Business TheReview Wednesday, August 1, 1990 — Blo # —————————————————————____—_—_———_—_————————————————————————— rr | 32 € Borrow money fo save on taxes _ FIRST PEOPLES Continued from Page Bi Are you ready to save some money? Today, we kick off this column’s summertime tax tips series with the story of Richard (and/or Louise) who will save more than $16,000 in tax by improving on a plan to borrow $30,000. Elio Luongo, senior tax manager with Peat Marwick Thorne, char- tered accountants, has put together a special series of tax tips for The Review’s readers. These tips will appear in this space periodically over the next couple of months. Whether you are an employee, investor, retired individual or widow/widower, you could dis- cover how to save up to thousands of tax dollars — sometimes year after year — through relatively simple planning. “The examples are based on the situations of actual individuals, couples and families,” said Luongo. “They reflect what is happening in the world today.” Note: The following case (which uses the combined federal- provincial tax bracket rates of 27, 40 and 46 per cent) illustrates various strategies aimed at saving as much tax for this year as possible. “Effective planning takes a much longer view, so it’s import- ant to look at your particular Take this Bud Peter Firestone, the Victoria law- yer whose name was so derogator- ily bandied about by former attor- ney general Bud Smith during the taped conversations, has hired Vancouver lawyer Tom Berger to act on his behalf. Berger lost no time letting Smith know that he means busi- ness. In a letter to the former A.G., Berger lists his client’s grievances. Incidentally, Berger is a former leader of the provincial New Dem- ocratic Party. “Your letter is no true apology. You have not retracted the state- ments that you made about my client, you have not acknowledged that your attack upon him in his profession as a lawyer was without foundation, you have not with- drawn the statements that you made, nor have you offered to make amends,” Berger’s letter stated. To give it a little extra punch, Berger cited a decision by Chief Justice Begbie in the Hoste versus Times Publishing Co. (1889) case. Begbie was known as the “Hang- ing Judge.” Berger goes on to say that “you tried to destroy my client’s reputa- tion. When discovered, you told the news media that you had said nothing that you would not say again. “You continue to say that you have done nothing wrong; this is consistent only with an attempt on your part to have the public think that you spoke the truth about my client, and that you regret only that your words became public. “Tf it is not wrong for the Attorney General of the province to seek to destroy the reputation of a lawyer because he has accepted a retainer to prosecute a former member of the Executive Council (Bill Reid), then nothing is wrong.” Berger sent copies of the letter to the media, stating that “you have left my client no choice but to make this letter public.” Peet sever wes2s fot se eee ts Situation over the long term — and possibly seek professional advice — before you take any tax-saving steps,” Luongo said. “Also realize that depending on the circumstances, Revenue Can- ada could use its general anti- avoidance tule (GAAR) to disal- low certain tax planning techni- ques.” Richard (there doesn’t even have to be a Louise — or possibly it’s Louise, and there doesn’t have to be a Richard) can wait no longer for new furnishings and sets off to borrow $20,000. “My friendly banker is convinc- ing me I should also borrow to make my $7,000 RRSP contribu- tion now, and to pay off the $3,000 on my credit cards,” he said. Total loan: $30,000. Richard earns $45,000 a year, most of which goes to living expenses. But he is building up investments for both a reserve fund and retirement nest egg. ‘Luongo pointed out that borrowing to invest and deducting the interest expense could create or increase a CNIL (cumulative net investment loss) balance’ So far, he has put $5,000 into blue chip stocks outside his RRSP. He has a real knack for the market: his portfolio is worth around $30,000 today and he has col- lected dividends of about $10,000 since the beginning of 1988. Richard has not yet used any of his $100,000 capital gains exemption. Ordinarily, Richard might sim- ply take out a $30,000 loan at 15-18 per cent. Instead, Luongo suggests the following four steps: — Sell the stocks to realize a tax-free $25,000 capital gain. “This enables Richard to take advantage of the capital gains WAREHOUSE FOR RENT HENRY AVE. BUSINESS PARK (2064 HENRY AVE) 1500 sq. it. plus upstairs office. The best spot.in town. Call LLEKAHL 478-5648 REMAX OF VICTORIA 386-5333 exemption now, in case Ottawa decides to limit or ends it use in the future,” said Luongo. “And this allows him to save about $7,500 in tax.” — Use the $30,000 proceeds to pay for the furnishings (or any other personal needs), make the RRSP contribution and clear off the outstanding credit card bal- ances. — Borrow $30,000 to replace the investments Richard sold. “Because this loan is being taken out to ear investment income, the interest is deductible,” Luongo said. “With a 17-per-cent rate over five years, Richard should save about $5,900 in tax.” — Contribute to the RRSP and save about $2,800 tax. “Of course, this tax is simply deferred. When the RRSP funds are withdrawn, then they will be included in income — but ideally in a lower tax bracket.” Luongo pointed out that borrow- ing to invest and deducting the interest expense could create or increase a CNIL (cumulative net investment loss) balance. “That happens if you have had little or no investment income — interest, dividends, rent — since the beginning of 1988,” he said. “Tn other words, if your invest- ment expenses, like the investment loan interest, are greater than your investment income, you will build up a CNIL balance. “This CNIL balance will affect your ability to claim the capital gains exemption.” Let’s say your CNIL balance (that is, excess of all investment expenses over all investment income since the beginning of 1988) is $5,000. Now you sell some stocks and make a $6,000 profit (capital gain). Thanks to the $5,000 CNIL balance, $5,000 of your taxable capital gain will be included as taxable income. You can claim the capital gains exemption against only the remaining $1,000. “This happens even if you have a CNIL balance because of rental losses,” said Luongo. “In other words, your CNIL cuts across all investments, and is not related only to one particular type of investments.” Mike Grenby is a Vancouver- based columnist and independent personal financial adviser; he will answer your questions as space allows in his column — write to him clo The Review, Box 2070, Sidney, B.C. V8L 3S5. Fed up with the tax bite? Call me today to find out how Investors can help you with your tax planning. CALL R.T. 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