Magazine article CMA - the Management Accounting Magazine

Year-End Tax Planning

Magazine article CMA - the Management Accounting Magazine

Year-End Tax Planning

Article excerpt

A good way to reduce your tax bill is to do advance planning. It is not too late to start looking at some strategies to help you save or defer tax in 1993. We have outlined below several tax-planning opportunities which may assist you in this regard.

Investment income and expenses

* If you borrowed money to make investments or to earn business income, the interest expense might be deductible. Interest expense incurred on borrowing for personal purposes is not deductible. Where possible, ensure that you borrow for investment or business purposes and pay for personal expenditures out of your savings. If you have both investment/business and personal loans, the latter should be repaid first.

* The marginal tax rate on dividends from Canadian corporations is lower than that for interest income. Consider restructuring your investments to earn more dividend income.

Capital gains and losses

* You are entitled to a "lifetime capital gains exemption" (exemption) of $100,000. To the extent that you have any exemption left, you might be able to realize capital gains on a tax-free basis in 1993.

* In addition to the $100,000 exemption, if you own shares of a qualified small business corporation you might be entitled to an additional exemption of up to $400,000 on their disposition.

* Real estate purchased after February 1992 and held for investment purposes will not be eligible for the $100,000 exemption. The exemption is restricted to property purchased prior to that time and will further erode the longer the asset is held. If you are considering a disposition of such an asset, you might want to include this restriction in your analysis of any offers.

* Your ability to claim the capital gains exemption will be restricted to the extent that you have cumulative net investment losses (CNIL). To the extent that your investment expenses (i.e., interest expenses, certain tax shelter deductions, rental losses, etc.) exceed your investment income, a CNIL balance will be created. This balance will reduce the exemption you may claim. You might want to consider receiving investment income in 1993 instead of 1994, or, as an alternative, delay paying investment expenses until 1994. This will allow you to claim the greatest capital gains exemption possible.

* Capital losses may be carried back to the three years immediately preceding the year of the loss and forward indefinitely to offset gains in those years. …

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