You are a financial planner who focuses on helping couples. Jasper (23) and Bill (25) live in
Toronto and have come to see you regarding their decision on whether to buy a house or
continue renting. Jasper and Bill have recently married, and they are thinking about
adopting a child 8 years from now. They are currently renting a 2-bedroom condo in
Toronto. The rental cost is $2,595 per month and this includes heating. They estimate
heating is about $200 a month from 1st November to 30th May. Internet, electricity, mobile
phones and other utilities cost them about $450 a month and they have tenants (home
contents) insurance which costs them $500 per year. They spend about $180 a week on
eating out and other living expenses come to about $250 a week. The apartment is good for
now, but in 8 years, they will need to upgrade to a bigger house.
They want to buy a property now, live in it for the next 8 years to get on the ‘property
ladder’ and then purchase something bigger. They have found a 2-bedroom apartment in
midtown Toronto which costs $899,000. They estimate moving costs will be about $10,000
and legal fees will be another $5,000. The maintenance fees on the new property are $800
a month and annual property tax is $3,600 p.a. If they purchase this home, they will have to
buy homeowners’ insurance at a cost of $1,600 per year. Also, they want to renovate, when
they move in, and this will cost them about $5,000.
Bill is more financially literate than Jasper, so he has invested their savings. He encouraged
Jasper to open a TFSA and both have maximised contributions to the allowable TFSA limit.
Their investments are currently in Canadian equity where they have purchased an All-
Canadian Stocks Capital Growth Fund. Their portfolio does not pay dividends but increased
in value by 7.9 % last year and is expected to do the same in the future. Bill and Jasper have
saved $210,000 towards the purchase of their home. Bill is holding $105,000 in a nonregistered
investment account (the cost price was $100,000) and both, Bill and Jasper, are
holding the remaining $105,000 in their tax-free savings accounts (cost price was $84,500).
Bill earns $110,000 per annum and his average tax rate 25%. Jasper earns $80,000 per
annum; his average tax rate is 21%. They both have employer pension plans and these gross
income amounts are after pension contributions. Bill is thinking about transferring all of the
non-registered portfolio into Jasper’s name to save on taxes because Jasper has a lower
average tax rate. Jasper has two years left on a student loan and the payments are $350 a
month. Jasper’s car loan will mature in 3 years and the monthly payments are $300 a
month until it is paid off.
Current mortgage rates at a bank are 2.24% APR, for a 5 year term with a 25 year
amortization. The current rate of inflation is 3% and it is expected that all prices will
increase at this amount. Assume future returns will continue at the same rate as past
returns. Round all rate-based figures to 4 decimal places and round all money figures to the
nearest dollar. Use tax information and financial regulations for the year 2021 in Ontario
and assume that these will remain the same over the next 8-year period for your
1) What is Bill’s marginal tax rate on capital gains? What is Jasper’s marginal tax rate
on capital gains? (10 marks)
2) Provide Bill with advice regarding his tax strategy of transferring assets to Jasper’s
name. (15 marks)
3) Calculate whether Jasper and Bill will be able to borrow the money under current
lending criteria. Note the stress test (15 marks).
4) Analyse whether Jasper and Bill should rent or buy the apartment. (40 marks)
5) Explain to Jasper and Bill two assumptions you have made in your calculations in
question 4) and why these might not hold. (10 marks)
6) Explain to Jasper and Bill two costs that been omitted from the calculations in
question 4) and why these should be considered