The Taxman Cometh for NSERC Award Recipients
T. Kim Nguyen
nice big scholarships like OGS or NSERC... I have a question that's
just burning to get out:
How does one reduce one's net taxable income to an acceptable level
(ie. $0) if one receives a sizeable scholarship? From what I can tell
and from a quick phone call to Revenue Canada, scholarship money does
not qualify as "pensionable", so you cannot use that money when
calculating how much you can contribute to, say, your RRSP. This
makes little sense to me. After all, is the !@#$@ country giving you
money or is it just going to take it all (well, partially) back?
What's the point of saying that NSERC awards are for $13.5k when
they're actually 30% less than that???
Can one contribute to some sort of pension plan to reduce the tax
burden?
--
T. Kim Nguyen k...@watsup.waterloo.{edu|cdn}
k...@watsup.uwaterloo.ca
{uunet|utzoo|utai|decvax}watmath!watsup!kim
Systems Design Engineering -- University of Waterloo, Ontario, Canada
Eugene Fiume
>
>How does one reduce one's net taxable income to an acceptable level
>(ie. $0) if one receives a sizeable scholarship?
My understanding when I was a grad student was that a scholarship was
considered "unearned income" (love that value judgement!), and
therefore could not be put toward an RRSP. I doubt the situation
has changed. All you can do (well, all I did anyway) is to claim
the standard $500 deduction.
Also, you're supposed to pay tax by quarterly installments. I never
did this, and was sometimes charged interest. I think they now have
their act together and are pretty insistent about charging interest.
As to how you reduce your taxable income to $0, you can't; so forget it,
hold your nose, pay up, and be proud of the fact that it's people living
near or below the poverty line that support this great country of ours :-( .
(BTW I have no idea how true this last remark actually is--I'd be interested
in seeing a breakdown of gov't tax revenue as a function of income (whether
taxable, net, disposable, etc.).)
--
Eugene Fiume
Dynamic Graphics Project
University of Toronto
e...@dgp.toronto.edu
Brian A. Jarvis
>In article <KIM.89Au...@watsup.waterloo.edu> k...@watsup.waterloo.edu (T. Kim Nguyen) writes:
>>
>>How does one reduce one's net taxable income to an acceptable level
>>(ie. $0) if one receives a sizeable scholarship?
>
>As to how you reduce your taxable income to $0, you can't; so forget it,
>hold your nose, pay up, and be proud of the fact that it's people living
>near or below the poverty line that support this great country of ours :-( .
>(BTW I have no idea how true this last remark actually is--I'd be interested
>in seeing a breakdown of gov't tax revenue as a function of income (whether
>taxable, net, disposable, etc.).)
>--
>Eugene Fiume
I think, by our current standards, I'm below the poverty line. Which doesn't
say a whole hell of a lot.
From 'way back in high school, the poverty line was defined to be spending
about 2/3 of your income on necessities: housing, clothing, food.
Am I under the poverty line? I'm not dressed in rags (Well, then again,
my friends do consider my tastes to be rather conservative... B{); I've
got plenty of food in the cupboards; I've got a small, but nice downtown
Toronto apartment. All things totalled, I'm probably pretty close to the
poverty line, but it's a damn comfortable form of poverty. I can handle it.
Didn't someone on the Net point out that while x million of people in Canada
are below the poverty line, there were fewer people without a VCR, implying
that although many may be poor, they do manage to have the modern
conveniences, whether they can afford it or not.
===============================================================================
__ __ Brian A. Jarvis,
/ ) ...jtsv16!brian / ) J.T.S. Computer Systems Ltd.,
/--< __ o __. ____ /--/ Downsview, Ontario
/___/_/ (_<_(_/|_/ / <_ / ( o My dog, Goof, still says "Hi!"
===============================================================================
DOUG JOHNSON - GEOGRAPHY
>Also, you're supposed to pay tax by quarterly installments. I never
>did this, and was sometimes charged interest. I think they now have
>their act together and are pretty insistent about charging interest.
Ha. Tell me about it. (For more details, e-mail me).
Tax installments are required if 1) your net federal tax payable is
> 1000 $, 2) more than 25 % of your income has no tax taken off at source,
and 3) this is your second year of meeting the requirments re 1 & 2.
