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August 24, 2018 | D&T

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

So many questions, so little time. Hardly enough hours left in the week to bash Trump, realtors, [email protected], moisters, wrinklies, T2, and now Mad Max or Ford Nation.

Speaking of which… blog dog Paul was driving to his inlaws’ place near Foleyet (where the hell is that?) when he came across this house. Itsa redneck billboard, bubba. We may be in more trouble than previously suspected…


Well, speaking of creative house usage, here’s Bill. “Hi Garth, a very sincere suck up before I start,” he wisely states.” I been reading your blog for the past 6 – 8 years daily (even the comments section).  You have done a great public service educating the public on financial matters,

“I ‘m planning to buy a new house for 1.1M.  I want to move into it and keep my current house as an investment property, worth $800,000. What I would like to do is leave 20% equity in my current house (160K) and take out a 80% mortgage (640K) and apply that to the purchase of my new primary residence.  CRA does not allow me to write off the interest of the mortgage against any rental income I will receive from renting out my old house so I was wondering if I could sell my old house to a third party  then obtain a mortgage to buy back my old house for 800K (20% down, 80% financed).  Technically, I should then be able to expense the interest from any rental income I get from renting out the old house, and use this mortgage money for the new house.

“I’m not sure if I should be contacting a real estate lawyer, tax lawyer or even an accountant.  I would really like your input to see if this is a valid tax planning strategy. “

When you sell the house, Bill, it’s sold. Period. Gone. Not yours, so long as the buyer is unrelated. Declare it on your tax return, claim the PRE and pocket any gain tax-free.  Now you can buy it back, of course, in a separate transaction at market value and finance the deal however you want.

But, wait. Mortgage payments ($3.300) plus property tax and  insurance (about $700) will mean rent of at least $4,000 a month to break even. The odds of that on a house worth eight bills are low. And the CRA won’t let you write off losses forever with no expectation of profit. But more fundamentally, this plan is a fail. The cost of money borrowed against real estate bought for investment purposes, then used to finance a non-income-producing asset (your house) ain’t deductible.

If you put the $640,000 into an investment portfolio, the interest could be fully deducted.. Better still, sell the old house and buy the new one. Or keep your pants on and stay where you are.  Haven’t you learned anything here in eight years?

Now here’s Matt, with a deathly serious question…

“I had drinks with a good friend of mine last night – we’re in our 50’s – and found out that her parents aren’t doing well.  Let’s just say both parents will be facing the final curtain in the near future.  We’re talking a few months…maybe.  My friend and I were trying to figure out how to handle the inevitable, from a financial point of view.

I know from personal experience that the death of a parent is a costly event.  Not just the funeral.  But the probate process.  The executor, the estate attorney, the government, all take a percentage of the estate’s net assets.  Whatever is leftover (after all the bills are paid) goes to the beneficiaries.

My question is this.  Her parents worked hard all their lives, and were quite frugal.  What can my friend do to minimize all these estate settlement costs?  We discussed the pros and cons of: (i) my friend getting power of attorney over property, (ii) my friend getting added to her parents’ financial accounts.  I suspect that (i) is the safer option for all concerned (parents and daughter), but (ii) is the best way to minimize executor / attorney / probate fees.  From what I know, the family is close, and they trust each other.  But I also know there are no guarantees in life; money can bring out the worst in people.  Well, what do you think; option (i) or (ii)?  Any suggestions would be appreciated. “

For something everybody shares (croaking), it’s shocking how little we prepare, or know. Did you hear that Aretha Franklin kicked without a will? Did she think she was immortal? Incredible.

Anyway, Matt, POAs and estate planning are two different animals. Everyone should grant power of attorney to someone else (for reasons I recently explained) in order to ensure good decisions are made when you can no longer reach them yourself. The POA holder has a fiduciary duty to act in the best interests of the grantor – for health care or income, for example – but that ends with death. Being a POA does not mean you can sell your deceased parent’s property and keep the money.

A  person’s will dictates how assets will be dealt with and what flows to beneficiaries. It is administered by an executor (who should not be your child or BIL or best friend, unless they’re trained, competent and have oodles of time), not a POA. RRSPs, RRIFs and TFSAs can go tax-free to a spouse (or dependent child) and principal residences can be passed along tax-free to anyone. Non-registered investments are deemed to have been sold upon death, and therefore taxable. But if you hold a joint account (for assets or cash) with someone who passes, it all becomes your property instantly. (This is why every married couple with money should have a joint non-registered investment account.)

Tell your friend her parents need wills with sensible executors (besides each other), POAs for property and continuing care and – if they have invested wealth – to ensure beneficiaries are named for RRSPs and TFSAs. Also consider a joint account. While at it, they should prepay their funeral, make their final wishes known (“bury me with my Harley,” etc.) and take some responsibility for the inevitable. Dying without a plan is irresponsible. Trust me, you will live to regret it.

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August 24th, 2018

Posted In: The Greater Fool

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