Investing

Retirement Income Question

  • Last Updated:
  • Sep 11th, 2019 9:40 am
[OP]
Member
Jul 5, 2010
380 posts
161 upvotes

Retirement Income Question

My Parents (69,65) recently sold their house and moved in with my brother to help him out with the children.

They also took possession of a Condo in Toronto this summer. This was supposed to be their residence for foreseeable future but circumstances changed. The Condo was 650K+ and is now worth 950K+. They have nominally moved in with change in address and some furniture, but place is empty. Longer term they intend to stay with my brother.

They have a steady income from CPP/OAS & GIS of about $2800 combined. All other income is zero. There is 300K mortgage on the Condo.



Option 1
Keep the condo for the year. Eat the cost for a year.
Sell it after a year. Net 600K-650K cash.
Max out TFSA 150K


Option 2
1. Rent the condo $3600/month
2. Take and additional loan of 150K from the equity to fund TFSA.
3. Condo Expenses incl interest + property tax + maintain would be $2000 month.
4. Rent would be $3600 a month. Net would be ~$1500 a month.
5. But this income would reduce the OAS/GIS income by roughly $750.
6. Capital gains tax on 300K increase in the condo would also have to be paid. There is an article about section 45(2) of income tax code to declare the condo as primary residence each year, but that would only shelter the gains for 4 year.




Thoughts?
34 replies
Deal Addict
Jul 14, 2006
2217 posts
2666 upvotes
Do your parents want to be landlords?

Option 1.
[OP]
Member
Jul 5, 2010
380 posts
161 upvotes
By choosing option 1, I will be left with a 400K balance to invest. Any income from that investment would also eat into the OAS/GIS.

SO parhaps may be OAS/GIS reduction should not be part of the discussion. If that's the case the income from the condo is pretty decent. along with further capital appreciation.
Deal Guru
Jan 27, 2006
14192 posts
7188 upvotes
Vancouver, BC
The question is: which will have a better return - the condo or the proceeds from the condo - after taxes?

Also, keep in mind that since your parents never lived in the condo, there is a good chance that the CRA will say that the profit of some $300,000 by your figures will be taxed as a capital gain.
Sr. Member
Sep 2, 2009
945 posts
658 upvotes
Ottawa
chicu1981 wrote: By choosing option 1, I will be left with a 400K balance to invest. Any income from that investment would also eat into the OAS/GIS.

SO parhaps may be OAS/GIS reduction should not be part of the discussion. If that's the case the income from the condo is pretty decent. along with further capital appreciation.
While a consideration, they should be better off with the lower OAS and GIS since it is not dollar for dollar that is clawed back. I don't know what the exact amount is now, but OAS is something like 15% clawed back after 70k+ of taxable income. The current 2,800/month you stated is 33.6k/year. That leaves a whole lot of room for gains on the 400k you estimated before OAS is lowered even a penny.

(I think you are right thinking that the - my borrowed words - "tax tail shouldn't wag the dog")
[OP]
Member
Jul 5, 2010
380 posts
161 upvotes
craftsman wrote: The question is: which will have a better return - the condo or the proceeds from the condo - after taxes?

Also, keep in mind that since your parents never lived in the condo, there is a good chance that the CRA will say that the profit of some $300,000 by your figures will be taxed as a capital gain.
They have changed their address to the condo. All mail goes there. Internet is setup as well. They have setup a room there in case they need to spend the night etc. Most days it is vacant but they have minimalistic setup there. They have no other property, so this is the only property which qualifies as principal residence.

CRA is not going to do a nightly audit if they actually live there.
Member
Jun 14, 2018
301 posts
338 upvotes
Obvious answer is #1, but it's clear that you've thought about this for a while and want to go with #2.

Your parents are 69 and 65. Being a landlord probably shouldn't be in their plans. Also, taking out a 150k loan to fund the TFSA is just absurd for people at that age. For such a potentially short-term investment, this is a silly idea.

Let your parents enjoy the money. It's as if you're trying to manage it with an eventual inheritance in mind.
[OP]
Member
Jul 5, 2010
380 posts
161 upvotes
MarinersFanatik wrote: Obvious answer is #1, but it's clear that you've thought about this for a while and want to go with #2.