Now, there are NO exemptions!
The requirements are designed for people such as self employed
businesspersons, those with rental income, etc., not students
(I've written my MP on this and its now before the Minister of
Revenue).
Talk about a far-sighted policy (sarcasm). Students who receive an OGS
(Ontario Graduate Scholarship) receive notice of such in late spring.
They can start their award in May or September. Say they start in May and
fall in the situation I've listed above re installment requirements.
The first installment is due on the last day of March. Never mind that you
don't have the scholarship yet, but you are required to pay a
a tax installment BEFORE (this is not a typo) you receive any income!!!!!
I don't know about anyone else, but I think this is a horrid policy
and I told my MP just that. I also called Revenue Canada about this.
I stated the above situation and was told that any student that
APPLIES for a scholarship should base their tax considerations
(i.e., to install or not to install) on the assumption that
they will receive the scholarship! I could go into details regarding
the monitary advantages and disadvantages of complying with this, but
enough already - this tax shit never fails to piss me off every year!
Arrrg.
D.J.
Dave Mason
>From 'way back in high school, the poverty line was defined to be spending
>about 2/3 of your income on necessities: housing, clothing, food.
Hey, I'm obviously above the poverty line then, I don't have 2/3 of my
income to spend on necessities, over 1/3 goes to income taxes :-) :-)
As one can price housing at arbitrary levels (or at least arbitrarily
HIGH levels), I don't think this is an appropriate measure.
../Dave
Craig Boutilier
>In article <1989Aug24.1...@jarvis.csri.toronto.edu> e...@dgp.toronto.edu (Eugene Fiume) writes (re scholarship income):
>>Also, you're supposed to pay tax by quarterly installments. I never
>>did this, and was sometimes charged interest. I think they now have
>>their act together and are pretty insistent about charging interest.
>
>Ha. Tell me about it. (For more details, e-mail me).
>Tax installments are required if 1) your net federal tax payable is
>> 1000 $, 2) more than 25 % of your income has no tax taken off at source,
>and 3) this is your second year of meeting the requirments re 1 & 2.
Well, I've got some good news for NSERC holders: condition 3) above isn't
exactly correct. You have to pay via installments only if you meet
conditions one and two in both the previous AND the current tax year.
Furthermore, you need only use installments if this is NOT the first year
you are "required" to pay in installments.
E.g. IF your net federal tax for 1988 was >$1000, and is projected for
that much in 1989, then you are required to pay in installments. However,
if 1987 was > $1000, but 1988 was not, then installments aren't applicable.
AND the first time you meet such conditions, no interest is charged on late
payments (i.e. you really don't need to pay installments at all).
To avoid meeting the requirement any time during the NSERC tenure period,
one might consider the following:
On alternate years, request your 2ND NSERC cheque BEFORE Jan.1, and
request it after Jan.1 during other years. This *may* prevent you from
ever meeting conditions 1) and 2) in consecutive years. I haven't
investigated how this affects the actual tax paid (since this first
happened to me inadvertently, so I had no choice). But starting my 4th
NSERC year, I've yet to pay any tax through installments (or be charged
interest because of it).
Craig
Greg Bond
br...@jtsv16.UUCP (Brian A. Jarvis) writes:
>From 'way back in high school, the poverty line was defined to be spending
>about 2/3 of your income on necessities: housing, clothing, food.
I've been doing some research for the teaching assistants' union here in
Ottawa which has uncovered the following stats:
o Canadian families spend an average of 38.5% of their income on food,
clothing and shelter
o the National Council on Welfare has deemed the low income cut-off (the
poverty line) when 58.5% of income goes to necessities - this percentage is
based on gross income which includes scholarships and excludes loans
o for areas with populations of over 500 000 the low income line for an
individual in 1989 is $12 037 (this figure is based on a projected inflation
of 4% for 1989 based on consumer price index figures)
This information is contained in the document "1989 Poverty Lines -
Estimates by the National Council on Welfare," Ministry of Supply and
Services Canada, April 1989. The preamble in this document stresses that
this is the most conservative of the poverty line figures calculated by
other agencies (i.e. the highest figure). However, I was surprised to see
that the figures were not calculated by geographic region since one would
think the poverty line in Metro Toronto would be higher than in, say,
Calgary.
