Retirement and Estate Planning
Bob (age 33) and Cindy (age 32) have been married for 12 years and are getting divorced. They have two children, Nicole (age 9) and Chad (age 5).
Bob started his own business three years ago and he thinks the tax-adjusted value is $201,000. He argues that the business is new and its value cannot be counted on, so it should not be divided. Bob’s annual salary is $87,000. His expenses are $2,050 per month. This does not include any credit card or support payments.
Cindy is going back to school to become a nurse. She will finish her degree in three years, and then she will earn approximately $35,000 per year. She will earn no income while in school. Cindy’s expenses are $4,828 per month. This includes her tuition expenses, which average $350 per month. Bob is offering to help Cindy through school by paying spousal support of $2,000 per month for one year, then $1,500 per month for two additional years. The support will be indexed annually.
The children will live with Cindy. According to the Federal Child Support Guidelines, Bob’s payments will be $1,245 per month to support the two children until they finish school or reach the age of majority. This number will drop to $774 per month (adjusted for the 3% growth rate) after the oldest child leaves home or school. They live in a province where the age of majority is 19 years.
The family residence is valued at $220,000 with a mortgage of $130,000 at 7.5% interest for 15 years. Cindy would like to remain in the home with the children.
They also have a rental house worth $160,000 with a mortgage of $100,000. They receive $1,200 per month in rental income, and the monthly expenses are approximately $1,200 per month.
Cindy’s has two RRSPs with a tax-adjusted value of $17,000. She also inherited a family art collection about a year ago. The collection is valued at $43,000.
Bob and Cindy have a joint Visa credit card that they both use with a balance of approximately $22,600. Without Bob’s knowledge, Cindy also opened another joint American Express credit card with a balance of approximately $5,000.
Bob has made the following proposal: Cindy will take the house, the rental, the RRSPs, her art collection, and the debt. Bob will keep only his business. Bob feels that since his business is so new and cannot be counted on, he is making a very generous proposal.
Assume they will each retire at age 65—the age at which they will qualify for full OAS benefits— and that Bob will be splitting his CPP with Cindy.
Answer the following questions about the case above:
1. What is the value of the marital property?
a) $345,400
b) $340,400
c) $388,400
d) $383,400
2. Based on Bob’s offer, how much of the marital property would Cindy receive?
a) 41%
b) 50%
c) 44%
d) 54%
3. Let’s say the judge wishes to create a 50/50 split of Bob and Cindy’s assets. Based on
Bob’s proposed split of the assets, who would have to pay an equalization payment and
how much would it be?
a) Bob would pay Cindy $61,600.
b) No equalization payment would be necessary to create a 50/50 split.
c) Bob would pay Cindy $9,300.
d) Bob would pay Cindy $30,800.
4. What amount is used for the value of the art collection in the equalization process?
a) $0
b) $43,000
c) $21,500
d) None of the above
5. Which of the following about the marital debt is true?
a) Both C and D
b) Bob has no liability for the American Express card because he didn’t know
about it and didn’t make the charges himself.
c) Bob and Cindy are equally responsible for all of the debt.
d) The judge could decide to punish Cindy for hiding joint debt by transferring all
debt liability to her in the separation agreement.
6. Based on Bob’s offer, what will be Cindy’s main source of net worth?
a) Excluded property
b) The marital home
c) The rental home
d) Her RRSPs
8. Cindy finishes school, but has a hard time finding a job. She asks Bob to pay her spousal
support in the amount of $500 in addition to the amounts set out in their separation agreement until she finds employment. Which of the following is the tax treatment of the payment?
a) Bob can deduct the extra $500 if Cindy agrees.
b) Bob must deduct the extra $500.
c) Bob cannot deduct the extra $500.
d) Bob can deduct the extra $500 if Cindy claims it as income.
9. Which of the following scenarios would NOT threaten Cindy’s financial stability?
a) Bob declares bankruptcy and gets his spousal support obligation discharged.
b) Bob is found to be uninsurable after agreeing to insure his spousal support
payments with life insurance.
c) Bob becomes disabled and can no longer work. He does not have disability
insurance.
d) All of the above would threaten Cindy’s spousal support.
