“A situation just arose with my 82-year-old mother and I confess that I don’t know what the best solution is,” says Lucie*.
“A few weeks ago, she had an appointment at her bank for maturing investments, and the financial advisor called me to tell me that she didn’t have much money left,” Lucie explains.
His mother, let’s call her Cécile*, was receiving payments from a Registered Retirement Income Fund (RRIF), which is practically dry and which constituted a significant 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,” says 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 a year, for a monthly rent of $1600. “My sister and I are going to pay the difference, so as not to sell out her money too quickly,” says Lucie. But you 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.
“Should my sister and I buy a three-way condo with our mom?” What impact on our finances? »
The two sisters would be willing to provide $25,000 each for the down payment, plus an equivalent amount contributed 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?” »
“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,” points out Lucie, who would then contribute to her mother’s expenses.
Johanne alone would assume the cost of the work, summarily estimated between $150,000 and $200,000, with a possible contribution of $15,000 by Cécile. But could its budget be in jeopardy?
“Could an idea be that she goes to residence, but we pay the portion that she is not able to pay? ”, evokes Lucie again.
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. »
“Buying a condo and building an extension to the house are expensive and risky options,” notes 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 realize either of these options. Borrowing costs have increased enormously in the last year and the profitability of such an investment is far from certain. »
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.
“We still 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 counting 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’s a self-contained apartment, the property could qualify as a bi-generational residence, says 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.
However, this extension opens another window. The expansion work could be eligible for the federal tax credit for the renovation of multigenerational housing. “It’s a 15% tax credit on qualifying expenses up to a maximum of $50,000 of 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 property taxes and condo fees, in the case of a condo.
It would be simpler 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.
“While 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),” says our advisor.
According to his calculations, the reduction in his lifetime income opens the door to an 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, this 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 large 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 an amount 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.
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