Save tax by using
loan for investment

ARE YOU ready to save
some money?

Today, we kick off this col-
umn’s summertime tax tips series
with the story of Richard (and/or
Louise) whe will save more than
$16,000 in tax by improving on a
plan to borrow $30,000.

Elio Luongo, senior tax manag-
er with Peat Marwick Thorne,
chartered accountants, has put
together a special series of tax tips
for North Shore News 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
discover how to save up to thou-
sands of tax dollars — sometimes
year after year — through rela-
tively simple planning.

dollars
and sense

Michael Grenby
ST ES

“‘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 feder-
al-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 impor-
tant to look at your particular sit-
uation 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
Canada could use its general an-
ti-avoidance rule (GAAR) to
disallow certain tax planning
techniques.”

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 $3,000
on my credit cards,’ he said.
Total loan: $30,000.

Richard earns $45,000 a year,
most of which goes to living ex-
penses. But he is building up in-
vestments for both a reserve fund
and retirement nest egg.

So far, he has put $5,000 into
blue chip stocks outside his
RRSP. He has a rea! knack for
the market: his portfolio is worth
around $30,000 today and he has
collected dividends of about
$16,000 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 $30,006 loan at 15
fo 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 ad-
vantage of the capital gains ex-
emption now, in case Ottawa
decides to limit or ends its use in
the future,"* said Luongo. ‘*And
this allows him to save about
$7,500 in 1ax."”

*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
balances.

* Borrow $30,000 to repiace the
investments Richard sold.
“Because this loan is being taken
out to earn investment income,
the interest is deductible."’

941 is now

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 in-
cluded in income — but ideally in
a lower tax bracket."

Luongo pointed out that bor-
rowing 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 —

See CNIL
Page 36

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35 - Wednesday, July 18, 1990 - North Shore News

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