dave@lsuc.UUCP (David Sherman) (07/07/87)
Well, having completely revised my tax course (gasp) I have
a bit of time for a posting. Where to start? The media have
covered most of the obvious stuff like the changes from deductions
to credits fairly well, so I'll skip that stuff unless people ask
for it and move into something which hasn't been covered as well:
the end-run around interest deductibility.
Speculation before June 17 was that Wilson might hit interest
deductibility, as MacEachan tried to in the 1981 budget (he backed
away on that after pressure from the investment community).
He didn't do it directly, but took an interesting cut at the
presently available "double-dipping".
As a general principle, under the Income Tax Act s.20(1)(c)
interest is deductible if it's paid on money borrowed to earn
income from business or property. In the typical case, you borrow
to buy shares on the market. Since they're common shares they can
in theory pay dividends, even though you may be buying "growth"
shares or stocks in some junior mining company that you know damn well
aren't going to pay dividends before you sell them (for a profit,
you hope). But since they could pay dividends, your interest is
deductible.
Then, of course, the stock goes up and you get a tax-free capital
gain thanks to the $100,000 (no longer to be $500,000) capital gains
exemption. So you not only get a tax-free gain, you get to deduct
the interest expense against your other income. That's the double-dipping.
What MacEachan tried to do in 1981, and Wilson stayed away from, was
to prohibit the interest deductibility except to the extent of your
investment income (interest, dividends, etc.). That was politically
too volatile. Instead, he's made the capital gains exemption unavailable
effective 1988 to the extent of your post-1987 "cumulative net
investment losses" -- effectively, the extent to which your interest
expense, plus flow-through share deductions and some other stuff,
exceeds your investment income, cumulatively from January 1, 1988.
The effect will be that if you're getting capital gains and claiming
the exemption, any interest expense you've claimed against other
income (such as employment income) will be taxed back. Quite neat,
and hard to complain about.
Tax planning tip: if you're in the market and have some winners
and some losers, and you're playing with borrowed money, cash in
all your winners before the end of 1987 (December 22 or whenever
the date is to have settlement by December 31). Then your accrued
losses on the losers will be around to offset future capital gains,
reducing the chance that you'll be nailed by this new rule.
David Sherman, Consultant
The Law Society of Upper Canada
Toronto
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{ seismo!mnetor cbosgd!utgpu watmath decvax!utcsri ihnp4!utzoo } !lsuc!dave