It is assumed that Carletti's personal tax rate is 45%.
Peter Carletti is a professional architect employed by a Halifax-based architectural firm. He is 58 years old and married, and has a 22-year-old son. Peter’s wife, Carla, recently returned to university and will complete a law degree in three or four years. Their son, who lives with them, also attends university and will continue to do so for at least three years.
Peter has asked you to review his family’s financial position and tell him what tax planning opportunities are available. Also, he does not have a will and would like you to tell him what tax consequences may occur at the time of his death. He provides you with the following information:
1. The Carlettis’ home in Halifax is owned by Carla. She had acquired the property five years ago for $200,000 with funds received from her father’s estate. The home is now worth $230,000 and has no mortgage. She has no other assets.
2. Last year, Peter purchased a vacation home on the Atlantic coast. The property cost $150,000 and has already increased in value to $180,000. Upon purchase, Peter assumed the mortgage of $90,000, which has an interest rate of 8%.
3. Peter owns a term life insurance policy that will pay $400,000 upon his death.
4. Peter’s annual salary is over $100,000. Carla currently has no income. Annually, Peter contributes to an RRSP, which is now worth $200,000. The plan invests primarily in secure common shares and earns capital gains and dividends.
5. Peter owns a rental property, for which he paid $240,000 (land $40,000, building $200,000) five years ago. It is debt-free and currently worth $300,000 (land $50,000, building $250,000).The UCC of the building is $166,000.
6. Peter owns the following other investments:
• $50,000 of Nova Scotia Hydro Bonds, which earn interest of 10%.
• Bank term deposits (one-year terms) of $170,000, which earn 9% interest.
• Common shares of a Canadian public corporation that are valued at $90,000. He purchased the shares two years ago for $40,000. Peter has not sold any capital property in the past 10 years.
Required:
Prepare a brief report for Peter Carletti outlining the tax consequences that may occur on his death. The report should also suggest what he might do now to minimize annual taxes during his lifetime.