Law Times

Law times • SEPTEMBER 15, 2008 t was a strange thing that Prime Minister Stephen Harper said the other day. He says a lot of strange things these days because of the election campaign. Harper was visiting the Harper more of an onion I The vegetable section in a super- market as part of his new image makeover. Make him look more homey, a friendly sort of guy who does the family shopping and cares whether people get sick and die eating tainted food no longer inspected by the Canadian Food Inspection Agency. Out of the blue, a reporter asked Harper, if he were a vegetable, what kind of vegetable would he be? Harper was caught. He didn't know what to say. He hemmed. He hawed. He crooked his head and he smiled. And then he re- membered why he was there. The makeover! Harper answered he would Hill By Richard Cleroux be, "more of a fruit, all sweet and colourful." Talk about staying on message. Harper never said what kind. A lemon perhaps? Actually, Harper is more like an onion. You start peeling away to find out what's in the middle, but layer after layer is the same. Only the smell gets stronger. He was asked why he called an election. He replied his gov- ernment had been blocked by the Opposition. He needed a majority to govern. But then he added he expects to get only another minority. So why call an election? Go figure. Trying to figure out Harper can be difficult. Newfoundland Premier Danny Williams said in a nationally tele- vised speech last Wednesday that to find out what Harper is really planning for Canada, one has to go back four or five years and read up on what Harper said back then. Fair enough. It was on June 8, 2004 before a crowd of cheering partisans in Victoria that Harper revealed his plans for the Supreme Court of Canada. His gripe stemmed back to an differently and said it would go against democracy as guaran- teed by the Charter of Rights, and it upheld the strict limita- tions on third-party spending in the Elections Canada law. So it was understandable that later, in 2004, Harper openly lashed out at the Supreme Court before his cheering fans, and announced that if elected he would change the role of Canada's highest court. Harper slammed the Su- earlier Supreme Court decision that went against him when he was head of the National Cit- izens Coalition. The case is called Harper v. Canada. Harper wanted the Elections Canada law changed so that "third parties," such as big corporations and their lobbyists, could spend as much as they wanted on advertis- ing at election time. The Supreme Court saw it preme Court for giving prison- ers the right to vote, but that "third-party" supporters such as himself couldn't spend what they want at election time. A foreshadow of the "in and out" scandal of the 2006 election. He would make the judges listen more to what his government said and less to what the Charter said about the things that really mat- tered to him — abortion, same-sex marriages, and minority language rights. The crowd cheered. It was somewhat tacky for a former lobbyist turned national politician to whip up a crowd against the national judiciary — the sort of thing one might expect from the leader of some tin-pot, emerging democracy. "We've got to have courts that apply the law, not courts that apply their own criteria," he told the crowd. If he became prime minister, judges would defer to his laws, he said. The irony, of course, is that the first Supreme Court judge that Harper got to appoint last year, Justice Marshall Rothstein of Manitoba, has proven to be any- thing but a Harper toady. All of Rothstein's judgments so far have been based on the law, not 2006 ballot box results. And there are no signs what- soever that this second judge he appointed last week, Justice Thomas Cromwell of the Nova Scotia Court of Appeal, will be any different. So what happened? Did Harper misjudge how judges feel about the law? Did Rothstein come under Charter influence or the influence of his colleagues on the bench? Or, rather, was Harper out to lunch right from the start and whoever was on the short list that came up from the bar associations would have been a good, impartial judge? Sure, three years ago at an anti- abortion conference Vic Toews got to deliver his famous, shameful speech "Abuse of the Charter by the Supreme Court," but eventu- ally after one too many gaffes the embarrassing Toews was quietly eased out of his Justice portfolio. And Maurice Vellacott did COMMENT A Tax shelters for retirement planning hope that the government will drop a pension in their lap; oth- ers do something about it. The federal government's latest tax shelter for investors — a tax- free savings account (TFSA) — should help individuals save tax dollars efficiently for retire- ment and other purposes. As with registered retirement sav- ings plans, TFSAs allow one to invest tax-free and improve the rate of return on investments by sheltering current income from tax. Contrary to popular wisdom, tax shelters are not loopholes; they are de- liberate public-policy deci- sions by governments. The theory underlying a tax shelter is simple: make it attractive for taxpayers to invest in prescribed activi- ties by lowering or eliminating taxes and improving the rate of return on the particular in- vestment. The activity may be drilling for oil, manufacturing, farming, fishing, or simply planning for retirement. To appreciate the difficulty of saving — whether for retire- ment, education, housing, or vacations — we first need to understand the four elements of investing: yield, expenses, infla- tion, and taxes. Your real savings is your nominal rate of return net of the other three elements. Assume, for example, that ll lawyers worry about saving for retirement. Some just worry and go around accusing Chief Justice Beverley McLachlin of saying she had "god-like powers." It was all in his mind. She never said such a thing. And so Vellacott had to re- sign as chairman of the Commons aboriginal rights committee. And Harper and his entire cab- inet boycotted the 25th anniver- sary celebrations of the Charter in Ottawa last year. Not a single one of them was there. It was shame- ful in a democracy that pretends to have an independent judiciary. But Harper never did end up stacking federal courts with judges who have predetermined conservative views on