Beware of some tax WHY WOULD anybody want an omvestment: that loses moncy? “So you can deduct the loss and get a tax break, oe of course,*” comes the reply. But wouldn't an investment that shows a profit be a better choice? “No,”" you say, ‘because then I'd have to pay tax.”” Sorry, | can't always agree with that logic. Money-losing investments are particularly popular around this time each year. The tax shelter promotions are beginning to ap- pear as the Dec. 31 deadline ap- proaches. Tax shelters ofien gen- erate tax savings because they lose money at least initially and sometimes, unfortunately, forever. (A TV show in which | discuss tax shelters — including a strategy to save tax when you plan retire- ment income — will be shown on North Shore Shaw Cable 4 at 10 p.m. Nov. 22, 8:30 p.m. Nov. 23, 10 p.m. Nov. 25 and 6 p.m. Nov. 28.) Let’s compare two identical in- vestments; assume you are in the 45-per-cent tax bracket. Investment ‘‘A’’ loses $1,000 — that is, expenses excecded income during the year by $1,000. ‘*Great,’” you say, as you deduct the loss from your other ince: “That will save me $450 ia tax.” True, but the tax break only reduces your loss by $450. You are still out of pocket $556. Investment “*B’’ produces a $1,000 profit. Sure, you pay $450 tax — but at lease you still have $550 in your pocket. So you are $1,100 better of f than being S550 out of pocket. You should consider an invest- ment that loses money only if you expect the value of the investment to increase more (after tax) than the cash fiow losses you are ex- pericncing. Typically, rental income might not cover rental expenses. But over the long term, you hope the property itself will go up in vatue and produce an after-tax profit much higher than the total after- tax renta! income losses. Since Jan. 1, 1988, however, money-losing investments face another problem: CNIL (cumulative net investments loss). If your investment expenses have exceeded your investment in- 30-119 days TERM DEPOSIT 983-3773 Lonsdale Quay Next to Seabus North Vancouver F Citizens Trust MEMBER CANADA DEPOSIT INSURANCE CORPORATION uring the winter months our North Shore News carriers deliver the paper after dark on Wednesdays and Fridays. You can assist our carriers by leaving your out- side fight cn for them. TH VINCE OF Ree ree Ted ANE WE AD VRC UVES arr #j DISTRIBUTION 1 986-1337 lo __ BUSINESS shelter schemes DOLLARS AND SENSE come since that date, you have been building up a CNIL balance. (You should have been completing Form 1936 to monitor your CNIL. Ask Revenue for its Capi- tal Gains Tax Guide, which in- cludes this form.) A CNIL balance will restric: your access to the capital gains exemption. Let's say you have run up a $5,000 CNIL balance on Wednesday, November 21 . 1990 - North Share News - 59 SRL EE ES your rental property. Now you sell some stocks and make a $10,000 profit. Instead of declaring «a $7,500 taxable capital gain (75 per cent of the actua: $10,000 capital gainj and claiming the offsetting capital gains exemption (assuming you haven't used it up), you will in ef- fect have to declare and pay tax on your $5,000 CNUL balance and can claim your exemption for only $2,500 of the taxable capital gain. Tax shelters often produce significant losses, which in 1urn build up your CNIL. That's only one putential problem. Most tax shelter calculations assume you are in the top tax bracket. But never Iet the prospect of saving (ax now tempt you into an investment that in the long run will leave you in the red. Answer this key question: What will your botiom line be 10 years from now? Add up your projected after-tax costs and look at your projected after-tax return. Remember, recapture of depreciation, CNIL and the Alternative Minimum Tax {AMT) could contribsie to a nefty tax bill. Also answer these ques- ticns: in- the © De you understand the sestment? Would you make investinent if there were no tax breaks? tn other words, is the underlying investment a sound one? eA tax break is usually offered because of the risk. Can vou ac- cept the risk? Can you afford to lose the rest of your investment? * How reputable are the pro- moters and managers of tne tax shelter? What is their track record with previous shelters? © How — and how much — do the promoters and managers get paid? Do they get paid up front, or is their income tied to the suc- cess of the project? ® What about future cash calls if the project runs out of money? After all, a partly finished apart- ment building won’t produce any revenue. Can you comfortably borrow more if you don’t have the money? e What about liquidity? Can you sell, and to whom — and at what price? Always get expert advice before you invest in a tax shelter. And don't be pressured. Do your research now, well ahead of the year-end deadline. 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