FINANCIAL PLANNING

Pay a price now to profit later

TAX PLANNING is one of the
most important parts of personal
financial planning. But sometimes
you have to pay a price now to
profit later.

“‘Frequently, to defer tax you

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must set aside funds which will
therefore not be available to spend
now,”’ notes the current edition of
Strategic Tax Planning, a publica-
tion of the Certified General Ac-
countants Association.

‘When you develop a tax strat-
egy, you must take into account
your needs — so enthusiastic tax
planning doesn’t leave you short of
money!’’

For example, if you contribute
to a registered retirement savings
plan, that money will not be avail-
able for other uses. You will save
tax with such a contribution and
the money in the RRSP will grow
tax-free, ideally producing more
for you to spend later, even after
you pay tax when you withdraw
the funds.

Here’s an example. Let’s say

you earn $1,000 and are in the
40-per-cent tax bracket. Do you
put the money into an RRSP or
not?

Py contributing $1,000 to an
RRSP, you cancel out the $400 tax
liability you incurred by earning
that $1,000. But then, while you
have $1,000 in your RRSP, you
have nathing to spend.

So it’s a choice of having $1,000
in your RRSP for future spending
and none of that money to spend
now, or of having $600 to spend
now but nothing in the RRSP for
the future,

“*As always, tax planning must
be done with a full understanding
of rules that are constantly chang-
ing,’ said the CGA tax publica-
tion. And it warned:

‘*The Income Tax Act now in-

A

Montreal Trust has defined its mission in simple terms: it is a
diversified marketer of financial and trust services to individuals,
businesses and other types of organizations. Incorporated one
hundred years ago, in 1889, Montreal Trust operates everywhere in
Canada through more than 175 branches and offices, and will be
expanding abroad in related services and businesses. Total assets
administered by the Company exceed $43 billion.

Come visit our booth and speak to our specialists about:

cludes far-reaching general anti-
avoidance regulations (GAAR)
which will allow Revenue Canada
to reassess any transaction that
produces a tax benefit — unless it
can be shown the transaction took
place for bona-fide purposes other
than to obtain the tax benefit.’’

Make debt

HOW MIGHT you make your
debts deductible —- that is, be able
to deduct for tax purposes the in-
terest you pay?

“Many people have investments
that are substantially debt-free
while having personal property,
like a home, with a large mor-
tgage,’’ said a certified general ac-
countant who does personal tax
planning for clients on a regular
basis.

“Taxable income is produced by
those investments while you pay
interest — which you can’t deduct
— on the personal property.

**What you might do is sell the
investments and use the proceeds
to pay off the existing mortgage.
Then, a little later, arrange new fi-
nancing with the home as collateral
and use the funds from this new
financing to buy different invest-
ments.’”

That way, said the CGA, inter-
est on the new mortgage may be

Because of the uncertainty —
the numerous grey areas — in tax
jaw and tax planning, it almost
always pays to consult with a CGA
or other professional adviser: be-
fore you implement any tax
strategies.

deductible

tax-deductible because you bor-
rowed the money to make invest-
ments, provided these investments
have the potential to produce in-
come.

Under the present rules, any
capital gain on the investments
should be tax-free — although you
should seek advice before taking
that capital gain to minimize any
potential effect of CNIL
(cumulative net investment losses).

“A 1987 tax decision (Bronfman
Trust) has questioned the validity
of this procedure when the steps
are tied directly together,’’ the
CGA said. ‘‘The judge suggested
this approach could be considered
a sham. And there is also the new
general anti-avoidance rule to con-
sider.

“However, the approach may be
valid if the last two steps are
isolated from the first two steps
and if the new investment is not an
identical replacement of the origi-
nal one.”’

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1524 Lonsdale Ave., North Vancouver, Tel. 980-3355

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1575 Marine Dr., West Vancouver, 926-8877
Branch Manager Trudi Kloepper