Law Times

www.lawtimesnews.com Law Times / January 21, 2008 Page 7 Tax planning for the new year A new year, a minority government in Ottawa, lots of promised tax cuts in the minister of finance's economic statement and some nasty surprises in the banking industry make investment planning imperative. It is never too early to begin tax planning for the year ahead. Most individuals instinctively think of tax planning only at the year-end. As the April 30 tax deadline approaches, stomachs begin to churn. In fact, individuals should be thinking early in the year about how they can best arrange their affairs to minimize their tax burden for the next year. Here are a few thoughts that may settle your stomach. Under the Canadian income tax system, spouses, common law partners, and children are separate taxpayers, each of whom is responsible for their own taxes determinable at individual rates. Canada does not have a system for pooling family income. Thus, the Income Tax Act generally prohibits income-splitting between family members, particularly where the sole purpose of the arrangement is to reduce one's marginal tax rate. There are, however, a few legitimate ways of income-splitting to reduce taxes. Income-splitting: In our progressive tax rate system, an individual's marginal tax rate increases as taxable income increases. The federal tax rate is 15 per cent on taxable income up to $37,178. The rate rises to 29 per cent on taxable income over $120,887. The combined federal-provincial rate is about 46.4 per cent (2007 Ontario). This means that income-splitting can reduce the overall tax burden for individuals. For example, an Ontario married couple each earning $50,000 will each pay $10,157 in 2007. That is $8,900 less total-tax- payable than if only one of the spouses earns $100,000. Thus, moving a certain amount of future income to a member of the family with a lower marginal rate can reduce the overall family tax burden. For example, an individual with a combined federal-provincial rate of 46 per cent who gifts investments to his adult child — who has no income — can shift his investment income that would be taxable at the high marginal rate to a lower rate of approximately 22 per cent. The child can then use the income to support himself in university. In transferring assets to adult children, one must be careful not to trigger capital gains in the parent's hands. The Income Tax Act deems property that one gifts is to be disposed of at its fair market value. Hence, it is usually better to gift cash or non-appreciated assets. One can also income- split with one's spouse or common law partner with a low tax rate. In this case, however, the technique is a little bit different. One cannot simply transfer property to one's spouse or common law partner because any income from the property will be taxable to the transferor and will not be taxable to the transferee. One can, however, loan money to the spouse or common law partner so that he or she can invest the money and have the income taxed at a lower marginal tax rate. In these circumstances, one must charge at least the prescribed rate of interest. One can lock in this rate forever — it will not change, even if interest rates subsequently rise. One should have a well- documented loan agreement that sets out the terms of the loan and the interest payable. An individual cannot claim a loss on any property that he transfers to his spouse or common law partner. The act considers such a loss to be a "superficial loss" and simply adds the amount of the loss to the cost of the property. This means that the transferee can ultimately recognize the value of the loss, but only if he or she sells the property in any arm's-length transaction. Note, however, that the superficial loss rules do not apply to transfers to children. Thus, the transferor can recognize his or her capital loss and split income with the adult child at the same time. Charitable donations: Charitable donations reduce taxes-payable and serve a useful purpose. A taxpayer can generally claim the fair market value of the property that he or she donates to the registered charity. Taxpayers who donate appreciated public company shares to a registered charity have an additional advantage. The donor can claim the full fair market value of the stock as a charitable donation. As well, the act deems any capital gain on the shares to be zero. Thus, the donor does not pay any tax on appreciated shares and gets a tax credit of about 46 per cent of the fair market value of the shares against his tax bill. Spousal RRSPs: A "spousal RRSP" is a trust that one sets up for the benefit of the lower-income spouse or common law partner. The higher-income spouse or common law partner can contribute into the trust and claim the deduction (subject to maximum annual limits) from his or her income. The beneficiary of the trust is taxable but only when he or she extracts the funds from the trust. Thus, the family saves on taxes if the beneficiary has a lower rate of tax than does the contributor. Thus, in effect, a spousal RRSP permits a high-rate deduction at the front end, a tax deferral during the life of the trust until the beneficiary's retirement, and lower marginal tax rates on withdrawals at the end. The contribution limits for 2007 is the lesser of $19,000 and 18 per cent of 2006 earned income. For 2008, the limit is $20,000 on earned income of $111,112. Although one can make an "in-kind" contribution to an RRSP, it is not possible to claim a loss on the transfer of shares into the plan. Further, unlike the general superficial loss rules, the denied loss is lost forever. Making interest deductible: As a rule, it is unwise to have a mortgage on one's home and own investment assets at the same time. Income and gains on the investment assets will be taxable; interest on the home mortgage will not be deductible and must be paid out of after-tax dollars. It is possible, however, to restructure one's affairs and make the interest deductible. The general idea is to sell the investments — paying tax on any realized gains — and pay off the home mortgage. One can then use the home to secure a line of credit to repurchase the investments. The interest on the line of credit for the purchase of the