Lifestyle |  Rescue RRSP and TFSA by remortgaging a residential quad

Lifestyle | Rescue RRSP and TFSA by remortgaging a residential quad

When reduced to net disposable income (after taxes and social security contributions), Marthe* and Noël*’s family budget leaves them with little ability to invest in long-term retirement savings.


The situation

Marthe, 43, and Noël, 45, are the parents of three children aged 11, 12 and 16.

His family lifestyle, active but on a reasonable budget, is relatively well supported by a gross household income of around $135,000 per year.

This household income is made up primarily of income from work as self-employed, up to $115,000 per year, as well as $20,000 in net income from a four-unit building.

As for the family’s balance sheet, it already appears to be well endowed with assets, with a total value of about $1.6 million and nearly $1 million in net asset value after subtracting liabilities of $610,000 in mortgage loans on the home. family and apartment building.

The problem, however, is that most of the value of this asset is concentrated in two residential properties: the family home valued at $600,000 (minus $160,000 of the mortgage balance) and the four-unit apartment building valued at $860,000 (minus $450,000 of the mortgage balance).

By comparison, Marthe and Noël’s financial assets in registered savings accounts, such as the Registered Retirement Savings Plan (RRSP) or the Tax-Free Savings Account (TFSA), remain very meager.

Although they do not have a pension plan as self-employed, their RRSP assets total only $59,000, but with available contribution amounts totaling $107,000.

As for their TFSA accounts, they are still at zero with available contribution amounts of up to $88,000 for each of the two spouses.

In return, the Registered Education Savings Plans (RESPs) of each of the three children are well stocked. They add up to about $70,000 in assets thanks to the annual generosity of their grandparents.

The numbers

Martha, 43 years old

Income : $120,000

  • self-employment in health: $110,000
  • net income from rental property: $10,000

Financial assets :

  • in a Registered Retirement Savings Plan (RRSP): $45,000
  • in a tax-free savings account (TFSA): $0
  • in checking savings account: $10,000

Christmas, 45 years

Income : $15,000

  • seasonal employment: $5,000
  • net income from rental property: $10,000

Financial assets :

  • in a Registered Retirement Savings Plan (RRSP): $14,000
  • in a tax-free savings account (TFSA): $0

Family economic assets:

  • in Registered Educational Savings Plans (RESP): $70,000 between three children ages 11, 15 and 16

Commonly owned non-financial assets:

  • family residence: $600,000
  • in a building with four rental units: $860,000

Joint liabilities:

  • home mortgage loan: $160,000
  • mortgage on rental property: $450,000

The questions

Marthe and Noël are concerned about the imbalance on their balance sheet between their substantial real estate assets and their meager assets in long-term investment savings, such as for retirement in twenty years.

Marthe and Noël consider two scenarios that subjected Press for consulting analysis.

First, Marthe explains: “Would it be financially and fiscally appropriate to use a line of credit that hasn’t yet been tapped up to $300,000? [et à taux d’intérêt variable approchant 6 %] to rescue our still very depleted RRSP and TFSA savings accounts? »

If yes, how to do it? At what annualized rate? And according to what listing priority between the RRSP and the TFSA?

If not, what solution should be explored?

Second, Marthe and Noël plan to resell the family home to move into two of the four units in their rental building.

Thus, Martha describes Press “We could use the net proceeds from the resale of the house [après les frais de transaction et le remboursement du solde hypothécaire] replenish a good part of the contributions available in RRSP and TFSA. »

“We could, Marthe adds, finance the renovation work of two units in one in our rental building, which would later become a triplex with our family as owners residing in the large new main house. »

Marthe and Noël’s questions were forwarded for analysis and advice to Julie Tremblay, a financial planner and investment savings products advisor at IG Wealth Management in Quebec City.


PHOTO ERICK LABBÉ, LE SOLEIL ARCHIVES

Julie Tremblay, financial planner and investment savings product advisor at IG Wealth Management in Quebec City

The advices

As for Marthe and Noël’s concern about the redemption of their RRSP and TFSA accounts, Julie Tremblay suggests that they resolve it using the technique known as “setting aside money” in personal finance.

“This technique aims to use the income from your rental property to increase your personal savings, starting with Marthe’s RRSP, to optimize tax credits during your years of higher taxable income,” explains Ms.to me Tremblay.

“As a counterbalance, this ‘cash damming’ technique implies that Marthe and Noël would spend construction expenses on their as-yet-unused line of credit, the interest costs of which would then be deductible from their building gross receipts. »

According to M.to me Tremblay, the advantage of this technique for Marthe and Noël is to be able to speed up the replenishment of their unused RRSP contributions while optimizing the taxation of their earned income and rental property income.

By bolstering their tax-advantaged retirement savings while completing the repayment of the mortgage loan on the family residence, Marthe and Noël could convert the debt on the non-tax-advantaged home into debt in a few years. rental property that is advantageous in tax terms thanks to the deduction of interest on the gross income of the building.

Julie Tremblay, financial planner and investment savings product advisor at IG Wealth Management in Quebec City

“As long as Marthe and Noël use their line of credit only for construction expenses, the after-tax net interest cost of this debt will be less than the contractual interest rate of around 6%,” summarizes Julie Tremblay.

Once Marthe’s RRSP has been fully contributed and the mortgage on the family home is paid off, it may be relevant from a fiscal and financial perspective for Martha to consider contributing to her husband Noël’s RRSP.

Another solution, suggests M.to me Tremblay, may consider paying rent at Christmas for their maintenance and management work on the rental property.

“By increasing his taxable Christmas income in this way, it might be more tax efficient for him to contribute more to his RRSP. This is not currently the case due to his very low level of taxable income. »

As for Marthe and Noël’s TFSAs, which are still empty with nearly $160,000 in total contributions available, Julie Tremblay doesn’t see any priority there “as long as the couple focus their savings efforts on RRSPs, which are advantageous for reducing income.” couple’s taxable income”.

In the meantime, notify Mr.to me Tremblay, Marthe and Noël will have an interest in keeping their family residence, “because it is the equivalent of a ‘super TFSA’, since the amount of the profit on its eventual resale will be exempt from taxes.”

Hence his final suggestion to Marthe and Noël to reconsider their plan to resell the family home in favor of moving to an expanded and renovated apartment in their rental building.

“There are several financial and fiscal elements to consider carefully before carrying out a project of this type, without neglecting the risk of subsequent impacts on the style and quality of family life, warns Julie Tremblay.

“Among other things, going from investor owner to resident owner of a rental property involves several changes in the taxation of rent and capital gains on the building. There is also the risk of legal complications with the eviction of two of the four tenants to recover their housing for the personal use of the owners and new residents. »

* Although the case featured in this section is real, the names used are fictitious.

Are you planning a project that requires smart use of your money? Do you have financial problems?


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