Reference no: EM133590532

Assignment: Advanced Financial Planning

Case:

You are a well-respected financial planning group, based in Markham, Ontario. Two of your longest tenure clients, who are permanent Canadian residents, Mr. and Mrs. Mehta, both age 64 live in North York and are concerned about the Capital Gains that are associated with their Family Cottage in Muskoka. As you know the family so well, the Mehta's have a son age 43 ( he has had various occupations since leaving University), and they also have a daughter age 41 who is a Physician, and lives in Oakville. Their son Kamal is getting divorced from his first wife, and has been living with the Mehtas. Kamal is getting ready to move to Kingston where his fiancé and her family live and have a vacation home in the area. His ex-wife will have sole custody of their two children, as they have agreed to visitation rights for Kamal including spending every other weekend with Kamal, provided he has a suitable place to house them. His ex-wife and children will continue to reside in the family home in Cornwall. Their daughter Nila is happily married to her husband of 12 years who is also a Physician. Now that Nila's children are school age, the family love to travel to new places, and take full advantage of time off when the kids are out of school. Mr. and Mrs. Mehta come to you wanting to employ a strategy to transition the Capital Gains concerns of the Cottage to their children before the burden of Capital gains attached to the cottage, that will need to be paid at the death of the second spouse, become so significant that the Cottage would almost have to be sold to cover the taxes. The Mehtas have decided that the cottage is so important to the family, with the memories of all those weeks and weekends with their children and grandchildren, that they must do everything they can to ensure it gets passed down to the next generation. They admit that there is some strain in the family, especially between Kamal and Nila. They chalk this up to Kamal's separation and upcoming divorce, but they are hopeful that once he gets settled with his second wife, since he is engaged, then things will get better. In passing they mention that Kamal is frustrated with having to do the majority of the maintenance at the cottage, which in their minds is a small price to pay to relax in such an oasis. The cottage currently has an Adjusted Cost Base (ACB) of $600,000, and Fair Market Value (FMV) of $1,400,000. They have met with their accountant and discussed putting the cottage in a trust. They admit to only partially understanding the implications of this and were hoping you could clarify how this works with some basic explanations. While discussing this with their Accountant they recall hearing terms like future growth / Capital Gains and Probate Fees being a couple of the reasons the Trust made sense, there were others, but these stuck with them. They both think that this is a good idea for them. Because of this, you have arranged a meeting to discuss these findings.

Note: Your answers should contain Canadian-only content. Any non-Canadian reference offered in this assignment that supports your response to any question asked will result in a deduction of 1 point per reference, with no limit. It is your responsibility to ensure that you are speaking to facts that pertain to Canada's Income Tax Act, and consistent with the course content which is Canadian focused.

Answer the following questions in complete sentences using Calibri (font size 12) for the body of your work.

I. By proceeding with the transfer to an inter-vivos trust, what would be the taxable capital gain based on the ACB and FMV figures provided. Keep in mind that the Mehtas intend to use their matrimonial home as their principal residence, therefore for the purpose of this example assume there is no option to have the cottage benefit from the principal residence exemption. (4 marks - for full marks show your work)

II. If the sale of the cottage took place in tax year 1994 at the same FMV and ACB as indicated above, and the Mehtas had never encountered Capital Gains prior, what, if any, would be the difference compared to question-1, in taxable capital gains on the disposition of the Cottage ? In order to get full marks please ensure you show and explain your work on this question.

Use Seneca College's MLA Citation Guide to reference any research you do.