How To Support Your Parents and Finance Your Children’s Education with Your Rental Portfolio

How To Support Your Parents and Finance Your Children’s Education with Your Rental Portfolio

Many of our friends know that we are real estate investors. Some of them ask us what we do, but very few of them actually take any actions.

We don’t go around and tell our circle of friends what we do all the time. At the end of the day, there’s quite a bit of sacrifice you would have to make to be real estate investors.

But one of my long time friends from university got inspired to take some actions.

She and her husband both attended the weekend training course offered by Real Estate Investment Network back in April.

Today, she already tied up an investment property in Kitchener, closing in August.

She and her husband are investing a large amount of capital to convert this property into a legal triplex.

Oh yeah, they didn’t take an easy strategy.

They didn’t stop there. I just happened to speak to them a couple days ago, they were out in Kitchener hunting for their second property… ALREADY!

Did I mention that they live in North York?

Why are they so motivated?

They have to take care of their parents and their children’s future education.

Currently, they are paying a monthly allowance to support their parents using their after tax money.

Since both of them are Chartered Accountants, chances are they both make over 6 figures.

This simply means that their marginal tax rates are roughly 46%, if not more.

A monthly allowance to support their parents in the amount of $2,000 is roughly equivalent to $3,703.

If this monthly figure doesn’t catch your eyes yet, this is equivalent to $44K before tax income on an annual basis.

Unfortunately, we don’t get a tax credit by supporting our parents (unless you live with them and they are over a certain age).

The plan for my friends is to set up a corporation and purchase these investment properties in it.

They will use the rental income to pay for the monthly allowance for their parents. Worst case – they pay a 20% tax in the corporation when taxable dividends are declared.

Since their parents are living in Cambridge, much closer to their upcoming Kitchener properties, the parents can even help them manage their properties.

In this case, the corporation may even be able to pay them a reasonable amount of compensation.

With no other income, their parents pay zero tax.

By buying these investment properties, my friends are able to pay their parents using before tax money (if they choose to manage the properties). This can be equivalent to a tax savings of $20K annually assuming a $2K monthly allowance.

Their ultimate goal is to use these properties to finance the future education of their two young children.

Unfortunately, CRA does not allow us to declare dividend to children under the age 18 without attributing it back to the parents.

They will be waiting for a while before they can declare dividends to their children.

Before this plan can be materialized, they are working their butt off these days searching for properties and putting their team (contractors, realtors, property management) together.

Real estate investing is not easy. But the flexibility and benefits you are getting is well worth the time and effort and headache!

Until next time, Happy Canadian Real Estate Investing.

Cherry Chan, CPA, CA

Your real estate accountant

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Narine Persaud

Good info!

It is highly important for you to have finances available for your children’s education. There are so many unexpected situations but you need to be prepared for a better situation.

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