Dr. Garth

The doctor is IN.

First up, Mike, we’ll treat him although he comes to this blog for animalistic reasons. “I’m a longtime reader of your blog and credit it with taking me from a zero to hero with my finances but really I read it for the dog pics,” he admits.

I have a question. My partner (Beth) and I have taken your advice and we are selling her rental condo. People here out west have lost their minds and as a result we just accepted an offer that’s $40k over asking. It is a 396sf one bedroom condo with 50 stairs to get to it and the accepted offer is for $641,000!  With only five figures owing on the mortgage we are going to walk away with a nice chunk of change but since it is a rental I’m assuming it will trigger an equally large tax bill.

What are the ways that we can avoid paying as much tax as possible? We both have maxed out TFSAs but we both also have lots of room in our RRSPs. I’m hoping we can use those for some tax shifting purposes but we aren’t sure about the best way to maximize them and we would appreciate any advice you may have as to how we can minimize our tax bill. For reference I make a little over $100k/year and my partner makes around $70k/year. The condo is in her name as she owned it before we met.

Yikes! That’s $1,620 for every foot of a place barely big enough to swing a wet feline in (they dry faster that way). This is all the evidence anyone needs that our house-horny society has truly lost its way.

Anyway, congrats on the bail. Good move. Now, don’t sweat the tax.

First, if you two recently hooked up, Beth was likely living in the condo for most of the time she owned it. This could eliminate any tax on the gain – so let your accountant know the dates involved. Second, the levy on capital gains is among the lowest you’ll ever pay. Half is free and the other half taxed at the owner’s marginal rate. In Beth’s case the max would be 28%.

So let’s say she made $100,000 on the unit. Only $50,000 is taxable at 28%, for a bill of $14,000. The other $86,000 is tax-free. Not a bad gig.

Can that be reduced? Of course, if B takes some of the condo proceeds and dumps the money into her RRSP that will reduce overall taxable income for the year. But, of course, she’ll have taken after-tax capital and made it taxable again. Think twice before you do that. And , besides, get a grip. You got forty thousand over asking, so that greater fool can pay your taxes!

Now here is Matt, who is easy to hate because he has one of those government defined-benefit pension plans we all enjoy dissing. At least he’s humble.

I will start with the MSU; I’m a long-time reader who is fortunate enough to have had one of my e-mail questions featured in one of your columns, and back groveling for more advice. My question is relating to your emphasis on having that 60/40 split (equities/fixed things) for long term investing. Your reasoning of this makes sense for most people, but what about the few of us who are fortunate to have a defined benefit pension plan.

My thinking is that with a solid reliable monthly income, which is tied to inflation that I can afford to be more risky as it relates to my TFSA. I plan to max out my TFSA each year, but instead focus on a 90% equities, 10% fixed ratio for investing. What do you think of this approach for somebody in my situation?

The logic is pretty sound, Matt, but you are forgetting about one key element – human psychology. Everybody is a swaggering, make-my-day cowboy when (like now) stock markets are percolating and the economy’s expanding. But things can turn on a dime, and it’s shocking what a 10% garden-variety equity correction can do to the macho men around us. They wilt.

The 60/40 model is for people who want to not lose money and make predictable long-term returns. The fixed-income hunk (not all bonds, for sure) helps quell volatility and achieve those goals. It also removes temptation, which is the downfall of many a DIY keyboard guru.

People jump on rising assets then fear everything’s going to zero when they fall. We buy high. We sell low. Watching a portfolio shed 10% or 20% of its value tempts investors without balance to seek shelter at the worst possible time. Being 90% into equities when North American markets are at record highs will probably make you dough in the short term (the vax recovery has a long way to go), but it could also bite you in the space of a day or two.

Why take the risk? Yep, greed. Shame on you, Matt. Now go back to running the CRA.

About the picture: “This is my executive assistant, Sunny, ” writes Lee. “She is our 8 year old mini-schnauzer who has brought so much sunshine into our family! She loves long dog-walks, chasing bunnies and crows and ensuring I stay on task while WFH-ing.”