An NSERC postgraduate scholarship is either $12 500 or $13 500 (effective
September 1988), so even without a TA or RA from your school an NSERC
recipient would be above the poverty line - with the additional funding one
would be comfortably above the poverty line.
-----------------------------------------------------------
Greg Bond - Dept. of Systems and Computer Engineering
Carleton University, Ottawa - bo...@sce.carleton.ca
Kelly Booth
following two suggestions:
1. If a majority of NSERC award holders prefer to have withholding
from their awards, this could be done. The process required to get this
done probably starts with your MP and will be long and arduous.
2. At Waterloo, at least in CS, many if not most of the NSERC award
holders also serve as TAs at one time or another. TAs have withholding
tax taken out. There is a Revenue Canada form that you can file to have
more withholding taken out. I think (though I am not a lawyer) that an
employer must honour such a request (i.e., the University can't refuse
to do this just because it is more paperwork for them). At the extreme,
you might have all of your TA income withheld, reducing your eventual
tax payment to zero.
Obviously the second solution lowers your immediate cash flow. But if
the object is to pay taxes in advance without the hassle of filing quarterly
payments with Revenue Canada, this could be the easiest solution.
T. Kim Nguyen
[how to go about having tax withheld at source,
for NSERC awards and for TAs and RAs]
... if the object is to pay taxes in advance without the hassle of
filing quarterly payments with Revenue Canada, this could be the
easiest solution.
I don't think that having tax withheld is a good ideal AT ALL.
Granted it makes it easier than to have to pay, say, in quarterly
installments, but do you realize how much INTEREST you'd be LOSING???
The govt does not pay interest on the money it receives before April
30. You'd be far better off parking the money in T-bills or short
term deposits rather than handing it over to Revenue Canada.
As an aside, I never really thought much about it until it was pointed
out to me -- you NEVER want to get a tax refund. The idea is to never
have more withheld than you need to, ergo no refund at the end of the
year. As above, the money you'd be getting back hasn't yielded ANY
interest payments during the time it was in the govt's hands.
T. Kim Nguyen
lawyer or Revenue Canada for more reliable (!) info. The tax
deductions mentioned below may/may not still exist.
In no particular order, here are some ideas you might try pursuing to
reduce your taxable income (recall that you can't use an RRSP to do
that, since it is not considered to be earned income).
- Don't forget to use the standard $500 scholarship deduction,
if your award is >= $500
- Check out the Ontario home ownership savings plan, if you
intend to buy a house in Ontario. The $$ you place in it
will not be taxed until (I believe) you use it to buy the
house.
- If you have young relatives, look into registered
scholarship funds as another tax shelter (these are intended
to help you put $$$ aside to pay for someone's education).
- Having your own company allows you to make use of MANY
deductions, such as (part of) rent, car costs, phone,
stationery, etc. which can be considered valid buisness
expenses. If you do any consulting work, make sure to have
the hirer pay your company (instead of you directly).
Self-employed persons get better deductions (larger eligible
amounts for RRSP contributions). Computers and other
"high-tech" assets depreciate tremendously, so you can use
those to great advantage in cutting your taxable income
down. Advertising for your company is also completely
deductable. Day care costs are also valid business
expenses for the self-employed.
- See an accountant for more deductions possible.
- If you are a grad student, you might be able to make use of
the "research expenses" deductions; you could deduct all
sorts of things related to your research, such as (possibly)
modems, books, and office supplies.
- Stock ownership in Canadian corporations get you tax credits
which offset dividend taxation. Share reinvestment plans
will allow you to obtain more shares in a company every
quarter. When you decide to sell your stocks, they count as
capital gains, hence nontaxable until you reach $100k
profit.
- Losses on rental properties can be written off against
other income. This might be a good reason to go out and buy
a place (building/condo) for yourself... and if it is your
principal residence, any profit you make on selling it will
be considered nontaxable (up to $100k).
- Gifts to universities: you donate $$$ to the university to
buy a computer (the donation is tax deductable). The
university lends you the computer, and a couple of years
later it sells it to you at its depreciated value. Two
birds with one stone.
