Alexis *, 55, single father, runs a small business. Like many entrepreneurs, the pandemic has led to a reduction in its turnover. Seeing his income and his bank account melt away, he must find different strategies to secure his future because he does not have a pension plan.
Posted on January 24, 2021 at 6:00 a.m.
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The situation
“The house I bought in 2009, in Montreal, is built on a large lot, much too big for my needs,” he explains over the phone. I decided to sell half of it to have cash and prepare for my retirement. ”
Alexis would like to know how to maximize the amount of the sale of his land. Should he invest in the stock market or in real estate? In the past, he was the co-owner of a quintuplex with his ex-wife. During the divorce, the ex-wife kept the plex and he kept the house.
“If I invest in real estate, I’m going to have to pay a lot of capital gain taxes once the buildings are sold. Would it then be more profitable to invest on the Stock Exchange in a TFSA? Even if the markets are moving a lot now? And once the maximum TFSA amount is reached, what should I do with the rest? ”
The father is also considering another strategy to pay less taxes. As he pays his children’s school fees, their transit pass, and their clothes, Alexis wonders if he could pay them a salary.
“My 17-year-old daughter is in CEGEP and my 20-year-old son in university. Is it possible and is it a good strategy for my company to pay them a salary that would be tax deductible from the company? My daughter is dependent on me for tax purposes and my son is dependent on my ex-wife. ”
Numbers
Salary: $ 51,000
REER: $ 90 000
TARGETS: $ 20,000
Pension plan: none
Mortgage: $ 95,000
House value / municipal assessment: $ 876,000
Sale of part of his land: $ 300,000
Company turnover: $ 100,000
The TFSA
Mathieu Huot, tax specialist and planner at IG Private Wealth Management, analyzed Alexis’ situation. Right away, he suggests that she take advantage of the unused space in her TFSA. The total amount in 2021 is $ 75,500. Alexis could therefore contribute $ 55,500.
“The yields are tax-sheltered, which we don’t have in real estate and in non-registered investments,” recalls Mathieu Huot. TFSA withdrawals are not taxable. It is therefore an interesting vehicle for retirement when you want to avoid having too high a tax rate. ”
Real estate or the stock market?
What to do with the rest of the sum? The planner offers Alexis to list the pros and cons of each option.
PHOTO PROVIDED BY MATHIEU HUOT
Mathieu Huot, tax specialist and planner at IG Private Wealth Management
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First of all, before embarking on real estate, Mathieu Huot specifies that it is necessary to acquire certain knowledge. “The reader has it because he had a plex with his ex-wife in the past,” he says. Otherwise, there are organizations that provide good training. ”
Then, he warns Alexis against the bidding, which could lead him to pay for a building more expensive than its value, also reminds him of the importance of surrounding himself with specialists (real estate broker, mortgage broker, accountant, financial planner) , without forgetting to take into account the investment of time to manage the tenants and the small frequent jobs.
“Will the capital gains tax percentage change? Will interest rates increase and result in less rent surplus once expenses have been paid? We don’t know the future, ”explains Mathieu Huot.
“On the Stock Exchange side, there is a difference between buying shares of a single company and buying a portfolio of shares in which a hundred companies in different sectors and countries are found,” explains the planner. The risk is nevertheless well diversified. ”
Although the time investment is minimal compared to real estate, the planner concedes that the markets are more volatile than usual. But waiting for the right time rarely works, he says. You have to think long term.
If Alexis opted for the stock market, he could enter the market gradually rather than putting in $ 250,000 all at once. “We could put in $ 50,000 for the next five months, then another amount thereafter. When there is a lot of volatility because of the news, you can minimize the risk by investing over a few months. ”
Pay children a salary
Could Alexis take advantage of certain tax advantages by paying a salary to his children through his business, considering that the tax rate for his children, who are still studying, is lower?
The idea of income splitting is good, argues Mathieu Huot, but let’s see if it is feasible.
It has always been permissible to pay a salary to your adult or minor children, but the most important rule to remember is the reasonableness and justification of the salary.
“You cannot pay a salary just to pay a salary without the child doing work in the company,” says Mathieu Huot. You always have to say to yourself: if there was a tax audit, would I be able to justify the salary paid to the child according to the tasks he performed in the company? The hourly rate must be the same as I would have paid to another employee who performs similar tasks. ”
Another thing to keep in mind: a child cannot work full time for the family business while he is also full time at school.
Like other employees, the child must absolutely obtain a T4 and will have to file an income tax return even if he does not have to pay taxes.
As for Alexis, since he does not have a de facto spouse, he will be able to continue to make his daughter dependent in his return, but will not be able to obtain the total amount of this credit, which is $ 12,000. If the child earns $ 5,000, for example, that amount will be subtracted from the $ 12,000.
A prescribed rate loan
As Alexis was looking for a way to do income splitting, Mathieu Huot thought about the prescribed rate loan.
The goal is to split your investment or capital gains income with your children, because their marginal tax rate is lower than yours. This strategy is carried out through a trust and ensuring that the situation is clarified with a notary.
“He could take his $ 300,000 and make a loan on behalf of the children. The return on the loan would then be in the name of the children, argues the tax expert. This is only the first 1% [qui représente le taux d’intérêt prescrit actuel de 1 % ] which would be taxed in the name of the father. If the $ 300,000 generates 5% return, 1% [3000 $] will be taxable in the name of the gentleman and the remaining 4% [12 000 $] will be taxed on behalf of the children. ”
Before opting for this strategy, it is essential to calculate the amount of taxes saved each year by comparing it to the sum to be paid for the creation of the trust.
“With the notary fees, this has to be a strategy that spans a few years. If it’s for seven years, while the child is in college, it’s probably a good investment. ”
* Although the case highlighted in this section is real, the first name used is fictitious.
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