Should Christopher defer QPP as well as OAS and gift real estate while he’s alive?

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Photo by DEV IMAGES/Getty ImagesWe independently select everything we recommend. Buying through us may earn us a commission, which supports our work.With retirement in sight, Christopher,* 64, has built an investment and real estate portfolio valued at nearly $3.5 million. His key financial concerns are focused on estate planning and how best to leave a tax-efficient inheritance for his two adult sons.THIS CONTENT IS RESERVED FOR SUBSCRIBERS ONLYSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman, and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.SUBSCRIBE TO UNLOCK MORE ARTICLESSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.REGISTER / SIGN IN TO UNLOCK MORE ARTICLESCreate an account or sign in to continue with your reading experience.Access articles from across Canada with one account.Share your thoughts and join the conversation in the comments.Enjoy additional articles per month.Get email updates from your favourite authors.THIS ARTICLE IS FREE TO READ REGISTER TO UNLOCK.Create an account or sign in to continue with your reading experience.Access articles from across Canada with one accountShare your thoughts and join the conversation in the commentsEnjoy additional articles per monthGet email updates from your favourite authorsSign In or Create an AccountChristopher’s current annual salary is $187,000 before tax. His target annual income in retirement is $60,000 after tax. When he turns 65, he believes he will be eligible to receive the maximum Quebec Pension Plan (QPP) benefit. “I’ve already informed Old Age Security (OAS) that I wish to defer to age 70; should I do the same for QPP?”This advertisement has not loaded yet, but your article continues below.When he retires, he plans to divide his time between his home in Quebec and his vacation property in Mexico.Get the latest headlines, breaking news and columns.By signing up you consent to receive the above newsletter from Postmedia Network Inc.A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of Top Stories will soon be in your inbox.We encountered an issue signing you up. Please try againChristopher’s investment portfolio includes: $100,000 in a tax-free savings account invested in dividend paying mutual funds (he plans to continue to maximize contributions throughout retirement); approximately $925,000 in an employer-sponsored registered retirement savings plan (RRSP) invested in United States and Canadian equity mutual funds and bond funds; and $950,000 in non-registered Guaranteed Investment Certificates (GICs) at three per cent that he renews annually.“The GICs generate about $27,000 a year, but I end up paying half of it back in income tax. Should I move this money and invest it in some other vehicle that can pay more than three per cent a year? If so, what?” he asked. “I don’t want to be at the mercy of the markets. That’s why I’ve invested in real estate.”Christopher’s primary residence is valued at $500,000, his condo in Mexico is worth approximately $320,000 and he also owns a rental property in Montreal valued at approximately $750,000. The rental property generates $1,750 a month in rental income — enough to cover the cost of the $150,000 mortgage and maintenance. He plans to renew the mortgage next year in order to be able to continue to offset the rental income.This advertisement has not loaded yet, but your article continues below.His initial plan was to leave the rental and vacation properties to his children as part of their inheritance. But he wonders if, in the case of the rental property, he should sell it and give the proceeds to his sons while he is alive.Christopher is concerned about Quebec’s estate regulations, which differ from the rest of Canada, and wants to make informed decisions that ensure his children don’t face a big tax bill.“What is the best way to leave the rental home to my sons?” he asked.What the expert says“Christopher has already accomplished the most difficult part of financial planning: building meaningful wealth. He is well positioned to meet his target retirement income of $60,000 after tax,” said Stephan Desbiens, partner, associate portfolio manager and financial planner with Exponent Investment Management in Ottawa.But Desbiens said Christopher needs to consider whether his target income is adequate to support his desired retirement lifestyle, particularly given his significantly higher current income. “A comprehensive retirement income plan and budget will help him confirm whether this target is realistic,” said Desbiens.This advertisement has not loaded yet.This advertisement has not loaded yet, but your article continues below.“Given Christopher’s strong financial position, preliminary retirement planning suggests he can use his non-registered investments to fund approximately the first six to seven years of retirement. This allows his RRSP assets to continue growing during the early retirement years while avoiding unnecessary taxable withdrawals before they are required. At age 71, when Christopher must convert his RRSP to a RRIF (registered retirement income fund) and begin mandatory withdrawals, his retirement income strategy would shift, with RRIF payments becoming a primary source of cash flow and the need to draw from his non-registered portfolio potentially reduced.”Desbiens said this approach also supports deferring QPP and OAS benefits until age 70, which would provide a larger, guaranteed, indexed income stream later in retirement while allowing his investment assets to remain invested for longer. “It also provides flexibility to manage taxable income over time.”Christopher is right to rethink his focus on GICs — one of the least tax efficient investments to hold outside a registered account, said Desbiens.This advertisement has not loaded yet, but your article continues below.“One way to improve tax efficiency is to consider holding more GICs and fixed-income investments in his RRSP while using his non-registered account for eligible Canadian dividend-paying companies. This type of asset-allocation can reduce tax while maintaining stability.“A portfolio manager can determine which investments are best suited to each account type and develop a tax-efficient withdrawal strategy that evolves throughout retirement. With nearly $1 million in non-registered assets, even modest improvements in tax efficiency can meaningfully increase after-tax retirement income over time.”While Christopher has stated he prefers GICs and real estate because he doesn’t want to be at the mercy of the markets, Desbiens said that every investment carries risk, including inflation risk, interest-rate risk, liquidity risk and concentration risk.“He doesn’t need to eliminate GICs. Instead, he could gradually transition into a diversified portfolio of high-quality dividend-paying companies and other tax-efficient investments that complement his need for reliable cash flow. Eligible Canadian dividends receive preferential tax treatment compared with interest income while also providing the potential for long-term capital appreciation,” said Desbiens.This advertisement has not loaded yet, but your article continues below.Selling the rental property could improve liquidity, reduce concentration risk and provide greater flexibility in his estate planning, he added. “After accounting for taxes and ensuring his own retirement needs are fully funded, Christopher could decide whether gifting some or all of the proceeds to his sons during his lifetime makes sense. This would allow his sons to invest those funds according to their own goals rather than inheriting a property they may not wish to manage.”If Christopher’s preference is to keep his real estate holdings for his children, a permanent life insurance policy could provide a tax-free source of estate liquidity to help cover future taxes and costs, said Desbiens. “Any insurance recommendation should be evaluated with a licensed Quebec insurance adviser to ensure the product, structure and ownership arrangements are appropriate for his specific circumstances.”This advertisement has not loaded yet.This advertisement has not loaded yet, but your article continues below.Because Christopher lives in Quebec and owns property in Mexico, Desbiens recommended he work with a Quebec notary and tax professional familiar with cross-border issues to ensure his wills, powers of attorney and estate structure reflect his objectives.“With thoughtful planning, Christopher can create a sustainable, tax-efficient retirement income stream while preserving flexibility and maximizing the value of the legacy he hopes to leave his sons.”*Names have been changed to protect privacy.Do you have a wealth building question for Family Finance? 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