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 non-

registered 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 Jaspers 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. Jaspers 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 calculations.

Tasks:

1) What is Bills marginal tax rate on capital gains? What is Jaspers 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 (10 marks)