10. Child and spousal support are:
a) Not taxable to the recipient
b) Both taxable to recipient
c) Treated differently: spousal support is taxable to the recipient and child support
is not
d) Treated differently: child support is taxable to the recipient and spousal support
is not
11. What is the equity value of the marital home?
a) $220,000
b) $90,000
c) $130,000
d) $60,000
12. In the year before their separation agreement was final, Bob gave Cindy a cheque for
$10,000 to help cover her tuition and monthly expenses. Which of the following statements is true?
a) The payment will be deductible by Bob and taxable to Cindy as long as the final
written agreement references the money and clearly indicates that they agree to
that tax treatment.
b) The payment will not be deductible by Bob and taxable to Cindy because it was
a lump sum payment.
c) The payment will be deductible by Bob and taxable to Cindy because the
money was paid in the same year as the final written agreement was signed.
d) The payment will not be deductible by Bob and taxable to Cindy because it was
not intended to be child support.
PART II: Short Answer. Write your answers in the space provided. (16 marks)
13. Ashley and Alan separated amicably at the end of 2017 agreed that their two children age 5 and 6 would live with Alan because Ashley travels a lot for business. Alan had stayed home for a few years and went back to work part-time when they separated. As a result, Ashley agreed to pay Alan $1,500 a month in spousal support and $1,800 a month in child support. However, they drew up their own separation agreement and stipulated only that Ashley would pay Alan a total of $3,300 a month in support. Ashley’s salary in 2018 is $125,000 and Alan’s is $25,000. How much do the annual payments cost Ashley after-tax? How much does Alan receive after-tax? (2 marks)
14. Paul and his wife had been married for 15 years and had been separated for 3 days when he suddenly died. He left an estate worth $600,00 after taxes. In his will, he left $300,000 to his wife Linda and the rest to be divided per capita between his three children. The family lives in Alberta and Paul had not had time to change his will before he died. How much does each child inherit? (2 marks)
15. Maureen died intestate leaving an estate after taxes and probate of $700,000. She is survived by her husband, Jack and her two children Adam and Kelly. She is predeceased by her son Mark. All three of her children had three children each. How much does each family member get if they live in Alberta and the estate is distributed per stirpes? (4 marks)
16. Richard is a major shareholder in a private corporation, holding $10,000 shares currently worth $98 each. His adjusted cost base is $42 each. He expects the shares will continue to increase in value and he is considering an estate freeze to minimize his tax liability when he dies. If no rollover provisions apply, what is his taxable capital gain? (2 marks)
17. Gary bought a cottage in 1977 for $45,000. When he died in 2001, the cottage was worth $250,000. In his will, he left the cottage in a trust to his daughter Beth, with the provision that she could receive full title after 10 years. After the 10 years, the cottage was worth $390,000. Barb held onto the cottage for 11 years and then sold it for $470,000. If the cottage is not her principal residence, what is her taxable capital gain in the year she sells it? (2 marks)
Change in Fair Market Value from prior valuation
Taxable Capital Gain for this transaction
Tax paid by
Misha dies
Scott transfers title to her name
Scott sold the cottage
Total Gain
18. Misha is much older than her husband Scott. In 1984, Misha bought a cottage for $60,000. When she died in 2009, the cottage was worth $195,000. Misha’s executor elected NOT to use the spousal rollover provision on her final tax return. Scott transferred the cottage to his name in 2011 when it was worth $210,000. He sold the cottage in 2014 for $230,000. Complete the following table showing all calculations. (7 marks)
19. Rafaela donated a painting to a registered charity. An independent appraiser valued the painting at $150,000. Rafaela bought the painting eight year ago for $60,000. Her income from other sources is $70,000.
a) What is her taxable income for the year? (2 marks)
b) How much of the $150,000 donation can she claim in the current year? (2 marks)
c) What is the value of her federal tax credit for the year? (2 marks)
d) How much of the donation can she carry forward to subsequent years? (1 mark)
20. Marty owns an auto body repair shop. The business has no real value without him and the building is pretty much a mess after being full of paint fumes for all those years but the land is worth $140,000 – the land is also pretty much of a mess and it will cost a buyer about $100,000 to clear the land for another use. The adjusted cost base is $150,000 – $80,000 for the land, $70,000 for the building.
He is very fond of animals and now wants to give the land and building to the Toronto Humane Society – he is going to retire and live in his daughter’s basement (she’s not too happy but since she will inherit a considerable amount of money when he dies, she has consented to this arrangement). Mark shuts down his business on December 15, 2018. His net income for the year was $45,000. He has taken Capital Cost Allowance of $66,000 on the building. HINT: Review Example 16 from chapter 12.
a) If this were a cash donation, what is the maximum he could claim on his 2018 tax
return? (1 mark)
b) Including recapture, what is his total income? (2 marks)
c) How much can he claim as a tax deduction for 2018? (2 marks)
d) If his net income is $13,000 a year forever, how much of the donation will he be able
to claim in total assuming he does not die for 30 years (he has lots of money but does not like to spend it. This is OK with his daughter!) (2 marks)
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