Client profile

Toronto-based couple is considering moving closer to either set of their elderly parents, each of whom live outside Ontario and have health problems. The couple wonders what the best solution is from a tax and estate planning perspective.

The situation

Akio Tomachi and Madeline Lefebvre* met while doing graduate chemistry work at the University of Toronto. Both are only children. That was in 1988, six months after Akio arrived from Kobe, Japan with his family. Madeline had relocated from her native Saint John, N.B., taking a bachelor’s at McGill University in Montreal, before moving to Toronto to start graduate work.

After marrying in 1995, both landed research positions at large pharmaceutical companies and settled in Mississauga, Ont. Each makes $100,000 per year. Akio never became a Canadian citizen, preferring to rely on Permanent Resident status in Ontario. He is still a Japanese citizen.

A planned family never materialized; neither did the expansion of the Streetsville bungalow the couple bought in 1998. The house, valued at $500,000, is paid for and they’ve socked $450,000 into an RRSP. They also have a non-registered mutual funds portfolio currently valued at $132,000.

Madeline’s parents still live in Saint John, and Akio’s moved to Winnipeg. Both sets are in the 80-plus club, and want their children to look after them. Akio and Madeline don’t intend to run home, but the demands are making them concerned that important financial matters may start getting overlooked if they don’t get more involved.

The out-of-town caregiver

Jennifer Poon

Jennifer Poon, Director, Advanced Planning – Wealth, Sun Life Financial, looks at what to consider when clients are “caregivers” from afar.
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The experts

Paul Coleman

Paul Coleman

partner at Grant Thornton in London, Ont.
Regan Exner

Abby Kassar

vice-president, RBC Wealth Management Services in Toronto
Abby Kassar

Regan Exner

regional tax leader at MNP in Regina, Sask.

Akio’s father has become increasingly forgetful; also his mom broke a hip recently and has a caregiver to help her with basic tasks while she recuperates. Madeline’s mother is fine, but her dad’s love of fine food and cigarettes brought diagnoses of lung cancer and adult-onset diabetes two years ago. The cancer is in remission, but the diabetes has led to mobility issues. His wife can take care of him, for now.

Both sets of parents are reasonably well-off. Akio’s parents own two investment properties in Winnipeg; in one, they occupy the main floor and rent out the basement and upper unit. Altogether, they have five sets of tenants. The monthly rental income of approximately $6,000 before taxes is sufficient to cover their expenses. It’s just a matter of how long they’ll be able to continue functioning as landlords. Both properties are valued at $750,000, and their securities portfolio is valued at $650,000.

Madeline’s father retired from his customs brokerage business in the late 1990s. He transferred ownership of the business to his wife in 2002. It’s currently valued at $850,000, but they hope recent modernizations of the port will turn the valuation higher before they pass. The company set up its own pension, which pays the couple $4,800 monthly atop government benefits.

He and his wife own a three-bedroom house near the water in Saint John, along with a family cottage in Lac-des-Loupes, Quebec. The couple’s real estate holdings are worth $1 million. They have no other registered or unregistered investments. They have a $250,000 fully funded permanent life insurance policy.

Akio and Madeline are concerned about how their parents’ assets are being managed. Akio’s mom has a good head for finance, but he’s afraid his father’s mental deterioration will cause him to sell the properties at a discount.

Madeline worries her black-sheep cousin, Charles, may try to influence her parents to send assets his way in their wills. Charles has been stopping by frequently to help around the house and he’s expressed interest in taking over the customs brokerage, even though, to date, he’s displayed no business acumen.

What should they do to help their parents and protect their inheritances?

To move or not?

AK: I’d start by finding out what Akio and Madeline’s objectives are. If they move, they’d have to look for other jobs, and establish their cash flow needs. What would be the minimum salary needed so they can continue to afford their lifestyle? And if they sell their home, would they be able to buy something cheaper, and use the difference for expenses? It would also involve a discussion with their parents, who are looking at leaving their estates to their respective children. But if the parents would like the child to move closer, would they be willing to make a lifetime gift to assist that child?

We’d look at how much the parents are relying on their own assets. Madeline’s parents have the pension, and that’s generating the cash flow they need for their retirement. So it might make sense for them to gift other assets—perhaps shares in the family business if it’s generating income—to Madeline to assist her with the move.

