stats Making the Business of Life Easier

   Finance globeinvestor   Careers globecareers.workopolis Subscribe to The Globe
The Globe and Mail /
Home | Business | National | Int'l | Sports | Columnists | The Arts | Tech | Travel | TV | Wheels


  This site         Tips

  The Web Google


  Where to Find It

Breaking News
  Home Page

  Report on Business



Subscribe to The Globe

Shop at our Globe Store

Print Edition
  Front Page

  Report on Business




  Arts & Entertainment



   Headline Index

 Other Sections

  Births & Deaths






  Facts & Arguments




  Real Estate









  Food & Dining




  Online Personals

  TV Listings/News

 Specials & Series
  All Reports...


   Where to Find It
 A quick guide to what's available on the site



  Customer Service

  Help & Contact Us



 Web Site

  E-Mail Newsletters

  Free Headlines

  Globe Store New

  Help & Contact Us

  Make Us Home

  Mobile New

  Press Room

  Privacy Policy

  Terms & Conditions


The price of success: a rising tax bill
How do retirees with rental properties organize their affairs in a way that minimizes tax hit?
Special to The Globe and Mail

Email this article Print this article
Saturday, July 21, 2018 – Page B13

At the age of 67, Ed and Alexa are reaping the rewards of years of saving and investing: Rising income and the prospect of big capital gains down the road. They are retired with three grown children.

They have amassed a nicesized real estate portfolio comprising five rental apartments in Vancouver in addition to their own principal residence. They also have substantial financial investments. As the mortgages on the rental properties are paid down over time, Alexa and Ed's income has been rising - and so has their tax bill.

"We'll soon have to convert our RRSPs to registered retirement income funds (RRIFs), resulting in even more taxable income," Alexa writes in an e-mail.

They're worried about having their Old Age Security (OAS) benefits clawed back if their income is too high.

"We have three children and we intend to pass down our assets to all three equally," Alexa adds.

"We'd like to avoid as much tax as possible and organize our affairs so that our beneficiaries inherit the maximum amount.

What can we do about our rental property capital gains?" We asked Brinsley Saleken, a fee-only financial planner and portfolio manager at Macdonald Shymko & Co. Ltd. in Vancouver, to look at Alexa and Ed's situation.


Alexa and Ed are financially independent, even without their real estate, Mr. Saleken says.

They are spending about $60,000 a year after tax.

"There are still a number of potential issues that need to be dealt with to prevent any tax complications further down the road," the planner says.

They are taking the right approach with their investments, selling some stocks, paying the capital-gains tax and transferring the proceeds to their tax-free savings accounts, where future gains will be sheltered, he adds.

They also make charitable contributions.

"One avenue to explore would be making contributions in-kind to their chosen charity, using those stocks with the largest capital gains," Mr. Saleken says. They would get a tax credit for the market value of the stocks and would not have to pay capitalgains tax on the disposal.

Both Alexa and Ed are in the 22.7-per-cent marginal tax-rate bracket now, so they have a "reasonable buffer" before they have to start worrying about the OAS clawback, which begins when an individual's taxable income surpasses $73,750 a year.

If anything, they may want to increase their income periodically through RRIF withdrawals or realized capital gains, even if that puts them in a higher tax bracket (28.2 per cent), as long as they stay below the OAS clawback threshold.

This would leave a lower amount to be taxed on the final deceased tax return, which likely would be at the highest tax bracket of 49.8 per cent (federal and B.C.), the planner says.

This leads to the question of the embedded capital gains on the rental properties.

"There isn't much that can be done to shelter real estate capital gains from taxation," Mr. Saleken says. "It's important to remember that the tax is the result of a successful investment."

The couple might want to consider selling some or all of their rental properties rather than leaving them to form part of their estate, the planner says.

They could sell one a year for the next five years, for example.

Although this would result in an OAS clawback, "our analysis shows that this would be more tax-efficient in the long run."

If they are not sold, the rental units would be deemed to have been sold in the final deceased tax return.

Alexa and Ed could use the sale proceeds to develop a more tax-efficient investment portfolio.

As well, having so much of their net worth in real estate exposes them to more risk than necessary, the planner says. The capitalization rate (rate of return) on their rental properties, based on assessed value, ranges from 1.79 per cent to 2.12 per cent - less than the yield on a Government of Canada bond, Mr. Saleken notes.

