In a small town in Ontario, a woman we’ll call Ursula, 50, has a civil service job and a lot of worries. She cares for her father, 84, her mother, 87, and her sister, 53, who is profoundly disabled. It’s a lot of responsibility to carry on her pre-tax income of $60,480 a year.
Ursula’s parents contribute their CPP benefits, which total $11,256 a year, and their combined annual OAS payments of $13,692. Her sister contributes her disability payments of $9,500 a year. Her household cash flow is thus $6,620 a month after tax — almost entirely on her own income. Her house is paid for and she has a Registered Retirement Savings Plan, a tax-free savings account and a lot of uninvested cash.
Ursula has sufficient money to live well and eventually to retire. But she has to care for her family. Her middle-aged sister in particular is a challenge, as she is entirely dependent on others.
“I have to do a lot of lifting and provide daily care that includes washing her, feeding and changing her,” Ursula explains. “I’ve made arrangements in my will for her if I predecease her.”
Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with Ursula. “We have no ability to manage family needs, but we can simplify her finances and make the transition from work to retirement easier for her and her family,” he says.
Related
Woman with $879,000 estate worries about fate of her cats when she is unable to care for them
Couple in their sixties overspending by $30,000 a year need to boost investment returns, cut fees
Cost control
Ursula pays eight per cent interest to borrow $20,000 of her own money on a paid-up whole-life policy with a $100,000 death benefit that passes to a named beneficiary without tax. She can pay off the loan, really an advance to cover premiums, from the $42,000 she has in cash. Time is likely to diminish her needs when her parents pass on. Her sister will always have disability assistance, Moran notes. However, Ursula could buy a $500,000 10-year level term policy for a $100 a month to add to money that could be had in the event of her premature death.
She has financed two vehicles: a wheelchair van for her sister, and an SUV for Dad and herself. Her vehicle loans cost her $445 and $475, respectively — $920 a month total. She can continue to pay them or reduce them with some of her cash. If she continues with present payments, the vehicles will be paid for in 6.5 years, at which point she can reallocate the $11,040 a year she spends on to the loans.
>
Ursula is now paying a 31.5 per cent marginal tax rate on the small sum of interest income she earns on her $42,000 cash and GICs. There is reason to switch to investments that pay Canadian source dividends. Ursula can lower her taxes by loaning some of her non-registered cash to her mother, who pays almost no income tax. Mom would have to pay the prescribed rate of interest — currently one per cent — by Jan. 1 of the following year, and each subsequent year the loan continues. She would deduct interest paid to Ursula and Ursula would declare the interest as income. The loan would be repayable on the death of the borrower, or on demand. If Mom invests the loaned cash