Meanwhile, Akio’s parents have a securities portfolio of $650,000, but they also have properties generating rental income. They may want to gift a lump sum of $650,000, and whether they do that while still alive or on death, the gift would trigger capital gains tax if the investments have appreciated in value. If the overall portfolio has a net loss, they could carry the loss back up to three years to reduce the capital gains in previous years. Or they could carry the loss forward and claim it against any future capital gains that may be triggered.

And their own needs would be a concern. The parents today are finding it sufficient for them to live on their rental income. But in the future, they may need their additional assets to support their increasing healthcare needs. So it’s a complicated discussion.

The business

AK: One of the considerations would be whether to continue holding it in the mom’s name, sell to a third party or pass it on to Madeline. They anticipate the business will increase in value, and that’s why they’re hanging onto it. But selling to a third party would be easier, from an estate planning perspective, since they’d be dealing with liquid assets.

If they pass it on to Madeline, there are tax implications. It’s not clear whether it would qualify for the capital gains exemption. And would it be a gift, or a sale in which she would have to repay them over time?

PC: To still benefit from an increase in value, they could do an estate freeze. There’s the issue of whether the shares qualify for the lifetime capital gains exemption. The husband transferred ownership of the business to his wife in 2002, but let’s assume there was fair market value consideration paid by her at the time of the transfer and the exemption was not used.

You take the participating value that the parents have, exchange it for fixed-value shares, and then have Madeline acquire participating future value. That freezes the value of the parents’ interest, so that the estate tax obligation doesn’t grow. If the shares do qualify, you can freeze the interest so you crystalize that gain, and they’d have a step up in the cost base of the shares.

From an income tax perspective, let’s say they acquired the shares originally for a nominal amount, and those shares grew to a value of $850,000. Then to the extent of their available lifetime capital gains exemption, you can step up that cost base in performing that freeze, so that upon their demise it’ll be just the difference between the freeze value and the stepped-up cost base that will be taxable.

Also, you can still direct any cash flow from the business to the parents. They can use a wasting freeze: as cash flow is generated on a periodic basis, the company can buy back some of the shares that would be issued to mom or dad, and you’d further erode that estate tax obligation.

RE: The ideal thing is to keep that company eligible for the capital gains exemption, which for a small business in 2016 is $824,176. If we do the estate freeze, we can avoid triggering a gain now using a tax-deferred share exchange under section 51 or section 86 of the Income Tax Act. Or, under section 85, we could trigger the gain and crystalize to increase the cost base of those shares now. But when you crystalize or trigger that gain now, even though it’s going to be offset by the capital gains exemption, it’s still included in net income for tax purposes. So you might trigger tax, OAS clawback and have other social program implications, such as the GST/HST credit.

PC: From a non-tax perspective, an estate freeze could also address the black-sheep cousin, Charles. You might be able to pass voting control, for instance, to Madeline. Then, it would be problematic for Charles to insert himself into an ownership position without Madeline at least knowing, and she’d have the legal right to block that from occurring.

The rental properties

PC: I doubt Akio and his wife want to own those properties. So I’d encourage the parents to dispose of these properties when market conditions are right, and invest the proceeds, like Abby suggests. Also, consider the potential tax obligations that will arise. Unfortunately, the lifetime capital gains exemption doesn’t apply to residential rental properties, so there aren’t any means by which they can mitigate the tax liability.

RE: If the children were interested in maintaining these rental properties for sentimental reasons, for instance, there is enough liquidity within the estate to cover the future tax liability. They have a $650,000 non-registered portfolio and the properties are worth $750,000, with the gain on the part of the property where the Tomachis live being sheltered by the principal residence exemption (e.g., if they occupy half the house, half the gain will be sheltered from capital gains tax).

AK: But it may not be feasible for the parents to continue to be landlords. So the question becomes whether to hire someone to do that or sell.

Since they’re living in one of the properties, if they sell they’d need to find a new home. And that opens up a discussion on how Akio and Madeline should look at long-term homecare for their parents. It sounds likely that the parents should move into assisted living, so selling the properties may not impact them personally.

The other implication for selling is triggering taxes on any capital gains, but they’d have the proceeds from the sale to fund the tax liability. If they didn’t sell, the taxes would be deferred until the second spouse’s death (assuming they’re leaving the property to each other). The taxes would be triggered at that point even if there is no actual sale. At that time, the estate would have to pay for the tax liability.

Also, they’re currently grossing $6,000 a month in rental income. If they sell, they have to look at strategies to generate that income.