If they sold a property or two, Alexa and Ed could increase their spending and perhaps travel more or take up a hobby. They would also lighten the burden of being landlords. "They deserve to reward themselves."

Another benefit of selling while they are still around would be to provide early inheritances for their children, the planner says. This could be done in a staged approach, "which has far more privacy, flexibility and potential tax-efficiency than passing it on via the estate," the planner says.

For example, one of their rental properties has a capital gain of $374,000 (only half of which is taxable).

"Based on current income, if this was sold and realized, the tax shared between Alexa and Ed would be roughly $72,000, whereas the tax, if part of a deemed disposition at their passing, would be roughly $93,000, given it is likely that all of the gain would be taxed at 49.8 per cent."

If they decide not to sell their rental properties, the couple must figure out how their estate will pay the capital gains tax that will come due on the final return.

"One option would be to take out a life insurance policy to cover the expected tax due on the survivor's final return," Mr. Saleken says.

The downside is they'd have to pay the insurance premiums in the meantime.


The people: Ed and Alexa, both 67, and their children, who range in age from 34 to 40.

The problem: How to arrange their investments in a taxefficient manner.

The plan: Consider selling one or more properties and giving some money to their children now. Alternatively, explore insurance to pay the capital gains tax on their estate.

The payoff: Avoiding potential tax complications for their heirs.

Monthly net income: $6,510 (net rental, CPP and OAS, investment income).

Assets: Principal residence $1,300,000; rental properties $2.7-million; joint non-registered portfolio $115,320; her nonregistered portfolio $77,875; his savings account $16,840; her registered retirement savings plan $399,813; his RRSP $300,895; her TFSA $68,214; his TFSA $66,397. Total: $5.04million Monthly outlays: Condo fee $515; property tax $175; home insurance $40; hydro $50; maintenance $40; house cleaning $125; transportation $445; groceries $375; clothing $100; line of credit $375; charity $460; vacation, travel $835; dining, drinks, entertainment $405; club memberships $320; subscriptions $15; health care $290; phones, TV, internet $160; RRSPs $915. Total: $5,640 Liabilities: Rental property mortgages $634,700; line of credit $114,000. Total: $748,700

Huh? How did I get here?
Return to Main John_Doyle Page
Subscribe to
The Globe and Mail

Email this article Print this article

space  Advertisement

Need CPR for your RSP? Check your portfolio’s pulse and lower yours by improving the overall health of your investments. Click here.


7-Day Site Search

Breaking News

Today's Weather


Rick Salutin
Merrily marching
off to war
Roy MacGregor
Duct tape might hold
when panic strikes

Where Manley is going with his first budget



For a columnist's most recent stories, click on their name below.


Roy MacGregor arrow
This Country
Jeffrey Simpson arrow
The Nation
Margaret Wente arrow
Hugh Winsor  arrow
The Power Game

Rob Carrick arrow
Personal Finance
Drew Fagan arrow
The Big Picture
Mathew Ingram arrow
Brent Jang arrow
Business West
Brian Milner arrow
Taking Stock
Eric Reguly arrow
To The Point
Andrew Willis arrow

Stephen Brunt arrow
The Game
Eric Duhatschek arrow
Allan Maki arrow
William Houston arrow
Truth & Rumours
Lorne Rubenstein arrow
 The Arts

John Doyle arrow
John MacLachlan Gray arrow
Gray's Anatomy
David Macfarlane arrow
Cheap Seats
Johanna Schneller arrow

Murray Campbell arrow
Ontario Politics
Lysiane Gagnon arrow
Inside Quebec
Marcus Gee arrow
The World
William Johnson arrow
Pit Bill
Paul Knox arrow
Heather Mallick arrow
As If
Leah McLaren arrow
Generation Why
Rex Murphy arrow
Japes of Wrath
Rick Salutin arrow
On The Other Hand
Paul Sullivan arrow
The West
William Thorsell arrow

Home | Business | National | Int'l | Sports | Columnists | The Arts | Tech | Travel | TV | Wheels

© 2003 Bell Globemedia Interactive Inc. All Rights Reserved.
Help & Contact Us | Back to the top of this page