How Much Coverage a Leveraged Portfolio Calls For

A portfolio carrying debt owes two different kinds of money on the day its owner dies. It owes lenders, who hold the mortgages and who usually hold a personal signature behind them. It also owes the Canada Revenue Agency, which treats the buildings as disposed of on that day whether or not anyone sold anything. Both obligations are settled in cash. Buildings are not cash, and that gap is the whole subject of this page.

What follows is a method for turning those obligations into one figure that belongs to your file and to nobody else's. It works through the mortgage balances, the guarantees standing behind them, the tax the deemed disposition produces, the discount a hurried sale costs, and the liquidity an estate needs to hold the buildings through a first year of administration. Then it subtracts what already exists. This page sizes the obligation and does not recommend a product.

What does a leveraged portfolio owe on the day the owner dies?

Three things at once: the mortgage balances the lenders can call or refuse to renew, the tax the deemed disposition produces on accrued gains and recaptured depreciation, and the cost of running the buildings while an estate is being administered. Each is payable in money, and each has a different deadline.

The lenders come first because their documents are the most specific. A mortgage is a contract with a term, a renewal date and covenants, and death is an event most mortgage documents address somewhere in their standard charge terms. Some lenders continue the loan with the estate as borrower. Some treat death as a default. Your own documents say which, and reading them is an evening's work that almost nobody does.

The tax comes second in order and often first in size. It arrives on the terminal return, on the schedule the Income Tax Act fixes, and the estate owes it before the estate can safely distribute anything to the family. An executor who pays a beneficiary before the tax is settled has a personal problem of their own.

The operating cost comes third and gets forgotten. Mortgage payments, property taxes, insurance premiums, utilities on vacant units and the repairs that never wait all continue during the months an estate takes to organise itself. Rent keeps arriving, which helps. It rarely covers everything when a building empties out because nobody yet has authority to sign a lease.

How do you count the mortgage balances?

Take the balance outstanding on each property as of today, from the most recent statement. Add every line of credit secured against a building, every vendor take back still owing, and every advance drawn on one property to buy another. The sum of those balances is the first line of the worksheet.

Use the balance and not the payment. A portfolio is often described by what it costs monthly, because that is the figure an owner watches. The obligation at death is the principal a lender can demand or decline to renew, and the monthly figure says nothing about it. Pull the statements, write the numbers down, add them up.

Two adjustments matter. Debt held inside a corporation is the corporation's obligation and not the shareholder's, which changes who owes it and changes nothing about whether the family can pay it. And amortisation keeps working in your favour: a balance counted three years ago is wrong today, in the direction that helps, which is a pleasant reason to redo the arithmetic.

Write down the renewal date beside each balance. A portfolio where three terms mature within eighteen months of each other behaves differently from one where they are spread apart, because a lender reviewing a file held by an estate is a lender reviewing a file with no borrower left in it.

What do personal guarantees add to the number?

Often a great deal, and this is the line most owners cannot recite from memory. A personal guarantee makes you liable for a debt your corporation borrowed. The obligation survives you and lands on your estate, which means the full guaranteed amount belongs in the sizing even where the mortgage itself sits in a company.

Find the guarantees before you size them. They live in the loan documents, in the commitment letters, and sometimes in a separate one page instrument signed at a lawyer's office years ago and never seen again. A lawyer or a notary can list them from your files in an hour. Guessing at this line is the commonest way a sizing comes out low.

Read what each one covers. A guarantee limited to a stated amount is a different exposure from one that covers all present and future indebtedness to that lender. Where a joint venture partner also signed, ask whether the liability is joint and several, because joint and several liability lets the lender pursue your estate for the whole balance and leave your estate to chase the partner.

Where a corporation owns the buildings, run this line twice: once for what the company owes, and once for what you have personally promised. The two figures are frequently different, and the second one is the figure your family meets.

How does the deemed disposition enter the sizing?

Section 70(5) of the Income Tax Act generally treats a taxpayer as having disposed of each capital property at fair market value immediately before death. The accrued gain on every building enters income in the year of death. That produces a tax amount, and the amount belongs on the worksheet as a debt.

