“A situation has just arisen with my 82-year-old mother and I must admit that I don’t know what the best solution is,” confides Lucie*.
The situation
“A few weeks ago, she had an appointment at her bank for investments that were coming due, and the financial adviser called me to tell me that she didn’t have much money left,” explains Lucie.
His mother, let’s call her Cécile*, was receiving payments from a Registered Retirement Income Fund (RRIF), which is practically depleted and which constituted a large part of her income.
Another small fund pays him $136 a month. Cécile also receives her public pensions, the Quebec Pension Plan (QPP) and the Old Age Security pension (PSV).
The lady had two children, Lucie and her sister Johanne*. She lives alone in an apartment.
“She will be 82 this summer. She is 100% autonomous, still drives her car, does all her things,” notes Lucie.
” For the moment everything is well. »
And it may be because everything is fine that the two sisters had not seen the problem coming.
“All of a sudden, she loses half of her monthly income, so she can no longer pay her rent. »
Cécile renewed her lease for one year, for a monthly rent of $1,600. “My sister and I will pay the difference, so as not to sell out her money too quickly,” says Lucie. But we have to find a discreet way to do it, because she would be very angry. »
The two sisters will then have to find another solution.
“She has the budget for about $1,000 in rent a month. We have just excluded all residences that have a certain quality. We don’t want her to go anywhere, and neither does she. She lives in a nice apartment, but too expensive for her means. »
They are considering three avenues of solution.
Numbers
Cecile, 82 years old
- Life income fund (LIF): $17,800, from which she receives a payment of $136 per month
- Tax-Free Savings Account (TFSA): $81,400
- Bank account: approximately $10,000
- Pension plan: $129/month
- PSV: $760/per month
- QPP: $509/month
- GST and QST credit: $116/month
- Solidarity tax credit: $75/month
Buying a condo for three?
“Should my sister and I buy a condo for three with our mother? What impact on our finances? »
The two sisters would be willing to provide $25,000 each for the down payment, plus an equivalent amount paid by their mother.
Lucia owns a house. Johanne owns a house and a chalet. “What does it mean if two or three of us invest in a condo? »
Build an extension to Johanne’s house?
“Another plan: my sister said she could add a wing to her house, where our mother would have her small unit, with a studio and a kitchen”, underlines Lucie, who would then contribute to her mother’s expenses.
Johanne alone would assume the cost of the work, roughly estimated between $150,000 and $200,000, with a possible contribution of $15,000 by Cécile. But would its budget risk faltering?
Partially pay their mother’s rent?
“Could an idea be that she goes to residence, but that we pay the portion that she is not able to pay? ”, evokes Lucie again.
A beneficiary of her dead father’s life insurance, her sister Johanne placed the $50,000 indemnity in a tax-free savings account (TFSA), in anticipation of their mother’s needs.
“We want to find a solution,” says Lucie. We are really ready to do our part. »
The answer
“Buying a condo and building an extension to the house are costly and risky options,” immediately points out financial planner Benoit Chaurette, advisor at the National Bank Private Banking Center of Expertise 1859.
“In the current situation, a loan would have to be taken to carry out either of these options. Borrowing costs have increased enormously in the last year and the profitability of such an investment is far from certain. »
PHOTO KARENE-ISABELLE JEAN-BAPTISTE, SPECIAL COLLABORATION ARCHIVES
Benoit Chaurette, Advisor at the National Bank Private Banking Center of Expertise 1859
The tax issue also shakes the foundations of the project.
“If Lucie and her sister choose to buy a condo, the property cannot be designated as a principal residence upon resale,” he says. A residence inhabited by his parent does not meet the definition of principal residence. »
The two sisters would then have to pay their tax shares on half of the capital gain realized.
To avoid this pitfall, their mother could be the sole owner of the condo, allowing her to designate the property as her principal residence for tax purposes.
“Still we will have to find a way to provide him with the necessary cash for the purchase of the property, underlines the planner. His daughters will have to give or lend him the funds required for the purchase, hoping to recover these sums when their mother dies. This is without taking into account the transfer taxes, the costs necessary for the move and the additional cost of being an owner. »
The project of an extension to Johanne’s house is not exempt from tax complications either.
If it is an independent apartment, the property could be qualified as a bigenerational residence, indicates Benoit Chaurette. “You will have to make sure you have the required authorizations from the municipality to carry out such a project,” he advises.
But the question of capital gain is not avoided.
Generally, only one unit qualifies as a primary residence. Upon resale of the property, the new unit may be subject to a capital gain on which tax will be payable.
Benoit Chaurette, Advisor at the National Bank Private Banking Center of Expertise 1859
However, this extension opens another window. The expansion work could be eligible for the federal tax credit for the renovation of multigenerational housing. “This is a 15% tax credit on eligible expenses up to a maximum of $50,000 in expenses,” explains our advisor.
Even if it remains “one more stick in the wheels”, a capital gains tax is still a lesser evil insofar as it results from an increase in the value of the property.
The obstacle lies more in the two sisters’ budgetary capacity to support their share of the monthly mortgage payment – not to mention the property taxes and condo fees, in the case of a condo.
It would be easier and less restrictive to take the avenue of less expensive housing, or perhaps even to keep the current apartment for a while longer. The planner’s calculations do not rule out this possibility.
The savings that Cécile still keeps in TFSAs and life income funds (LIF) would allow her to maintain her rhythm of life for a few years, he estimates.
“Although Cécile has recently seen the amount of these LIF withdrawals decrease significantly, this will have at least one positive consequence: reducing her taxable income and qualifying her for the guaranteed income supplement (GIS)”, indicates our advisor.
According to his calculations, the reduction in his lifetime income opens the door to a GIS of $6,200 per year.
With this contribution, her other income and an average return of 3% on her assets, Benoit Chaurette estimates that Cécile could support monthly expenses of $2,470, indexed annually, for the next 15 years, which brings her to 97 years old.
“Is this amount sufficient for his needs? There is no doubt that with a rent of $1600 per month, it can be complex. However, considering that his other expenses seem low, this might be realistic. »
By carefully compiling all of her expenses, it will be easy to determine the cost of rent that Cécile could afford, he adds.
The planner makes another suggestion.
“Considering the significant amounts that Lucie and Johanne were ready to invest in a property or an extension, why not keep this money aside in the event that their mother reduces her LIF and TFSA investments to zero? Johanne had also kept a sum for this purpose from her father’s life insurance policy. »
These sums could be kept in reserve in guaranteed investments or in fixed income in anticipation of their eventual use.
A cushion for their mother’s comfort.
* Although the case highlighted in this section is real, the first names used are fictitious.
Calling all
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