One option is an annuity, which would typically provide a higher after-tax return than similar fixed-income products. They could purchase an annuity with the sale proceeds. But the purchase of the annuity would result in the loss of the principal amount, unless they acquired an insured annuity, which combines an insurance contract to pay the estate the amount of the principal and an annuity contract.

Given the age of Akio’s parents, they may not be insurable, so they may consider the use of a principal guarantee or a fixed guarantee. These guarantees can be structured to allow for a payment of either the principal remaining in the contract, or the annuity payments remaining in the guarantee period.

The cost of these guarantees would reduce the income provided by the annuity, so Akio’s parents need to consider their options carefully if they wish to maximize their annual income.

Joint registration and trusts

PC: Probate, or estate administration tax as it’s referred to in Ontario, varies from province to province. New Brunswick and Manitoba have among the lowest probate costs in Canada (see “Probate fees,” below). [I’ve seen] people go to extraordinary lengths to avoid probate, but the fees aren’t significant.

Still, one means of mitigating it is to register assets jointly. For instance, the parents could add their children onto an account in joint title. On the demise of the parent, the account entitlement flows to the child by right of survivorship. That asset would not be subject to administration under their will and, therefore, not subject to probate. This process also doesn’t have tax implications because you’ve granted a legal right, not a beneficial right, over those funds.

When you’re dealing with real estate, the process for joint registration is a little bit more involved. But you can typically do a title transfer without incurring land transfer tax. For instance, in Ontario, you’re permitted to make transfers for something called “natural love and affection” under the Land Transfer Act, which is nominal consideration.

Also, they could consider alter ego and joint partner trusts. They’re in their 80s, so they meet the age test, which is 65. Let’s say they transfer the properties in Winnipeg into a joint partner trust. There is no impact from an income tax perspective—you’re permitted to transfer those properties for their tax cost.

There are requirements around the use of income and capital during the lifetime of the parents, but it would mirror their present circumstances, which are that mom and dad have a right or an interest in all income from the rental property. Further, the problem with wills is that they’re subject to change. So if Madeline’s mom and dad fall under the influence of this black-sheep cousin, they could change their wills. But if they use a joint partner trust for their business, for instance, there’d be certainty that, [while alive], mom and dad would have exclusive right to the income generated, and a right of encroachment over capital. Upon the demise of the second parent, the property would automatically flow to Madeline.

Should Akio become a citizen?

Permanent residents in Canada have the same tax status as citizens. So while Akio might consider becoming a Canadian citizen for other reasons, his finances need not be one.

“As a Canadian permanent resident, he would have the same obligations and qualify for the same benefits as a Canadian citizen from a tax, estate and retirement perspective,” explains Abby Kassar, vice-president, RBC Wealth Management Services. “However, if he wanted to obtain his Canadian citizenship, it would allow him to vote during elections or get a Canadian passport. And it would eliminate the need to renew his PR card.”

Estate planning

AK: Both sets of parents must obtain updated wills and PoAs—one for property, one for healthcare. Typically, a PoA would not be valid once the donor becomes incapable, unless the PoA is enduring or continuing. Akio’s father is becoming forgetful, so they should set up an enduring PoA, assuming that he’s mentally competent at this time.

It would be difficult for Akio and Madeline to act as PoA for property if they continue to live in different provinces, given the responsibilities and varying rules. So, they could name a trust company. But the children could [have] PoA for healthcare, which would be less burdensome and includes personal decisions they may not want a third party to manage.

RE: Also, while Canada doesn’t have an inheritance tax, we do have deemed disposition of all assets at death. So any couple should consider leaving assets to the surviving spouse to get access to the automatic spousal rollover. That way, the tax liability won’t be triggered until the death of the surviving spouse, at which time they go to the beneficiary.

The parents should have addressed succession for the business and the overall estate plan for other assets years ago. But better late than never.

Probate fees

Province Estate size Fee
$5,000 or less$25
$5,001 up to $10,000$50
$10,001 up to $15,000$75
$15,001 up to $20,000$100
more than $20,000$5 per $1,000 or portion (0.5%)
$10,000 or less$70
more than $10,000: › on the first $10,000 › on the amount over $10,000$70 $7 per $1,000 or portion (0.7%)
$1,000 or lessNo tax
more than $1,000: › on the first $50,000 › on the amount over $50,000
$5 per $1,000 or portion (0.5%)

$15 per $1,000 or portion (1.5%)

N/ACourt filing charges for will verification: $106 for a natural person $119 for a legal person

Source: Paul Coleman, partner at Grant Thornton

*These are hypothetical clients. Any resemblance to real persons, living or dead, is purely coincidental.


