dave@lsuc.uucp (David Sherman) (05/23/89)
The April 27, 1989 federal budget did not include very many
income tax changes, but there were a few. A budget wouldn't be
a budget without adding some more complexity to the Income Tax
Act, after all.
One proposed measure which has not received much publicity is
the new rule on interest accrual for individuals. This one may
catch a fair number of people, beginning in 1991. The time to
start planning around it, to the extent you can, is now.
Before 1981, individuals had a choice as to how to report accruing
interest (on, for example, multi-year term deposits or compound
Canada Savings Bonds). For any given investment, the income could
be calculated and reported annually, or it could all be reported
when the investment matured (which might mean a large amount of
interest, pushing the taxpayer into a higher tax bracket).
In 1981, the rule was changed to require accrual at least every
three years. The government was concerned about the deferral of
tax for many years on long-term investments.
Now, it is proposed that all accruing interest be reported annually.
This will apply to investments acquired after 1989, so the hit will
be in the 1991 taxation year (tax returns filed in 1992). The
government's goal is not only revenue enhancement: as noted in the
budget papers, "confusion has arisen because information slips
reporting the accrued investment income have not been generally
available to taxpayers". Under the new system, you will get a T5
for accrued income on investments, accruing on the anniversary of
the investment.
So, if you buy a three-year term deposit in January 1990, you
will be deemed to have received your first year's interest in
January 1991. To some extent this will mean that you may have
to pay tax on income you haven't yet received.
To avoid this rule, acquire long-term investments before the
end of 1989. Note, however, that the existing three-year rule
will apply, so you'll still be taxed in 1992 on investments of
longer than three years. Be careful also that you don't bump
yourself into a higher tax bracket with this maneuver.
In general, of course, when acquiring T-Bills or term deposits,
one should always keep the maturity date in mind. If you buy a
7-month T-Bill today, it will mature in 1989 and you'll have to
report the income on your 1989 tax return. If you choose a term
of 8 months, you will recognize the income in 1990 and not report
it until you file a return on April 30, 1991. But if your 1989
taxable income will be $25,000 and your 1990 taxable income will
be $30,000, you definitely want the 8-month term.
David Sherman
Tax Lawyer
--
Moderator, mail.yiddish
{ uunet!attcan att utzoo }!lsuc!dave dave@lsuc.on.cadave@lsuc.uucp (David Sherman) (05/23/89)
Oops. In tip #22, I wrote: > But if your 1989 > taxable income will be $25,000 and your 1990 taxable income will > be $30,000, you definitely want the 8-month term. I meant the 7-month term, of course. The reason is that your 1989 marginal rate will be ~26% while your 1990 marginal rate will be ~41%. David Sherman -- Moderator, mail.yiddish { uunet!attcan att utzoo }!lsuc!dave dave@lsuc.on.ca
ianmoss@idacom.UUCP (Ian Moss) (05/25/89)
A recent article in the Financial Post by Bob Saunders of Vancouver
suggested it is possible to hold shares in a private company in a
self-directed RRSP. A little research led to an article in the
July-August 1988 edition of the Canadian Tax Reporter (vol 36, No.4
pg. 992 ). To my layman's view, it appears that myself and other employees
in our company should be able to take advantage of this type of tax
break using shares we have bought and/or recieved from a profit sharing
plan. I have a couple of questions however that perhaps you could help
me with.
1. What constitutes "dealing at arm's length"? Do employees
holding small amounts of voting shares in a private company qualify
as "at arm's length"?
2. How do we determine with reasonable confidence that our shares
qualify for inclusion in a self-directed RRSP? I assume that the plan
administrator would require some form of "authorization" before issuing
the necessary documentation for filing with a tax return.
Additional references - Section 146, regulations 4900 and 5100
Income Tax Act RSC 1952 c148 as amended by sc1970-71-72 c63
and as subsequently amended.
dave@lsuc.on.ca (David Sherman) (05/26/89)
In article <672@idacom.UUCP> ianmoss@idacom.UUCP (Ian Moss) writes: > >A recent article in the Financial Post by Bob Saunders of Vancouver >suggested it is possible to hold shares in a private company in a >self-directed RRSP. A little research led to an article in the >July-August 1988 edition of the Canadian Tax Reporter (vol 36, No.4 You mean the Canadian Tax Journal. (There's a big difference.) >pg. 992 ). To my layman's view, it appears that myself and other employees >in our company should be able to take advantage of this type of tax >break using shares we have bought and/or received from a profit sharing >plan. I have a couple of questions however that perhaps you could help >me with. The provisions for putting small business shares into an RRSP were introduced in 1986 and have never been widely used, because of their restrictions. I used them in January 1987 for my own RRSP, and I had some questions about the wording in the Act when I was setting it up. When I spoke with the person at the Department of Finance who had drafted the provision in question, he was delighted to hear that I was using them, because I was the first person he'd heard of who was doing so! (I also had to shop around for a long time before finding a broker who would accept a self-directed RRSP with small business shares -- most of them didn't, and probably still don't, understand it.) > 1. What constitutes "dealing at arm's length"? Do employees >holding small amounts of voting shares in a private company qualify >as "at arm's length"? Usually. "Related" (as defined) persons are deemed not to deal at arm's length, and in other cases it's a question of fact. (ITA s.251(1)) > > 2. How do we determine with reasonable confidence that our shares >qualify for inclusion in a self-directed RRSP? I assume that the plan >administrator would require some form of "authorization" before issuing >the necessary documentation for filing with a tax return. In my case I got a letter from the Secretary of the corporation setting out all of the facts required to satisfy the conditions laid down in the Act. The broker was happy with that. I suggest you consult a qualified tax expert for professional advice, to make sure you do it right. >Additional references - Section 146, regulations 4900 and 5100 ... which totals 25 pages of dense type and impenetrable language. Happy reading, if you try on your own... > Income Tax Act RSC 1952 c148 as amended by sc1970-71-72 c63 > and as subsequently amended. That's just legalese for "the Income Tax Act". You only see it in footnotes. David Sherman (author, forthcoming book, "Income Tax Research") -- Moderator, mail.yiddish { uunet!attcan att utzoo }!lsuc!dave dave@lsuc.on.ca