Many thanks to those who sent in these great tips! Good luck to all
of you, and may these ideas reduce your tax burden.
Not intended as promotional or anything, but a book I purchased,
called How to Beat the Taxman All Year Round by Brian Costello, seems
to have very good advice (not limited to grad students only). Of
course, there'd be nothing better than paying a few $$$ and talking to
an expert on the matter (accountant).
Todd Heatherton
>following two suggestions:
stuff deleted
>
>2. At Waterloo, at least in CS, many if not most of the NSERC award
>holders also serve as TAs at one time or another. TAs have withholding
>tax taken out. There is a Revenue Canada form that you can file to have
>more withholding taken out. I think (though I am not a lawyer) that an
>employer must honour such a request (i.e., the University can't refuse
>to do this just because it is more paperwork for them). At the extreme,
>you might have all of your TA income withheld, reducing your eventual
>tax payment to zero.
This DOESN'T work. I tried it last year. Unfortunately, the tax man claims
that they should have been paid quarterly installments on the NSERC
payments and will not credit you for overpayments from another source (they
view the employment income from a TA as a different source of income).
Given that an NSERC is now worth 15K, it would be hard to have enough
eaten up from TA tax to offset tax owed.
To make a long story longer, this method ended up costing me $183. Ouch!
Be sure not to use the quarterly payment method unless they WARN you to
do so. They always give you a one year grace period (but you must
pay after they warn you).
Solution: Tax at source or reduce awards by 17% (or whatever figure) and
make scholarships, fellowships non-taxable.
--
************************************************************************
Todd Heatherton Department of Psychology University of Toronto
Phone: 416-978-6387 (office) Email: he...@gpu.utcs.utoronto.ca
416-482-4847 (home) or he...@psych.utoronto.ca
************************************************************************
Kelly Booth
>
>This DOESN'T work. I tried it last year. Unfortunately, the tax man claims
>that they should have been paid quarterly installments on the NSERC
>payments and will not credit you for overpayments from another source (they
>view the employment income from a TA as a different source of income).
This is interesting. If over-withholding from one source doesn't count for
credit against another source, then why in heck is there such a form? No one
could possibly be in a position to benefit from it, since normal withholding
is calculated to keep enough of your income to cover taxes (or just about)
UNLESS you have other sources that significantly raise your tax bracket
or that do not have withholding. Given the relatively flat brackets, the
former is not that likely (although I'm sure it happens).
I would very much like to see the written policy that states this.
Chris Shaw
>In article <waytoolong> ksb...@watcgl.waterloo.edu (Kelly Booth) writes:
>This DOESN'T work. I tried it last year. Unfortunately, the tax man claims
>that they should have been paid quarterly installments on the NSERC
>payments and will not credit you for overpayments from another source (they
>view the employment income from a TA as a different source of income).
So? All that means is that some heuristic caught you. Appeal this.
>To make a long story longer, this method ended up costing me $183. Ouch!
Tax paid is tax paid. Just because some fuckwit in Sudbury thinks you owe
$183 doesn't mean that you do. Get a tax lawyer (perhaps). This is nonsense.
>Be sure not to use the quarterly payment method unless they WARN you to
>do so. They always give you a one year grace period (but you must
>pay after they warn you).
Absolutely. A friend on an NSERC has not paid quarterly for 4 years, but he
would have had to pay quarterly this year if he hadn't graduated. It takes them
a while to catch on.
>Todd Heatherton Department of Psychology University of Toronto
--
Chris Shaw cds...@alberta.UUCP
University of Alberta
CatchPhrase: Bogus as HELL !
Socrates
>br...@jtsv16.UUCP (Brian A. Jarvis) writes:
>>From 'way back in high school, the poverty line was defined to be spending
>>about 2/3 of your income on necessities: housing, clothing, food.
>
>individual in 1989 is $12 037 (this figure is based on a projected inflation
>
This is an interesting argument but it fails to take into account one very
important point. A person with an income of $12 037 is *not* committed to
over $1000 in school expenses. NSERC is not granted to someone not in
school! Therefore, the *actual* income of someone possessing a $12 500
NSERC scholarship is more on the order of $11 000. (Not to mention the
possible added expenses incurred as a result of being forced to live in a
more expensive area in order to be close to the school. For example, a
person from Dundalk being forced to live in or around the University of
Toronto.)