This page states no rate, no percentage and no inclusion figure, because those are questions for your CPA, on your own file and on the law as it stands when the calculation is done. What this page can tell you is which three numbers the CPA needs for each property: the fair market value today, the adjusted cost base, and the undepreciated capital cost where depreciation has been claimed.

The mechanic is set out at length in the tax at death on a rental portfolio, including what a transfer to a spouse or a qualifying spousal trust does to the timing. Read that page first if the deemed disposition is new to you, then come back with the figure it produces.

One caution on how this interacts with debt. The tax is calculated on value and on cost, and the mortgage does not reduce it. A heavily mortgaged building carrying a large accrued gain produces a full tax charge and very little equity to pay it with, which is exactly the combination that forces a sale.

What does recapture of capital cost allowance add?

A second amount, wherever depreciation was claimed against rental income over the years. Section 13(1) of the Income Tax Act brings that claimed depreciation back into income on a disposition, including the deemed disposition at death. It sits on top of the capital gain and it is a separate line in the sizing.

Your accountant has the number. The undepreciated capital cost of each building appears on the schedules filed with your returns every year, and the gap between that figure and the original capital cost is what this line measures. No estimate is needed here. The figure exists, dated and filed.

Owners who never claimed capital cost allowance skip this line entirely, and owners who claimed it steadily for twenty years usually find it is the largest surprise in the exercise. Neither owner did anything wrong. The deduction was worth taking in the years it was taken, and the sizing simply records what taking it moved to the end.

Ask your CPA to run the gain and the recapture together, on one page, property by property, at the marginal rate a terminal return containing the whole portfolio would actually reach. An average rate understates the result. A figure produced any other way is an impression with a decimal point on it.

What does a sale made under time pressure cost?

More than a sale made on your own schedule, and the difference belongs in the number. An estate selling to meet a deadline is a visible seller in whatever market exists that quarter. Add the selling costs, the carrying costs during the listing, and the discount a buyer extracts from a seller who cannot wait.

No percentage appears here, because the discount on a forced sale varies with the property type, the market, the month, and how visible the pressure is. Your own realtor can tell you what a comparable building sold for when the vendor was an estate and what it sold for when the vendor was patient. That comparison is local and it costs nothing to ask for.

The costs that do have knowable figures should be written down at their real amounts. Commission on the sale price. Legal fees. Mortgage prepayment charges where a term is broken, which your lender will quote on request. Land transfer consequences where a property moves inside a family. Each one can be established in advance, and each one reduces what reaches the beneficiaries.

There is a second cost that never appears on a settlement statement. Selling the building the family wanted to keep, in the year they were least able to argue about it, is a decision made by a deadline. Sizing the exposure in advance is how a family keeps that decision for themselves.

How much liquidity does an estate need to keep the buildings?

Enough to carry the portfolio through the months an estate takes to organise itself, on top of the debts already counted. Count the mortgage payments, property taxes, insurance, utilities and ordinary repairs for that period, subtract the rent that will still arrive, and hold the difference as a separate line.

How long is that period? Ask the lawyer or notary who would administer your estate how long files of your size take in your province, and use their answer. Probate timelines, a clearance certificate, and a lender's own review of a file with a deceased borrower on it all run in parallel and none of them runs quickly.

Assume the rent is interrupted somewhere. A tenant gives notice during the administration, a unit needs work before it can be relet, and the person who normally handled all of that is the person who died. A liquidity line built on full occupancy is a line built on the strongest month of the year.

This is also the line that keeps the buildings in the family where that is the intention. An estate with the debts covered and no operating money still ends up selling, because the taxes and the insurance do not wait for a plan. Covering the debt and covering the carry are two different jobs, and the worksheet adds them together.

What already exists that offsets the exposure?

Subtract before you conclude. Existing coverage of any kind, liquid assets the estate could reach quickly, the income a surviving spouse will continue to earn, and the portion of the portfolio the family would genuinely sell anyway all reduce the gap. The number that matters is what remains after those subtractions.

List the coverage you already hold and read what each contract actually does. Group coverage through an employer usually ends with the employment and frequently ends at retirement. Mortgage creditor insurance sold by a lender typically pays the lender and declines as the balance falls, so it offsets one line of the worksheet and none of the others. Personally owned contracts pay a named beneficiary. Write the amount and the owner beside each of them.

