Lillian, who is age 66, recently retired from her career in education and Emmett, who is 72, ran a successful business before hanging up his hat a few years ago.Tannis Toohey/The Globe and Mail

Over the years, Emmett and Lillian have amassed considerable wealth, thanks mainly to moderate spending and the long-term rise in Toronto-area real estate prices.

Lillian, who is age 66, recently retired from her career in education and is getting an indexed pension of $39,750 a year. Emmett, who is 72, ran a successful business before hanging up his hat a few years ago. They have two children in their mid 30s.

In addition to their family home, they have a country house where they spent most of the past two years. They have two rental properties generating $36,900 a year net as well as substantial investments.

Lillian recently renounced her U.S. citizenship because of the “significant costs” of filing U.S. and Canadian income tax returns, she writes in an e-mail. “I am now free to open a TFSA, invest in mutual funds if desired and own real estate.”

Lillian and Emmett are considering selling the family home in Toronto and buying a smaller place, perhaps a condo. They are also thinking of gifting the country home – and some of their wealth – to their children as an advance inheritance. They plan to travel extensively.

Their questions: How to organize their investments and the eventual sale of real estate to minimize tax; and how and when to gift assets to their children.

We asked Gordon Stockman and his associate Gregor Daly of Efficient Wealth Management Inc. in Mississauga, to look at Lillian and Emmett’s situation. Mr. Stockman is a certified financial planner and a chartered professional accountant. Mr. Daly is a CFP candidate.

What the experts say

For dual citizens such as Lillian, filing U.S. tax returns can be costly, but the detrimental tax and reporting issues should be a “very minimal” constraint on the design of a good investment portfolio, including a tax-free savings account, says Mr. Stockman, who specializes in cross-border tax and investment issues.

Lillian could have opened a TFSA, invested in U.S. securities and declared the income on her U.S. return, the planners say in their report. Though not tax-free, the resultant rate of tax would have been lower than putting those same investments in a regular Canadian non-registered account.

The U.S. tax authorities consider TFSAs, Canadian mutual funds and exchange-traded funds as passive foreign investment companies and so not covered by Canada-U.S. tax treaties. As well, U.S. citizens pay capital gains tax on the sale of a home more than a certain amount, so the couple’s property is all in Emmett’s name.

At this stage in their lives, tax, gift and financial planning are of more concern to Emmett and Lillian than their investment strategy, the planners say. Given their substantial assets, they can easily fund the retirement lifestyle they desire without ever running out of savings or having to draw on the equity in their properties.

The couple’s pensions and government benefits currently add up to about $60,000 a year before tax, while their net rental income adds another $36,900, for a total of $96,900. Against that, their basic lifestyle spending is $69,000 a year, their travel budget $36,000 a year and their tax liability on the above income $14,000, for a total of $119,000. They will have to draw $32,000 gross from their RRSPs/registered retirement income funds, the planners say. At age 70, Lillian will begin receiving government benefits totalling $32,000 (2022 dollars), eliminating the need for support from their investments.

At age 72, when they will have begun making mandatory withdrawals from their RRIFs, the extra cash flow will be more than they need to pay taxes on the withdrawals, make up for the clawback of OAS benefits and settle the tax bill on any non-registered earnings.

“It is at this point that I ask clients, What are you going to do with all this wealth?” Mr. Stockman says. “We want to ensure there is a plan in place for them to enjoy their wealth, either through enhanced lifestyle or by gifting to family or donating to charities.”

In preparing their forecast, the planners assumed a rate of return on a portfolio of 60 per cent stocks and 40 per cent bonds of 4 per cent (inflation, assumed to be 3 per cent, plus one percentage point). Rate of return is after inflation and before fees. Because the couple want to travel internationally, the planners increased their $24,000 a year travel budget by $12,000 a year to $36,000 for 15 years.

Gifts to the two children and charities are both possible and encouraged, the planners say. “We find gifts made with a warm hand and early in the recipient’s adult lives have both the greatest impact and the warmest thanks attached to them,” Mr. Stockman says. “Our hope is that the analysis will give them the confidence to make the gifts sooner rather than later.”

If they wish to give the rural property to the children, Emmett and Lillian could consider either an estate transfer after death or a gift during their lifetime. Regardless, it will be deemed sold at the date of transfer. An advantage to a current transfer is that upon the couple’s death there would be no tax triggered. Instead, it is triggered at time of transfer. This allows future growth to accrue to the children and lowers the tax on the estate. A transfer to the children directly or via a trust will result in the same current taxes payable, the planners say.

If they transfer the property, Lillian and Emmett should retain a “right to use” for their lifetime since they plan to enjoy it for many years to come. They may want to watch for a pullback in the property market and take advantage of lower prices to transfer to the children – “if it seems wise after an in-depth family discussion.”

Of all their investments, the greatest future tax burden lies within the rental properties, the planners say. “Preparing for this taxation will be very important.” Where possible, they should plan to sell no more than one property – not including the home – in a single tax year.

Now that the properties are more valuable, the earnings from the rentals should be regularly examined to make sure that they are still adequate compared with alternatives. For example, the market value of the two rentals is about $2.3-million while the rate of return from the rental income was about 1.4 per cent last year and a projected 1.6 per cent a year in the future.

As for their investments, asset location – which accounts hold what assets – is as important as asset allocation. Lillian and Emmett have TFSAs, separate, non-registered brokerage accounts and RRSPs/RRIFs. “Start with the items with the highest expected return and put them in the TFSAs,” Mr. Stockman says. “We lean toward emerging markets and U.S. small caps for TFSAs.” Non-registered accounts should hold mainly Canadian equities. “Lastly, put all interest-bearing items or real return products in the RRSPs.”

Client situation

The people: Emmett, 72, Lillian, 66, and their two children in their mid 30s

The problem: How to organize holdings to minimize taxes, including capital gains on property. When to gift some of their wealth to their children.

The plan: Consider making gifts to children sooner rather than later. Try not to sell more than one taxable property a year.

The payoff: Time to sit back and enjoy the wealth they have amassed and think about how to give some away.

Monthly net income: $8,075

Assets: Her bank account $8,000; his bank account $25,000; her non-registered portfolio $627,000; his non-registered portfolio $663,000; mortgage investments U.S.$38,000; her TFSA $93,000; his TFSA $122,000; her RRSP $547,000; his RRIF $494,000; residence $2-million; rural property $500,000; two rentals $2.3-million. Total: $7.4-million

Monthly outlays: Property tax (both houses) $900; water, sewer, garbage $300; home insurance $140; electricity $155; heating $245; maintenance $600; garden $100; transportation $475; groceries $600; clothing $150; gifts $275; charity $200; travel budget $3,000; dining, drinks, entertainment $650; personal care $20; pets $100; sports, hobbies $75; subscriptions $10; doctors, dentists, drugstore $50; health and dental insurance $380; communications $325. Total: $8,750

Liabilities: None

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

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