22 -— Wednesday, May 8, 1991 - North Shore News After-tax analysis key to investment strategy HOW MUCH interest did you earn this past year? How much income tax did you pay on that interest this past filing season? Michael DOLLARS AND SENSE While we are happily into the “after-tax” season once again, don’t close the file before you review the ‘‘after-tax’’ returns you earned on your investments in 1990. Tax planning should be a year- round activity: you need to plan now 10 make sure your 1991 tax bill will be as low as legally possi- ble. Investing in a tax effective way is an important part of this planning. Take another look at Line 121 on the front page of your 1990 tax return. That’s where you reported the interest you earned last year. You might think you made !1 to 13% interest on your GICs, T-bills, bonds, money market funds and similar instruments. And indeed, you did get a cheque for $1,200 if you had a $10,000 deposit earning 12%. But when you reported that $1,200 interest on Line 121 of your tax return and paid perhaps 41-47% tax, you had to give Rev- enue Canada at least $500 of your interest. So instead of earning 12% on your money, you really earned on- ly 6 to 7%. With inflation running fast year around 5 to 6%, you barely maintained the purchasing power of your money — and that’s assuming you reinvested the interest. You pay a price — the damage income tax and inflation can do to your investments — for a guaran- teed return of principal, guaran- teed interest’ rate and liquidity {except for locked-in desposits, you can easily get back your money). if you are in the lowest) tax bracket and have indexed pensions or otherwise have more income than you need, you can make moncy on interest-bearing instru- ments. But if you find your invest- ments are only barely surviving inflation and income tax, at least explore the alternatives: Ube stock market, revenue property or a business venture. But be prepared to invest time, effort and expertise — as well as money. Stock. property and business investments all offer tax advan- tages and a good chance to keep ahead of inflation. But you must also accept the risks invalved: the higher the potential return, the higher the potential loss. Take a long-term approach to these investments. Be prepared to hang in for perhaps 10 years to give your time, effort and exper- tise a chance to pay off. Whenever you analyse an in- vestment strategy, always compzre the returns on an after-tax basis. One couple came to see me for financial advice. They had bought a property for $100,000. “We plan to rent it out for about $665 a month while we house-sit another place, then retire to our new home in about a year,*’ they said. ‘‘We have $100,000 cash from the sale of our last place. “Should we buy the new place for cash, or get the largest mor- tgage we can so we can deduct the rental losses and save tax?”’ The rule is this: invest your money for the highest after-tax return. By all means mortgage the new place to the hilt if you can then use your other funds to safe- ly earn a higher return — after tax — than the cost — after tax — of the revenue property mortgage. But if you might need money for personal expenses, keep enough to pay cash; you can’t deduct the interest on consumer debt. This couple, in the 41% tax bracket, simply planned to keep their $100,000 in a deposit so the funds would be available to pay off the mortgage when they retired and moved into their™ home. Top NV grads honored NORTH VANCOUVER'S top secondary school graduates will be recognized at an Honors Lun- cheon at the Seymour Golf and Country Club on Wednesday, May 8. The event is sponsored by the North Vancouver School District and 20 local businesses, including the North Shore News. Speaking at the lunch will be the Superintendent of Schools, Dr. Robin Brayne, and Dr. War- ren Mayo, Lions Gate Hospital's PERSONAL BANKING ONLY “RATE SUBJECT TO CHANGE F Citizens Trust} Head of Intensive Care. Auending will be students who have been chosen by their school ror their wide background in a variety of subject areas, North Vancouver secondary school prin- cipals, North Vancouver District and City mayors, school trustees and central office personnel. At the event, which was orga- nized by the school district's vice-principals, the students will be presented with commemorative pins and certificates. 5 YEAR TERM DEPOSIT 983-3773 Lonsdale Quay Next to Seubus North Vancouver 24 Hr. Quote Line 682-4636 MEMBER CANSINN DP POSFT INSURANCE CORPORATION Using the two extremes, the (simplified) calculations — showed the following: (1) Pay $100,000 cash for the property. Collect $8,000 rent — for a total after-tax return of $4,700. (2) Get $100,000) financing at 10.5% to buy the property and invest the $100,000 cash from the sale of the previous home at 9.5% for the year. Collect $8,000 rent and $9,5G0 interest —- after tax, a total investment income of $10,300, OUR NO MATTER WHAT YOUR OCCUPATION Is... RESIDENTIAL MORTGAGE SALE 10% oserea CLOSED MORTGAGE Gulf and Fraser Fishermen’s Credit Union offers flexible residential mortgage packages... Call or come in and see us if you're... * Shopping for a New Mortgage * Facing a Mortgage Renewal * Looking at Re-Financing an Existing Mortgage LOT LEGAL FEE PACKAGE Gulf and Fraser is offering a residential mortgage “Legal Fee Package” exclusive to our members. NO TRANSFER FEE Gulf and Fraser has a “No policy for transferrin, mortgage to Gulf and institution. We make it possible to pay age sooner and save you () ars. Weekly, bi-weekly along with semi-monthly and monthly payment schedules are available to you. FIRST MORTGAGES* | TERM | oPEN | TERM GPEN 6 Month 11% i Year 11% 2 Year ~ 3 Year 550,606 pecple work hard to protect Canada’s endangered species. av oy For more intormation contact Canadian Wildlife Federation 1673 Carling Avenue Ottawa, Onitoro K2A 374 (613) 725-2194 your residentia] raser Fishermen’s Credit Union from any other financial PRE-PAYMENT FLEXIBILITY * Rates are subject to change without notice Gulf and Fraser Fishermen’s Credit Union Pay $10,500 interest on the mortgage — deductible, so after tax, an expense of $6,200. Sub- tract the $6,200 after-tax mortgage expense from the $10,300 after-tax investment income -- for a total after-tax return of $4,100. So this couple would be $600 ahead by paying all cash. Also, if the couple had financed the total purchase of the property, knowing the rent wouldn't cover the expenses and planning to move into the place in a year, Revenue Canada might have disallowed the rental income loss as a deduction. There would have been no “reasonable expectation of prof- i.”” - Copyright 1991 Mike Grenby ts a Vancouver- based columnist and independent personal financial adviser; he will answer your questions as space allows in his column - write to him ¢/o Noth Shore News, 1139 Lonsdale, North Vancouver V7M 7H4. WELCOME TO HOME Transfer Fee” off your mort- thousands of 10.5% 10% 11.25% Richmond 271-5911 You can help too. Vancouver Isiond Mamot Manmaa vancouverensis 20/20 PLAN Our closed residential mortgages also include our 20/20 PLAN. On any one year anniversary date Gulf and Fraser allows you to increase your payment up to 20% and/or pay an additional amount of princi- pal not exceeding 20% of the original amount of the mortgage. 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