Your parents are 69 and 65. Being a landlord probably shouldn't be in their plans. Also, taking out a 150k loan to fund the TFSA is just absurd for people at that age. For such a potentially short-term investment, this is a silly idea.

Let your parents enjoy the money. It's as if you're trying to manage it with an eventual inheritance in mind.

Lol. My preference is for #1. Its a cleaner solution. If i just fast forward 1 year, I will have another decision to make on what to do with 400K+. i dont want obe in a situation where for some reason renting the condo seem like a better idea.

My parents are simple. I finally convinced my dad to get a X3 instead of the Camry and blow some of that windfall.

i disagree with you on TFSA, any income received form TFSA has no impact on OAS/GIS. Good dividend paying ETF would enhance their income. Its a great tool.
[OP]
Member
Jul 5, 2010
380 posts
161 upvotes
I think the overwhelming answer is #1. Thank you for the confirmation.
Deal Addict
Jul 23, 2007
4113 posts
2161 upvotes
I'm the same age as your parents and there's no way I'd want to have any kind of debt in retirement. Obviously we're all different.
Deal Fanatic
Feb 9, 2009
9175 posts
6740 upvotes
Personally I think gis should be abolished for anyone netting 400k from the sale of their property and should be for the poorest of the poor.

No offense op.
Sr. Member
Oct 21, 2016
734 posts
493 upvotes
chicu1981 wrote: My Parents (69,65) recently sold their house and moved in with my brother to help him out with the children.

They also took possession of a Condo in Toronto this summer. This was supposed to be their residence for foreseeable future but circumstances changed. The Condo was 650K+ and is now worth 950K+. They have nominally moved in with change in address and some furniture, but place is empty. Longer term they intend to stay with my brother.

They have a steady income from CPP/OAS & GIS of about $2800 combined. All other income is zero. There is 300K mortgage on the Condo.



Option 1
Keep the condo for the year. Eat the cost for a year.
Sell it after a year. Net 600K-650K cash.
Max out TFSA 150K


Option 2
1. Rent the condo $3600/month
2. Take and additional loan of 150K from the equity to fund TFSA.
3. Condo Expenses incl interest + property tax + maintain would be $2000 month.
4. Rent would be $3600 a month. Net would be ~$1500 a month.
5. But this income would reduce the OAS/GIS income by roughly $750.
6. Capital gains tax on 300K increase in the condo would also have to be paid. There is an article about section 45(2) of income tax code to declare the condo as primary residence each year, but that would only shelter the gains for 4 year.




Thoughts?
Not many people would rent for 3600 a month when they can easily afford to buy a place of their own and mortgage at that price point . You will have trouble finding a tenant and maintaining tenancy.
Deal Guru
Jan 27, 2006
14192 posts
7188 upvotes
Vancouver, BC
chicu1981 wrote: They have changed their address to the condo. All mail goes there. Internet is setup as well. They have setup a room there in case they need to spend the night etc. Most days it is vacant but they have minimalistic setup there. They have no other property, so this is the only property which qualifies as principal residence.

CRA is not going to do a nightly audit if they actually live there.
You are right that they won't do nightly audits but they can always ask the neighbours or see how much hydro is being used in comparison to the surrounding properties. Remember that the CRA doesn't have to prove that your parents are living there but your parents have to prove that they are. Lots of people do a similar set up to rent out of the condo and the CRA doesn't seem to have too much of an issue in nailing them.
Deal Addict
Oct 4, 2009
2583 posts
1447 upvotes
Montreal
Are your parents still eligible for GIS since moving in with your brother? Not sure how that works, I know single GIS recipients would often lose eligibility when coupling up but not sure about a couple no longer living by themselves. Do the other household members’ incomes enter the equation?

Paging @Dogger1953
Deal Addict
Mar 3, 2018
1523 posts
1450 upvotes
GTA
The risk involved here for seniors with limited income is ridiculous. They should be in low risk investments like GIC’s and very limited stock market exposure. Preservation of capital is king at their age. They don’t have the time horizon to recover if the real estate market crashes.

They should be enjoying life at their age. Travelling and not worrying about finances and being a landlord. Seems like the kids are trying to increase their inheritance at the expense of the parents.
Last edited by DaveTheDude on Aug 28th, 2019 9:34 pm, edited 1 time in total.

Top