Avoid a taxing time… plan ahead

The slower pace of late summer makes it an ideal time to think about your personal finances. Whether relaxing at the cottage, or on the patio at home, cast your mind back to the income tax you had to pay last April. And to other issues such as the low interest rates you’re getting on your savings; or how the federal government’s Seniors Benefit proposals may affect you in the future.

Don’t you think it’s time to protect yourself from the combined effects of powerful banks who pay only a pittance in interest on your savings, and cash-hungry governments that impose excessive taxes on your income — not to mention clawbacks on your pensions?

If you recall my last column, I had just finished my own tax return and resolved to make the ordeal less painful in future. I’m now in the process of looking at every conceivable, but legal way to avoid losing all my public benefits plus avoid playing right into the hands of the tax collectors. I’ve compiled the following 10 ideas which should be helpful:

  1. Limit taxable income to just under $30,000 a year if you can (some suggestions appear below). Up to that level, the combined federal and provincial income tax rate in most pvinces is in the range of 26 per cent to 29 per cent. Above that, it jumps to 40 to 45 per cent depending on the province, and above $60,000 the rate is a painful 50 per cent plus.

  • Defer income as long as possible. Delay realizing capital gains as long as you can, but incur and claim any deductible expenses as soon as you can.

  • Invest savings where the return isn’t taxable. Life insurance policies usually accumulate value on a tax-deferred basis if you don’t withdraw the money, and on your death the proceeds pass to your heirs both tax and probate free.

  • Consider gifts or interest-free loans to your children or grandchildren to buy a home, start a business or get an education. But watch the income attribution rules under the tax law if the proceeds are used for other investment purposes. These tax traps can be avoided if the right precautions are taken.

  • Weigh the pros and cons of investing your savings in tax-sheltered or tax-deferred areas such as real estate investment trusts or royalty income trusts. There are risks, but they can be evaluated, and there have been some good investment opportunities in these sectors in the past year.

  • Consider investment in a portfolio of good dividend-bearing stocks, such as utilities and banks. Buy shares you’ll likely never have to sell, thereby deferring capital gains indefinitely. If you incur a loss, realize it immediately and shelter another capital gain.

  • If you have enough cash flow to live on and yet more capital to invest, consider something that yields no annual taxable income, but is likely to grow in value on a tax-deferred basis. Farmland, recreation, property and collectibles qualify.

  • Most small business ventures are treated much more favorably from a tax standpoint than passive investments. While business ventures are usually much riskier than other investments, consider a business if other factors are right. Structure it so it qualifies for a business investment loss if things don’t turn out well.

  • If you invest in rental buildings or other tangible property to be leased or rented, part or all of your investment return can be sheltered by capital cost allowance (depreciation for tax purposes) on the assets.

  • Interest paid on money borrowed for a business or investment can be deducted from any other income for tax purposes. With current low interest rates and an improved economy, there are numerous opportunities.

      My August 1997 Newsletter expands on the above items and examines tax reduction and deferral in more detail plus the other options for portfolio investors. For a copy, please send $5 to cover production and mailing costs to: Donald I. Beach & Associates Inc., 2555 Highway 7, Greenwood, Ont., L0H 1H0.