the cases before them. But was it because, as Wil- liams says, Harper didn't have his majority, or rather because our democracy is stronger than the machinations of any one man, majority government or not? Oct. 14 will tell. LT Richard Cleroux is a freelance reporter and columnist on Parliament Hill. His e-mail address is richard cleroux@rogers.com. "Carmen" invests $1,000 in a risk-free government T-bill bond fund that yields three per cent an- nually. She will lose approximate- ly 2.5 per cent to inflation, 0.25 per cent in fees, and about 1.3 per cent in taxes at a 46-per-cent marginal rate. Thus, Carmen will have a net return of minus one per cent — not a formula for comfortable retirement. We can alleviate the prob- lem somewhat by increasing the real rate of return and re- ducing the tax costs of invest- ing. To be sure, inflation is be- yond an individual's control. To some extent, however, the rate of inflation influences the gross return on investments. Compounding interest — that is, earning interest upon in- terest — is one of the easiest forms of growing income. The formula to determine the future value of a compound- ed sum of money is: FV = P (1 + i)n Where: FV = future value; P = present sum of money; i = interest rate; and n = time period If we can eliminate or defer the tax cost, the rate of return in the above example increases to 0.25 per cent. Not a great return, but better than losing money year after year. Using the principles of compounding, we can cal- culate the future value of an equal amount invested annu- ally at a given rate of interest www.lawtimesnews.com for a given term. For example, the future value of $5,000 in- vested annually for 20 years at five per cent per year would be about $165,000. We can improve the rate of return on investments by in- creasing yield and reducing costs, such as taxes payable. The compound interest formula is the core of one of the basic tech- niques of tax planning — tax deferral. Simply stated: a dollar of tax liability deferred to a fu- ture date is a dollar saved. Re- ducing the immediate tax bite on investment income enhances future after-tax returns. Thus, it Financial By Vern Krishna should not surprise anyone that tax-deferral plans — such as RRSPs — are the most popular devices with Canadians. Now we have another plan —TFSA — to add to our ar- senal of tax-planning vehicles. The essence of a TFSA is that investors can set aside money in an eligible investment ve- hicle that will be entirely tax- free. Unlike RRSPs — which allow for tax deductions on contributions into, and tax deferral on income earned in, the plan — contributions to a TFSA are not deductible for tax purposes. There is no im- mediate up-front tax savings from contributing to a TFSA. The principal advantage of a TFSA is that all of the earnings in the plan will be exempt or sheltered from tax. Since investors cannot de- duct contributions into a TFSA, capital withdrawals from the plan are not taxable to investors. However, all investment income — including capital gains — that an investor earns in a TFSA is tax-free upon withdrawal. Thus, there are two princi- pal differences between RRSPs and TFSAs: 1. Contributions to an RRSP 2. are taxable at the individu- al's marginal tax rate when he or she withdraws funds from the plan. TFSA with- drawals are not taxable. The TFSA technical rules are fairly straightforward and easy. The limitations are as follows: Canadians over the age of are deductible for tax purpos- es within certain prescribed dollar limits; TFSA contribu- tions are not deductible. Withdrawals from an RRSP 1. 2. 17 can save up to $5,000 every year in a TFSA. An investor may carry for- ward his or her unused TFSA contribution room to future years. For example, an individual who contrib- utes $2,000 in one year will have $3,000 unused contri- bution room. He can then carry forward the $3,000 3. and contribute up to $8,000 in the following year. Any amounts earned in or 4. 5. withdrawn from a TFSA do not affect an individual's federal income-tested ben- efits and tax credits. An individual may contrib- ute to his spouse's TFSA. One can transfer all TFSA assets to one's spouse upon death. attractive tax shelters, but for different reasons. RRSPs allow individuals to defer tax until age 71 and are attractive for high- income individuals because of the up-front deductions and tax savings. Both RRSPs and TFSAs are Matters save only modest amounts an- nually. For example, monthly savings of $200 invested at five per cent will grow to nearly $80,000 in 20 years. Also, since TFSA withdraw- als do not affect federally funded income-tested benefits — such as the Guaranteed Income Supplement and the Canadian Child Tax Benefit — TFSAs will not prejudice lower-income Canadians who contribute to and save in such plans. Individuals can use RRSPs to convert taxable invest- ment income into tax-ex- empt savings when with- drawn. Thus, the TFSA is attractive for lower-income Canadians even if they TFSAs allow taxpayers PAGE 7 and TFSAs to shift income between spouses without any attribution penalty. Gener- ally, the attribution rules ap- ply if an individual transfers property to his spouse. Thus, any income that the recipi- ent spouse earns is taxable in the hands of the transferor spouse. The attribution rules prevent income splitting. For example, if "Jane" transfers $40,000 to her spouse "Michael," any in- come that Michael earns on the $40,000 is taxable back to Jane. If Michael invests the $40,000 in five-per-cent bonds that produce annual income of $2,000, the inter- est income is taxable in Jane's hands. However, the attribu- tion rules do not apply to spousal RRSPs and TFSAs. TFSAs can invest in the same type of investments as RRSPs — mutual funds, publicly traded securities, government and cor- porate bonds, and guaranteed investment certificates. Lawyers — whether high- or low-income — should seri- ously consider the advantages of tax-sheltered investing early in their careers to provide for their retirement income. The alternative is to get appointed to the bench. LT Vern Krishna is tax counsel with Borden Ladner Gervais LLP and executive director of the CGA Tax Research Centre at the University of Ottawa. His e-mail address is vkrishna@ blgcanada.com.

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