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Q & A Archive:
Tim Cestnick
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Tuesday, February 26, 2002.
Q:
Joe writes:
What is your opinion on investing outside RRSP compared to inside. Would you agree with the argument that since capital gains tax is now at 50 per cent the advantages of an RRSP are lowered? Also, with the government having its hands on large RRSP funds of the "baby boomers" is it more likely that capital gains tax outside the RRSP will fall more (to induce foreign investment) than personal tax rates, in future?
A: Thanks for the question Joe.
I do agree that investing outside the RRSP does have some merit. I only recommend this, however, once you already have enough in your RRSP to provide a healthy income in retirement, or where you are able to replace the RRSP deduction with some other deduction (perhaps an interest deduction).
Finally, don't count on the capital gains inclusion rate falling again. It's not going to happen. I spoke with Finance Minister Paul Martin in June of last year, and he confirmed that the capital gains inclusion rate is low enough now that it is in line with the U.S. capital gains tax rate. If the U.S. cuts their capital gains tax rate again (which is not likely in the near future), our government may have to revisit this issue, but don't count on that happening any time soon.
Tuesday, February 19, 2002.
Q:
Grace writes:
What I want to explore is Tim's views on RRSPs and RRIFs and how one can unlock the assets in these vehicles without triggering too great an amount in taxes. I know he has written on this issue. It is a big issue for those of us elderly who would like to enjoy more of the assets we spent years working hard to build up, without paying huge taxes.
A: Thanks for the inquiry Grace.
I have written about the strategy called the "RRSP Meltdown, or RRSP Freeze." This strategy allows you to withdraw money from an RRSP or RRIF on a tax-efficient basis. The strategy is not for everyone. It does require that you be a good candidate to borrow money to invest. The interest deduction on the borrowed money can offset the taxable income from the RRSP or RRIF withdrawal.
An article that I wrote on this issue appeared in the Globe & Mail on January 24, 2001. I have also discussed this issue in my book Winning the Tax Game 2002.
If you don't want to borrow to invest, it may be possible to create other tax deductions or credits to help offset a taxable RRSP or RRIF withdrawal. Deductions offered by flow-through shares and credits offered by labour sponsored investment funds come to mind - but you must be willing to take on the higher risk associated with these investments.
Thursday, January 31, 2002.
Q:
Steve writes:
Can one lock in an employee loan, at the prescribed rate, for the life of the loan? I'm asking because I looked into this about five years ago and was informed that the "lock-in" period was only for five years, and even then only for house purchases. The “lock-in” rate was only for one year on other loans, if I recall correctly. Is this only in the absence of a written agreement? What if the employee is also a shareholder, say for a private corporation, where the employee (or child) owns the majority of shares?
A: Thanks for the question Steve.
When it comes to employee loans, the rate of interest can be locked-in for five years on loans to purchase or refinance a home, so your understanding was correct.
As for other loans to employees, the rate of interest must be at CCRA's (Canada Customs & Revenue Agency) prescribed rate as it changes from quarter to quarter. There is no ability to lock in this rate.
In a situation where the employee is also a shareholder (or related to a shareholder), the same rules apply. I should mention, however, that a loan to a shareholder will be included in the income of the shareholder unless: (1) the loan is for a limited number of things (to buy a car, finance a home, or purchase more shares from the treasury of the company), and (2) the loan is made to the individual in his/her capacity as an employee (not a shareholder).
This last point (point # 2) can be a difficult one to meet. You should speak to a tax pro about this issue if you plan to borrow money from a corporation you own.
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Wednesday, January 30, 2002.
Q:
Tom writes:
We are considering buying a house or a townhouse in a suburb of Vancouver because of the low interest rates. Some swear that it is the best investment in the long run since you don't get taxed on the capital gains. Others say the stock market will always outperform real estate in the long term. The boomers have driven up the prices over the last 20 years, but there are not as many younger people buying houses to fuel demand. Are we better off renting?
A: Thanks for the question, Tom.
I can't tell you whether you should buy or rent. This decision can be made only after visiting a trusted financial advisor who will look at many factors, including: your level and stability of income, your long-term financial objectives, your current savings for retirement, etc.
I will say, however, that I do generally agree that real estate is not likely to appreciate in value as much as publicly-traded securities and mutual funds over the long term (although there may be exceptions depending on where you are buying).
I would not look at the home strictly as an investment. It is a lifestyle decision.
You should visit a financial advisor to discuss this issue more.
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Tim Cestnick, is Managing Director, Tax Smart Services, AIC Ltd. Tim is author of the best-sellers Winning The Tax Game and Winning The Estate Planning Game. He is author of Winning The Education Savings Game, co-author of Death & Taxes, Your Family's Money and editor of the best-seller Taxes for Canadians for Dummies. Tim is also a tax commentator for television's CBC Newsworld, and tax columnist for The Globe & Mail's Report on Business.
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