Disclaimer: Granted that a University education is not a right, especially
a graduate degree, but forcing those desiring the degree to live at a
below-poverty level is extremely counter-productive. (After all, they will
be earning a higher salary and contributing more to the government later :-)
--
--- Kevin Picott NTT Systems, Inc., Toronto, Ontario
ke...@dretor.dciem.dnd.ca, or on some sites ke...@dretor.ARPA
"There can be no offense where none is taken" - Japanese Proverb
David Sherman
on tax. I don't have much time right now, however, so I may not
post very much over the foreseeable future.
djoh...@watdcsu.waterloo.edu ( DOUG JOHNSON - GEOGRAPHY ) writes:
>Talk about a far-sighted policy (sarcasm). Students who receive an OGS
>(Ontario Graduate Scholarship) receive notice of such in late spring.
>They can start their award in May or September. Say they start in May and
>fall in the situation I've listed above re installment requirements.
>The first installment is due on the last day of March. Never mind that you
>don't have the scholarship yet, but you are required to pay a
>a tax installment BEFORE (this is not a typo) you receive any income!!!!!
A useful fact to know is that you can combine prepayment and
late payment of instalments, and have the prepayments generate
what's known as "contra-interest" to offset the late payments
of the same taxation year. (Prepayments can't generate interest
that's actually paid to you.)
This feature was available before 1986 as an administrative concession,
but after Revenue Canada changed its mind, Parliament put it in the
Income Tax Act in subsection 161(2.2), effective 1987. So you're
guaranteed the contra interest.
You instalments for 1989 are due March 31, June 30, Sept 30
and December 31. (Effective 1990 they'll be due on the 15th.)
So if you didn't make your March payment, but on June 30 you
paid 3/4 of your instalment requirement, the "contra-interest"
you generate by having paid your Sept payment 3 months early
will offset the interest owing due to your March payment being
3 months late. (That is, subject to fluctuations in the interest
rate, which has been going up as late.) You can figure out for
yourself how much of your instalments you should pay at any
given time to allow the contra interest to offset any late payments.
Also, when figuring out the cost of interest as opposed to what
you can earn by leaving money in the bank, remember that interest
you pay on late taxes or late instalments is non-deductible, while
interest you earn is fully taxed. Also, the interest you pay is
compounded daily. The interest rate is 13% at the moment, but it
will be going up by 2 percentage points (leaving aside interest
fluctuations) on October 1.
David Sherman
Tax Lawyer
--
Moderator, mail.yiddish
{ uunet!attcan att utzoo }!lsuc!dave da...@lsuc.on.ca
David Sherman
> - Having your own company allows you to make use of MANY
> deductions, such as (part of) rent, car costs, phone,
> stationery, etc. which can be considered valid buisness
> expenses. If you do any consulting work, make sure to have
> the hirer pay your company (instead of you directly).
This statement is generally correct but reflects a confused
meaning of the word "company", which normally means the same
as corporation. You want to have the funds paid to you as
an independent contractor, or "paid to your business", in
such cases. If you are carrying on business through a corporation,
that's an entirely different situation. Of course, in either case,
effective 1991 you're going to have to collect an extra 9% GST if
you're not paid as an employee.
Also, whether you're classified as an employee or not depends on
the facts, not just on what you and the payer call yourself.
If the facts determine that you're really an employee, you'll
be taxed as such even if you issue invoices and are paid without
source deductions.
> Self-employed persons get better deductions (larger eligible
> amounts for RRSP contributions).
That specific example isn't quite correct. The deductions are
larger only if you aren't a member of a company pension plan.
If you are, you're getting benefits through the plan anyway.
> Computers and other
> "high-tech" assets depreciate tremendously, so you can use
> those to great advantage in cutting your taxable income
> down. Advertising for your company is also completely
> deductable. Day care costs are also valid business
> expenses for the self-employed.
The last statement is somewhat misleading. A Federal Court
case earlier this year held essentially that such is the case,
but the case is under appeal and is widely expected to be overturned.
