Advisors need to untangle the emotional and financial realities of their clients’ properties, explains Mariska Loeppky
The trouble with real estate is that, for clients, it’s not just an asset. Telling a client that they need to sell their Nvidia holdings to deal with a tax bill doesn’t open a conversation about hopes, dreams, legacy, and memory the way asking them about selling a home might. Thankfully, in Canada, the primary residence exemption can keep the dispersal of a home from incurring a significant tax bill to a client’s heirs, allowing that property to exist primarily in its meaning as a home. For high net worth clients who own multiple properties, however, the dynamics aren’t quite so simple.
Mariska Loeppky, Assistant Vice-President for Tax & Estate Planning at IG Wealth Management, explained how clients with multiple homes, especially with homes in different jurisdictions, can end up sleepwalking into major estate and tax planning issues. She emphasized that as advisors work to navigate these issues, they need to remain aware of what these properties mean to their clients and their families and that the meaning extends far beyond just money.
“Real estate is really where tax decisions collide with emotional attachments,” Loeppky says. “Properties are illiquid, and people really care about them. They often don’t want to sell them, and when they do sell them there might be a tax bill to contend with.”
Mistakes & best practices around HNW properties
Loeppky says that the principal residence exemption is a powerful tool that advisors and clients can use to navigate some tax issues around one property. However, the choice as to which residence to claim under that exemption is an important one, and it should be optimized based on levels of appreciation enjoyed by a particular property.
Clients will often think that transferring, gifting, or selling properties to family members can end up avoiding some of those tax issues. She notes that in the eyes of the CRA, a sale, gift, and transfer are treated as functionally the same thing, with transfers treated as deemed dispositions. She says that some clients think there won’t be a tax bill if a realtor isn’t involved, when there almost always will be.
Beyond education on how transfers and gifts won’t necessarily save much on tax, Loeppky says advisors should also remind clients to keep track of the cost base in any property they may own. The cost base on the sale of a property will have to be substantiated and accurate record-keeping is essential.
Advisors also need to stay cognizant of the jurisdiction a property is located in. That might mean bringing in local experts who know property markets and tax codes that a Canadian advisor might not be aware of. That also means holding to certain rules of thumb. Loeppky gives the example of a property in the United States that a client wants to hand over to their child. In Canada, a property is typically inherited on a stepped-up basis, meaning a Canadian tax bill would be incurred by the transfer of the property. In the US, however, property is not inherited on a stepped-up basis, so when the child sells that US property they could incur a capital gains tax based on the cost their parents initially paid. Effectively, that results in double taxation. This is why Loeppky says it’s best to avoid gifting US property.
While some form of tax bill on the dispersal or sale of a non-principal residence is inevitable, Loeppky says that other estate planning tools can help counter-balance that bill. For example, clients might not take dividends from their corporation in the year they sell a property, spreading taxable income across multiple years.
Loeppky says that the fundamental approach that advisors should take rests primarily on their clear understanding of the client’s finances, their holdings, and their goals for the property. Tax efficient plans can emerge from that core understanding. It should also help them reckon with the emotional realities of a property sale.
While selling a property that was just held for investment income doesn’t come with much emotional baggage, a much-loved summer home or winter retreat could be deeply troubling for clients. Sometimes these are properties that the family has held for generations, maybe even a last connection to the country the clients’ parents were born in before they came to Canada. Challenging as it may be for an advisor to start these conversations, Loeppky says that there can be a benefit to rooting the conversation in the rational choices necessitated by hard financial realities.
“As an accountant, I start with the balance sheet. So I just go very methodically. You have this here and this here and this property there, and then asking some questions, probing questions. And usually clients like to talk about these properties that they care so much about. And so sometimes it just comes from that,” Loeppky says. “We tend to be more comfortable talking about investments, but real estate is also an investment with a very, very personal attachment to it. And so it’s not something to be overlooked.”