investments will be deductible for tax purposes. One should wait at least 31 days to reacquire any investments on which the taxpayer claims a loss. Procrastinating on tax planning is expensive. The earlier one starts arranging one's business and family affairs, the lower the tax cost. It is remarkable how regularly April 30 rolls around each year is upon us before we realize it is time again for stomach-churning. Plan now to have a better spring next year. Vern Krishna, CM, QC, LL.D, FCGA, is Counsel, Borden Ladner Gervais LLP and executive director of the CGA Tax Research Centre at the University of Ottawa. His email is vkrishna@blgcanada. com It's up to the lawyers I t's up to the lawyers now — or at least up to MPs who probably wish they were lawyers so they could do a decent job grilling the slippery characters appearing before them this week. The Commons ethics committee cranks up for round two of the Mulroney-Schreiber affair, in the Old Railway committee room with a full dozen or more witnesses to be heard. There are several excellent legal minds on the committee, including Serge Ménard of the Bloc Québécois, a longtime Montreal Crown prosecutor and former Quebec justice minister; Joe Comartin of the New Democrats, a Windsor lawyer who goes after the truth like a dentist extracting a back molar; and the Liberals' Robert Thibault, a former municipal manager with a lot of experience in Nova Scotia politics. If anything valuable comes out of the hearings, it should come under questioning from these MPs. Other MPs on the committee who aren't lawyers sometimes slip into theatrics or resort to name- calling, as if they were in question period. It's their default position — looks great on television, builds up the ratings — but as for getting to the bottom of things and that all-too- elusive truth — not much use. On Dec. 13 Brian Mulroney testified before the ethics committee. He was asked why when testifying under oath during his libel suit against the federal government in 1996, Mulroney had said about Karlheinz Schreiber, "I never had any dealings with him." How did that square with the fact that he met Schreiber in hotels in Montreal, Mirabel, and New York, and took hundreds of thousands of dollars in cash in envelopes from him. Wouldn't that constitute "deal- ings?" Mulroney explained, "When I used the language, 'I never had any dealings with Mr. Schreiber,' I was referring to the sale of Airbus aircraft and the time when I was in government." In 1988 Air Canada bought 34 passenger jets for $1.8 billion (about $52 million per jet) from Schreiber, who was representing Airbus Industrie of Europe. Mulroney was prime minister at the time. Air Canada was still a Crown corporation. The Airbus purchase was mightily criticized at the time by American competitors McDonald- Douglas and Boeing, as well as by American government officials and by then-U.S. Ambassador Thomas Niles. Niles is slated to appear as a witness before the committee. Mulroney told the committee that his business dealings with Schreiber in the hotel rooms were about doing "representation" abroad for a military light-armored vehicle that the German firm, Thyssen Industries, wanted to build in Canada. Schreiber was the Thyssen representative. The committee was not impressed. New Democrat Pat Martin, a plainspoken carpenter from Winnipeg, put it rather succinctly. "I'm not calling you a liar, Mr. Mulroney, but I want everyone here to know that I don't believe you." There was a murmur in the audience — and a sudden, small reaction from Mulroney's son, Canadian celebrity Ben Mulroney, who was sitting in the gallery. He was quickly quieted down by his sister. The next round this week promises to be as lively. But does that mean the committee will get any closer to the truth. "I've got 8,000 questions I want to ask Mulroney," said Thibault, "and about as many that I want to ask Schreiber." The committee also has at least a dozen witnesses, trimmed from a list of more than 35, whom it wants to hear. Some were close to Mulroney; others are linked much more closely to Prime Minister Stephen Harper, which leads one to wonder where this committee inquiry is going. Mulroney's former right-hand man Fred Doucet is on the list, but his brother Gerry, who was with Government Consultants International — linked to the Airbus deal — is not. Gerry is ill and recovering in Nova Scotia. But Elmer Mackay, who Schreiber calls a great friend, is on the list. So is his son Peter MacKay, who is Harper's minister of national defence. Elmer's wife Sharon is on the list too; she once sent an e-mail to Schreiber. The relationships are thick, and the selection is unusual. Mulroney's chef, François Martin, is on the list. He once told author Stevie Cameron that he used to deposit large amounts of cash at night into Mila Mulroney's account at the Bank of Montreal on Wellington Street in Ottawa. Schreiber has his antagonist, his former accountant Giorgio Pelossi, testifying from Europe by video- conferencing. There is no love lost between Schreiber and Pelossi. Reporters Harvey Cashore and Linden McIntyre of the CBC, who did extensive research and produced several television specials on the Mulroney-Schreiber affair, are on the list. So are Cameron and Toronto lawyer William Kaplan, who both have written two best- selling books on the Mulroney- Schreiber affair. Harper's chief of staff, Ian Brodie, and his communications director, Sandra Buckler, are on the list. It may have something to do with Harper's office issuing a statement recently that the dozens of letters and hundreds of documents sent by Schreiber in recent years were never passed on to Harper. With all this hitting so close to the political bone, it promises to be quite a show. The stakes are high. And if the committee members can't get at the truth, well, they can always go back to shouting names at each other during question period. Environment Minister John Baird's voice is still in great shape. Richard Cleroux is a freelance reporter and columnist on Parliament Hill. His email address is richardcleroux@ rogers.com. The Hill By Richard Cleroux COMMENT Financial Matters By Vern Krishna LT LT *Pages 1-16.indd 7 1/17/08 7:18:41 PM

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