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Linda's lifestyle spending will fall to about $62,000 after she moves to the condo.Tijana Martin/The Globe and Mail

Linda is 74 and widowed. She recently sold the family home in Toronto for $1.5-million and plans to give most of the sale proceeds to her three adult children. With the closing imminent, Linda is moving to a condo she’d been renting out. She plans to renovate it and make it her new home.

Linda estimates she can cover her basic living expenses on the income she gets from her work pension, partly indexed to inflation, her late husband’s pension, not indexed, government benefits and RRIF withdrawals. She can draw on her investments to make up any shortfall.

“I would like to give my children a large portion of their inheritance now when their expenses are greatest and they are raising their own families,” Linda writes in an e-mail. She has 10 grandchildren. She’s thinking of giving each of her offspring $300,000. “Do you agree this is prudent?”

Linda reasons that if she needs to move to assisted living at some point, she would sell the condo to pay for the costs.

Linda’s income adds up to $75,036 a year pretax, or about $60,000 a year after tax. Her lifestyle spending will fall to about $62,000 after she moves to the condo.

We asked Cherise Berman, principal of Bespoke Financial Consulting Inc. of Toronto, to look at Linda’s situation. Bespoke is a fee-only and advice-only financial planning company, Ms. Berman holds the certified financial planner (CFP), the advanced registered financial planner (RFP) and the chartered professional accountant (CPA) designations.

What the Expert Says

Linda plans to use up to $75,000 of the house sale proceeds to renovate her condo and pay off the $206,400 mortgage, Ms. Berman says. Selling costs will take about $17,000, leaving Linda with about $1.2-million.

Paying off the mortgage is a good idea because mortgage rates have risen substantially, the planner says. As well, the mortgage interest will no longer be deductible once Linda is living in the condo.

To avoid any early repayment penalties, Linda should wait until January, 2024, when the mortgage comes due. In the meantime, she could invest that money in a high-interest savings account or short-term guaranteed investment certificate – no more than 120 days – to earn some interest from September to December, Ms. Berman says.

Linda will need to split the $206,400 among financial institutions to have adequate CDIC insurance coverage. CDIC insures up to $100,000 of combined eligible deposits held in saving accounts, term deposits and GICs per member financial institutions.

Linda’s net income from her two pensions and government benefits will cover all of her fixed expenses and 78 per cent of total expenses – including discretionary. She will have to draw on some of her other assets to cover the remainder.

Linda’s monthly income breaks down as follows: survivor’s pension $1,660; her own hospital workers’ pension $1,590; RRIF income $1,200; and combined CPP and OAS $1,830. After subtracting income tax of $1,250, she is left with about $5,030.

Most of her income streams will be increased annually for inflation. This should provide Linda with comfort that she will be able to fully fund her fixed expenses throughout retirement, the planner says.

“The biggest risk for Linda is giving away too much too soon,” Ms. Berman says. Linda’s health could change in the future, requiring in-home care or a move to assisted living, and the costs could quickly add up. “For example, the cost for Linda’s first choice of assisted-living residence starts at $5,400 per month and increases depending on the level of care and services that are needed.”

One way to manage the risk of possibly needing more of her assets in the future would be to transfer money to her children in stages, providing some funds now with more to come later, the planner says.

Alternatively, Linda could consider making interest-free loans to her children instead of outright gifts, “especially if she decides to give the larger sums now,” Ms. Berman says. As long as the loans are for personal use, such as paying down debt, purchasing a home, or paying education costs for the grandchildren, and not for income-splitting purposes, there will be no tax implications for Linda or the children, the planner says.

Loans would provide her children with money today for their own use, with the understanding that if Linda needed money for health care costs in the future, she could ask for all or part of the loans to be repaid.

“Although it is not Linda’s intention to have the loans repaid, it provides her with a safeguard if needed,” the planner says. Any loans should be properly documented with an agreement prepared by a lawyer. There are other pros and cons to making loans or outright gifts to children and they should also be reviewed with the lawyer.

Linda should have an emergency fund of at least six months of expenses, or $31,000, liquid in a high-interest savings account (HISA), Ms. Berman says. “As HISA interest rates vary, currently from 1 per cent to more than 4 per cent, it is worth shopping around.”

In January, 2024, Linda will be able to contribute $61,500 to her tax-free savings account. She must wait until then to recontribute the $55,000 she withdrew in 2023 for the condo renovations, Ms. Berman says. Plus, she will have new annual contribution room of $6,500 for 2024. As long as Linda has non-registered investments, she should continue to contribute the annual maximum each year to her TFSA.

“This will help to minimize income taxes and the Old Age Security clawback and make her estate more tax effective,” the planner says. With each annual contribution to her TFSA, she will be shifting non-registered assets earning taxable investment income to assets earning tax-free income. As well, the TFSA is not taxable at death whereas there would be taxable capital gains on any securities that have appreciated in value in a non-registered account.

The balance of the sale proceeds is to be invested in Linda’s non-registered account. Her current investments, RRSPs and TFSA are invested 95 per cent in equities. “Linda should review with her investment adviser the high equity weighting to ensure it is aligned with her risk tolerance,” Ms. Berman says. Because Linda will have additional funds to add to her investments, this is an opportune time to adjust the asset mix to her overall risk profile.

Linda’s condo was purchased in 2019 for $325,000 and until now has been a rental property. “Now that Linda is moving into the property, there is a change in use and consequently a deemed disposition for tax purposes,” the planner says.

Linda will have a taxable capital gain of $87,500. As long as no capital cost allowance has been claimed in any year, Linda will be able to elect to defer the capital gain until when the property is actually sold, Ms. Berman says. “Linda should keep in mind that there will be some tax to pay when the condo is eventually sold.”

Client Situation

The People: Linda, 74, and her children, 48, 50 and 52.

The Problem: Can she afford to give each of her children $300,000 from the house sale proceeds without jeopardizing her own retirement spending?

The Plan: Consider making the gifts gradually. Alternatively, consider making loans that could be repaid in a pinch if Linda needed more money for health care or assisted living.

The Payoff: A fine balance between generosity and prudence.

Monthly net income: $5,030.

Assets: Residence $1,500,000; rental condo $500,000; non-registered stocks $31,519; RRIF $219,100; TFSA $93,176. Total: $2.3-million.

Monthly outlays forecast for condo: condo fees $640; Property tax $90; water, sewer, garbage $0 (included in condo fees); home insurance $85; heat, hydro $0 (included in condo fees); maintenance $100, security $0; garden $0; transportation $545; groceries $400; clothing, dry cleaning $75; vacation, travel $500; gifts, charity $600; pet $55; dining, drinks, entertainment $370; personal care $110; club membership $50; sports, hobbies $780; subscriptions $35; health care $535; phones, TV, internet $220.

Total: $5,190.

Liabilities: Mortgage on condo of $206,400 at fixed rate of 3.79 per cent.

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Some details may be changed to protect the privacy of the persons profiled.

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