In Toronto, a woman we’ll call Cynthia runs a business out of her rented apartment. She also has a condo in British Columbia where she spends about half the year. Now 58, she has an active social life in Toronto, but plans to retire to B.C. However, the cost of maintaining two homes is much more than her annual $29,808 after-tax income can support. She has done it so far by spending her capital. “I’d like to be in both communities for the next 10 to 15 years, but what should I do? Buy a small condo in Toronto at a price of about $300,000? Can I afford to give up that much of my $715,000 in taxable investments?”


Facelift asked Mike Cherney, a certified financial planner in Toronto, to work with Cynthia to examine the costs of her choices and to create a financial road map for her work and retirement.

Cynthia’s life will be easier if she gives up one of her residences, the planner says. Her current total monthly expenses are $5,168, more than twice her $2,484 monthly after-tax income. That cost overrun is being paid out of capital at the cost of her future living standard.

If she were to give up her Toronto apartment and settle permanently in B.C., her monthly expenses would decrease to $3,068 a month. Her expenses would still exceed her after-tax monthly income. Therefore she needs to consider selling her B.C. condo. Were she to realize $500,000 after expenses for selling the condo, her investments generating current taxable income would rise to $1,215,000.

Assuming that she can obtain a 4-per-cent annual return on those taxable assets, and that inflation runs at 2.5 per cent a year, she could have a total investment return, including income and reduction of capital, of $54,675 a year or $4,556 a month from her enhanced sum of capital, Mr. Cherney estimates. That cash flow would exhaust her taxable assets by her assumed death at age 94.

She can also add income from her registered retirement savings plan, which he estimates would be $12,840 a year on the same assumptions. That total, $67,515, will more than sustain her expenses until she reaches age 60 when she can take Canada Pension Plan benefits reduced by 0.5 per cent a month for each month prior to age 65 that she begins benefits. Her age 65 entitlement would be $8,492. Adjusted for early application benefits, she would receive $5,944 a year or $495 a month, the planner estimates.

Her income to age 65 would therefore be $73,459 a year or $6,122 a month. At age 65, she would receive Old Age Security, which currently pays $6,204 a year. On a monthly basis, her total age 65 income would be $79,663, or $6,639 a month, which would more than cover her present expenses and allow her to generate an emergency fund for unexpected expenses.

Cynthia, in conversation with Mr. Cherney, rejects the idea of giving up one residence. She thinks that she could put more hours into her business and raise her income by nearly $30,000 a year. That would be nearly four times her present income from self-employment. The planner thinks she can do this, but she would have to work much longer hours, he adds.

Betting that she can make her small business generate four times its current income is a risky proposition, the planner notes. Illness or injury could impair her income. She does not have disability insurance.

She could sustain two homes by a combination of working longer hours and reducing the cost of living in Toronto, perhaps by moving to a less expensive apartment.

Cynthia could also increase her income by renting out her Toronto apartment or renting her B.C. condo out when she is not using one or the other.

Most of Cynthia’s investments have been in guaranteed income certificates.

They have not suffered any losses of value in the current market slump. She has averaged a return of 4.75 per cent a year, though she will have to turn to preferred stocks or perhaps depressed common shares to equal this rate of return as the GICs mature, Mr. Cherney suggests. She could also consider a prescribed annuity as a tax-effective way of getting yield in non-registered assets and of providing income in the event that she lives a good deal longer than her life expectancy. She should wait for bond yields, on which annuities are based, to rise. That could be several years, the planner suggests.

Cynthia can boost her income through use of the Tax Free Savings Account that went into operation on Jan. 1. It can shelter $5,000 a year of contributions of income on which tax has already been paid. Payouts will not be subject to tax. There are no limits on withdrawals.

“She can make a choice or bet on raising her income,” Mr. Cherney says. “But if she fails to quadruple her present business income, which is $725 a month after expenses, she will be forced to make a decision about which home to keep. Moreover, she does not have a great deal of time to make up for slow business. A tough decision has to be made.”

“At some point, I will accept the necessity of giving up one residence,” Cynthia says. “I will probably keep the B.C. condo because I think my future is there.”