Count liquid assets honestly. Registered accounts are frequently taxed at death, which means a registered balance offsets less than its statement shows, and your CPA can tell you how much less. Money inside a corporation has to come out before it can pay a personal obligation, and coming out has a cost. Deposit accounts and non-registered investments are the cleanest offsets on the list.

Then the part nobody writes down. If the family would sell two of the seven buildings in any event, the exposure to be funded is the debt and the tax attaching to the five they would keep. Deciding which buildings those are, while you are here to decide it, removes more from the number than any other single step.

How do the pieces come together into one figure?

Add the debts, the tax, the forced sale costs and the carrying reserve. Subtract the coverage, the liquid assets, the spouse's continuing income and the portion the family would sell regardless. The remainder is the exposure, expressed in dollars, dated, and specific to your portfolio and to nobody else's.

The worksheet has seven lines and every one of them comes from a document somebody already holds. Nothing on it is an estimate produced by a website.

Run the total twice, once assuming the family keeps everything and once assuming they sell the properties you identified as saleable. The two numbers bracket the real answer, and most families find that the decision they have been avoiding sits somewhere between them.

Date the page and sign it. A sizing without a date is a sizing nobody can trust two years later, and the person who will need it most is an executor reading your filing cabinet under pressure.

How often should the number be redone?

Every two or three years in a stable portfolio, and immediately after any purchase, sale, refinancing or new guarantee. Values move slowly and balances amortise slowly, so an annual rebuild wastes everybody's time. A transaction changes the answer overnight, and transactions are what should trigger the work.

Three events should send you back to the worksheet before the calendar does. A new property, because it brings a balance, a guarantee and a fresh cost base with it. A refinancing, because it raises a balance that had been falling. And a change in the family, whether that is a marriage, a separation, a partner joining a joint venture, or a child old enough to be part of the plan.

Keep the previous versions. A sizing that has been run three times shows a direction, and a direction is more useful than any single figure. An owner whose exposure has grown at every rebuild is learning something about how the portfolio is being assembled.

Store it where an executor will find it. A worksheet in a drawer is worth more than an intention in your head, and the names of your CPA, your lawyer and your lenders belong on the same page as the numbers.

Why does this page name no product?

Because sizing a liability and then selling the cure on the same page is how this subject earns its reputation. The obligation described here is arithmetic and it belongs to you. What a family does about it is a decision with several answers, and a page doing the measuring should not also be doing the selling.

The routes a family can take are the ordinary ones and they are not exclusive. Sell a property while the owner is alive and pay the tax on a chosen date. Reduce the debt so that line shrinks. Hold liquid assets against the obligation and accept that they are not deployed in the portfolio. Arrange financing in advance with a lender who has met you. Or accept that a building will be sold after death, decide which one, and tell the executor in writing.

Where a family decides to fund the exposure with life insurance, the figure produced by the method above is the input to that conversation, and the mechanism is treated separately. What a contract does and does not do beside a portfolio is set out on the real estate investors page. This page stops at the number.

That refusal is deliberate and it should be visible to you while you read. An advisor who hands you a sizing and an application in the same meeting has done one of those two jobs properly.

Who this suits, and who it does not

This method suits an owner carrying real debt across several properties, with personal guarantees behind at least some of it, and an intention that the family keep the buildings. It suits an owner who wants a figure built out of documents. It does not suit somebody looking for a rule of thumb.

It applies with the most force to an owner whose buildings are held in a corporation with guarantees signed personally, because that structure hides the exposure behind a company name and the family meets it anyway. It applies to a joint venture where two signatures sit on the same facility and only one of the two signers has done this arithmetic.

It applies less to an owner with no debt, whose exposure is the tax alone and who should read the tax page on its own. It applies less to an owner who intends to sell the portfolio during their lifetime, although the figure is the same figure and knowing it usually changes the timing of the sale.

It does not suit anybody who wants this page to end with a recommendation. The number is the deliverable. What you do with it is a separate conversation, held with your own documents on the table, and if the answer for your family is that no funding is required, that is a good outcome and you will know why.