equal shares by Diane and Claude, David Paré recommends that they proceed by establishing a mortgage line of credit.
“Despite her much higher interest costs than before, using a line of credit rather than dipping into Diane’s financial assets would be preferable in order to avoid overly affecting the planning of the retirement income that will come from these financial assets”, summarizes David Paré.
In addition, a mortgage line of credit allows more flexibility in withdrawing and repaying available funds according to the evolution of work expenses at the chalet, as well as the liquidities available in Diane and Claude’s common budget.
Then, to optimize this temporary financing through a mortgage line of credit, David Paré advises them to plan the work on the cottage over a period of one year, at the end of which Claude will be able to resell his house while benefiting from the tax exemption. capital gains tax on a principal residence.
“The net amount from the resale of the house [after paying off the mortgage balance and transaction fees] will allow them to pay off the entire home equity line of credit for the work at the cottage,” says Paré.
“Furthermore, this should result in a surplus in the order of $100,000 which Claude could then use to reduce the amounts of unused contributions in his registered savings accounts such as TFSA and RRSP, thereby increasing his financial assets. where a good part of his future retirement income will come from. »
In the same vein, David Paré recommends that Claude proceed with pre-retirement tax planning regarding the eventual resale of his rental condos.
Because these are two real estate income assets, the foreseeable capital gain on their resale would then inflate Claude’s taxable income, recalls Mr. Paré.
For example, a capital gain of around $150,000 on the resale of one of the two rental condos could result in an additional tax note of around $35,000 for the year. tax of this resale, believes David Paré.
“On the other hand, by planning this resale of condos at the start of retirement, when he would still be eligible for the tax credit for retained and shifted RRSP contributions, Claude could reduce his tax bill by a few thousand dollars after the realization of this taxable capital gain. »
