Spouses Jean*, 75 years old, and Marie-Josée*, 61 years old, lead an active life and treat themselves to a few trips. They are well established when it comes to financial wealth and retirement income.
Jean is co-owner (50%) with his sister of the triplex worth approximately $1.2 million where they reside in their respective apartments. The third dwelling is occupied by one of Jean’s two sons.
To plan his succession, Jean plans to buy out his sister’s share in order to then divide it between his two sons. They would then become co-owners (25% each) of the triplex with their father Jean, who plans to remain co-owner (50%) and reside there with his wife as long as possible.
To finance the purchase of the share of ownership of the triplex, at a price he estimates around $600,000, Jean plans to take out a new mortgage on the value of the triplex.
He then plans to register his two sons on the next deed of ownership of the triplex, replacing his sister, in order to formalize their status as co-owners.
As for the repayment of the mortgage, Jean plans to establish payment agreements with his two sons, the amounts of which would be modulated according to their budgetary capacity.
“With such a plan of transfer of ownership, I think I can achieve two objectives of estate planning,” says Jean during a conversation with La Presse.
“On the one hand, it would keep this triplex in the family heritage. On the other hand, it would allow my wife and me to secure our situation as co-owners in family management with my sons. »
Jean is therefore seeking advice on the feasibility of his joint ownership transfer project. If in doubt in the opinion of the consulting analyst, what alternatives could be considered?
Financial assets:– RRIF: $240,000– TFSA: $38,000– term deposit and savings account: $37,000
Non-financial assets: – 50% share of family residential triplex: approx. $600,000 – collectibles: approx. $150,000
No debt liabilities
Annual income: approx. $71,000 (retirement pensions [employment pension plan, provincial QPP, federal PSV], RRIF withdrawals, self-employment, triplex net income share)
Financial assets:– in RRSPs: $87,000
Non-financial assets: – rental condo: approx. $320,000
Liabilities: – Condo mortgage balance: $150,000 – Line of credit balance (at 8.5%): $4,600
Annual income: approx. $45,000 (RREGOP [Quebec public sector] pensions, net condo rental income)
Lifestyle of the senior couple: approx. $60,000 per year (disbursements for residence, lifestyle, budget assistance to loved ones, etc.)
Jean’s situation and questions were entrusted to François Bernier, who is a notary public and director of tax and estate planning for Eastern Canada at Sun Life Financial.
“I have reservations about this project that he wants to do for the benefit of his two sons”, François Bernier immediately indicates in an interview with La Presse.
“Considering the financial and tax costs generated by this proposed transaction, especially since it concerns a real estate asset whose financial return would then be very low, one must ask oneself whether this transaction would really be advantageous for all its stakeholders. »
In mortgage financing costs, for example, François Bernier estimates around $2,700 per month (or $32,400 per year) the minimum amount of payments on a loan of $600,000 over 20 years, at an initial interest rate by 5.7%.
“Based on their current budget, Jean and his wife would be able to afford these mortgage payments on their own in the event of the financial insufficiency of the two sons, as the new co-owners of the triplex,” explains Mr. Bernier.
“But what if there is a sudden change in the parents’ budgetary situation due to, for example, health problems that would put an end to self-employment income, while generating new costs for support services? at home or in residence? »
“In such a situation, would the two sons have the financial means to meet the mortgage payments in full? And without risking jeopardizing their other projects or priorities in their personal life? asks Mr. Bernier.
The project envisaged by Jean in favor of his two sons would involve significant tax costs on the market value of this asset.
Expect real estate transfer fees (or “welcome tax” in popular parlance) of around $7,600, warns our expert.
In addition, François Bernier estimates around $19,000 the tax note to be paid on the capital gain generated by the “disposition at fair market value” of the co-ownership share of the family triplex which would be bequeathed by Jean to his two son.
That said, what are the solutions to support Jean’s wish to keep the triplex in the family patrimony, while mitigating the risks of financial complications?
Mr. Bernier first suggested that Jean establish with his sister, co-owner of the triplex, an “indivision agreement” in which they could define in advance the main parameters of a possible transaction on their part of the property.
Such a joint ownership agreement would allow them to better prepare for a possible change in their relationship as co-owners of the triplex, depending on the evolution of their personal and family situation. “For example, by including a ‘right of first refusal’ clause for each co-owner in the event of a sale by one of the two, specifies François Bernier, the non-selling co-owner could thus ensure a certain control over this change of ownership. And especially if it had to involve a buyer outside the family. »
The addition of a “shotgun” type clause in business jargon could be useful in a new joint ownership agreement between Jean and his sister. Such a clause, summarizes Mr. Bernier, could mean that in the event of a difference of opinion between Jean and his sister on the sale or not of their share of ownership of the triplex, the selling co-owner could force the other to buy out his share at its current fair market value.
Finally, as another alternative to the relatively complex and costly transaction envisaged by Jean for the benefit of his two sons, François Bernier suggests considering instead the payment of contributions to new CELIAPP accounts (tax-free savings account for the first home ownership, announced in the 2022 federal budget and effective April 1) of his two sons.
While waiting to clarify the continuation of the co-ownership of the family triplex, as well as the evolution of their lifestyle, a contribution to the CELIAPPs of the sons “would be a very effective gesture in terms of fiscal and financial returns in the medium term” in the heritage family.
In preparation these weeks, the launch of TFSA accounts at financial institutions provides for deposits up to a maximum of $8,000 per year or $40,000 for life, including returns over time and future withdrawals for the purchase of a first residential property will be tax free.
“In their current budgetary situation, the spouses Jean and Marie-Josée would have the means to contribute a few thousand dollars a year to the CELIAPPs of their two sons”, points out François Bernier.
In addition, it would be a less restrictive and more effective solution to contribute to the constitution of a real estate asset for the two sons, rather than starting a complex and costly process of transferring shares of the triplex by a buyout with high rate mortgage financing.
