Talking tax, some strategies to reduce your taxes.
June 23 was officially the last day you worked for the government and started working for yourself. Tax freedom day, when the average Canadian family has earned enough to pay its taxes for the year and can start working for itself, falls on June 23 nationally. There are still opportunities available to reduce the amount of taxes paid in 1994 and to get a head start for 1995 by implementing some of the following strategies.
Strategy #1 - Use Lifetime Capital Gains
Capital Gains accrued or realized on or before February 22, 1994, will continue to be eligible for the exemption on your 1994 income tax return by filing a special election. The election is called 'crystallization'.
Any holdings you want to crystallize will deemed to have been sold on February 22 and then immediately rebought. The sale price can be set anywhere between your adjusted cost base and the budget day value. That lets you exhaust your exemption without incurring any tax on the pseudo-scale.
If you have a Cumulative Net Investment Loss (CNIL) balance, it may fully or partially block your ability to claim the exemption.
You will need to know the Adjusted Base Cost and the Fair Market Value of the investment on February 22, 1992.
Strategy #2 - RRSPs
RRSPs are tax deferred investment vehicles allowing investment of pretax funds with a view to using accumulated funds as retirement income. Not only are contributions deductible, but the income of the plan is not taxable until the funds are withdrawn from the plan.
Tip #1 - 1994 is the last year for rolling over $6,000 of qualified pension income to a spousal RRSP.
Tip #2 - Unused RRSP contribution room may be carried forward from 1992 up to seven years. The government may eliminate this option in 1995's budget because of the enormous amount of carryforward available. So Use It or Lose it!
Strategy #3 - Limited Partnerships
Limited Partnerships are not tax shelters; however, they allow a flow through o tax losses to the investor while at the same time providing limited liability.
LP investors are taxes on their share of income or loss of the partnership. Mutual Fund LPs entitles unitholders to large initial tax write-offs and a stream of future income. The LP unitholder is allowed to write-off the investment at the rate of 50% in the first year, and 25% in each of the following two years. Revenue Canada is considering changing the ruling for 1995 LPs to write-offs of 33 and 1/3% for three years.
Limited Partnerships in oil and gas wells stretch their tax write-offs over a longer period of time.
Strategy #4 - Labour Sponsored Venture Capital Corporation (LSVCC)
LSVCCs are investment funds set up by labour organizations in which individuals pool their money to purchase shares in small businesses and receive tax credits that reduce the effective cost of their investment.
The federal and Ontario governments offer tax credits of 20% each of the amount invested for a combined tax credit of 40% or $2,000 on a maximum investment of $5,000.
Additional tax savings are had when the investment is transferred to an RRSP.
Strategy #5 - Tax Deductible Loans
Leveraging means borrowing money to invest. As long as the investment has a reasonable expectation of earning income, you can deduct the annual cost of the loan on your tax return. The losses accrue in your CNIL account. Certain types of investment income such as interest and dividend income will reduce this balance and allow this type of income to be tax-free.
Optimal tax planning incorporates all five strategies. The effects of your CNIL balance, Alternative Minimum Tax, and government benefit clawbacks' will determine which type of strategy to use to minimize taxes and maximize your income.
As with any tax planning strategy, it is important to review your individual ta situation with your financial adviser to obtain the best quality advice.
Helen Graham, MCIC, graduated from the Chemical Engineering Technologist progra at Mohawk College and holds a BSc in Chemistry from the University of Waterloo. Working at AIC Investment Group in Hamilton, she is currently running a series of financial planning seminars for the CIC Hamilton Local Section.
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|Publication:||Canadian Chemical News|
|Date:||Sep 1, 1994|
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