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The out-of-town caregiver

Jennifer Poon, Director, Advanced Planning – Wealth, Sun Life Financial

Over 8 million Canadians provide care to a chronically ill or disabled loved one or friend. But what happens when clients aren’t able to provide care, they don’t live near their parents, have careers they’re focused on, or simply don’t want to? While 28% of Canadians provide care to family members or friends with long-term health conditions, it can’t be an expectation — and we need to plan for it.

When I look at this case, there are obvious planning needs for Akio and Madeline’s out-of-town parents, including:

  • Their immediate long-term care priorities.
  • Setting up powers of attorney.
  • Considerations for their estate plans.

DISCUSSING LONG-TERM CARE

Both Akio and Madeline live out-of-province and need to have a conversation with their respective parents about health conditions and getting long-term care in place. A conversation about long-term care can often go beyond financial considerations. Other considerations include:

  • whether their parents would like to stay in their home for as long as possible.
  • the types of living arrangements they would like if one spouse requires care but the other does not.
  • moving to a facility that’s closer to their children.
  • who could assist with emergency care, transportation, picking up prescriptions, booking medical appointments, etc.

POWER OF ATTORNEY

Once Akio and Madeline have conversations with their parents about long-term care, both sets of parents should review their powers of attorney. Assuming Akio and Madeline would have power of attorney for their parents, are they willing to travel to manage their parents’ affairs? If not, another option could be to set up joint attorneys with another relative and/or trusted friend who lives nearby. They should also clarify what is allowed under the power of attorney and discuss what they can do from outside the province. For example:

  • Can the attorney create gifts with the donor’s assets?
  • Can the attorney buy and sell the real estate as they see fit? (Are there properties the parents want to keep in the family?)
  • Can the attorney sell their principal residence?
  • In the province of New Brunswick, a statutory will is allowed. Can the attorney draft or change the donor’s will?

In addition to the power of attorney, their parents should consider setting up a medical directive. Since Akio and Madeline live out of province, and aren’t physically close to their parents, a medical directive will help to clarify their parents’ wishes if they became incapacitated. This would help determine whether their parents would:

  • want to be resuscitated,
  • have preferences for their course of treatment, and
  • at what point they want to refuse treatment.

ESTATE CONSIDERATIONS

Finally, once all of this is in place, the next step would be to review the estate. In this case, both sets of parents have considerable assets and they’ll want their wills to be up to date.

A discussion regarding inter vivos trusts could be worthwhile when clients fear that others are trying to get access to an estate. To learn more about inter vivos trusts, read Inter vivos trust planning: The impact on estate plans.

This is especially important with Akio’s parents. Since they are located in Manitoba, the case would go through the Manitoba probate courts. And since Akio is a resident of Ontario, he may have issues acting as the administrator on the estate if there isn’t a will in place. In the province of Manitoba, there are some specific rules around the administration of wills and probate based on The Court of Queen’s Bench Surrogate Practice Act.

  • Administration isn’t granted to people who don’t live in the province:
  • “Administration shall not be granted to a person who is not habitually resident within Manitoba.”
  • Security may be required to grant probate to people who don’t live in Canada:
  • “Probate shall not be granted to a person not habitually resident within Canada unless he gives like security as is required from an administrator, but the security may, in the discretion of the court, under special circumstances, be dispensed with or reduced in amount.”

Lastly, since both sets of parents have substantial investments and real estate, they may want to discuss adding Akio and Madeline as joint owners with rights of survivorship. If they do so, they would need to provide notice that the property is intended to go to them upon their death. Here are the pros and cons of this approach:

PROSCONS
  • As legal ownership is passed to the joint owner, assets are not included in the part of the estate that requires probate.
  • There’s immediate access to the assets upon the parent’s death.
  • If you believe the property will increase in value, this can effectively minimize potential capital gains on death.
  • After joint ownership with rights of survivorship is added, the joint owner shares the creditor and family law risks.
  • There could be taxable capital gains from adding new owners.

NEXT STEPS

Read: Advising clients about health insurance — life stage determines the “when” and the “what”

Read: Three strategies for managing clients’ future health and personal care costs

Read: 42% of Canadians have had financial hardship from a health event* — build a safety net for clients

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