So you can make the claim, but it may not hold up. If your daycare
expenses don't exceed the statutory limits allowed to all taxpayers,
then you can claim them anyway, regardless of whether you're
self-employed.
> - See an accountant for more deductions possible.
Or a lawyer who specializes in tax.
> - Losses on rental properties can be written off against
> other income. This might be a good reason to go out and buy
> a place (building/condo) for yourself... and if it is your
> principal residence, any profit you make on selling it will
> be considered nontaxable (up to $100k).
Wrong. First, the principal residence exemption has no dollar limit.
Second, if you rent part of the building, you may lose the principal
residence exemption in part. Third, the general capital gains exemption
is indeed $100,000, but that's combined with all other capital gains.
Fourth, you can lose access to the exemption if you deduct
certain passive losses including interest expense (such as the
mortgage interest on your rental property.)
> - Gifts to universities: you donate $$$ to the university to
> buy a computer (the donation is tax deductable). The
> university lends you the computer, and a couple of years
> later it sells it to you at its depreciated value. Two
> birds with one stone.
The donation gives you a credit, not a deduction. Be cautious with
such schemes. They could run into a number of anti-avoidance rules.
For example, if you're an employee of the university the use of the
computer might be deemed to be a benefit from employment and thus
taxed. GAAR might also apply if these transactions were planned together.
>Of course, there'd be nothing better than paying a few $$$ and talking to
>an expert on the matter (accountant).
Or lawyer. (Tax lawyers and accountants have different perspectives,
sometimes.)
David Sherman
Mary Margaret Schuck
>k...@watsup.waterloo.edu (T. Kim Nguyen) writes:
>
>> - Having your own company allows you to make use of MANY
>> deductions, such as (part of) rent, car costs, phone,
>> stationery, etc. which can be considered valid buisness
>> expenses. If you do any consulting work, make sure to have
>> the hirer pay your company (instead of you directly).
>
>This statement is generally correct but reflects a confused
>meaning of the word "company", which normally means the same
>as corporation. You want to have the funds paid to you as
>an independent contractor, or "paid to your business", in
>such cases. If you are carrying on business through a corporation,
>that's an entirely different situation. Of course, in either case,
>effective 1991 you're going to have to collect an extra 9% GST if
>you're not paid as an employee.
>
>Also, whether you're classified as an employee or not depends on
>the facts, not just on what you and the payer call yourself.
>If the facts determine that you're really an employee, you'll
>be taxed as such even if you issue invoices and are paid without
>source deductions.
All right, how does one do this? I was burned badly this year by a
combination of RevCan and my former(!) company. Initially I was hired by
this company as a contractor. I worked from my home and used my own
equipment and supplies etc. at this time. Later, when they paid me for the
"contract work" I noticed that they had taken source deductions, but since
the two months pay was accompanied by an offer of permanent employment I
decided not to get it straightened out. Later, of course, my T4 included
all my income from the "contract" period as well as when I was an employee.
By then, my employer refused to do anything about it since "that's they
way it is in our books and we can't change it" and since RevCan believed
the evidence of the T4, I lost almost $500 in tax credits.
Under similar circumstances, what should one do to ensure that if hired as
a contractor, one is treated as one in the eyes of Revenue Canada (and the
employer for that matter)?
Also, is it possible to claim business losses from self-employment against
earned income from another source?
Mary Margaret.
--
____________________________________________________________________________
My mailer hates everyone. Try to deceive it if possible.
sch...@dretor.dciem.dnd.ca {decvax,attcan,watmath...}!utzoo!dciem!schuck
____________________________________________________________________________
S. Crispin Cowan
>> - Losses on rental properties can be written off against
>> other income. This might be a good reason to go out and buy
>> a place (building/condo) for yourself... and if it is your
>> principal residence, any profit you make on selling it will
>> be considered nontaxable (up to $100k).
>
>Wrong. First, the principal residence exemption has no dollar limit.
>Second, if you rent part of the building, you may lose the principal
>residence exemption in part. Third, the general capital gains exemption
>is indeed $100,000, but that's combined with all other capital gains.
>Fourth, you can lose access to the exemption if you deduct
>certain passive losses including interest expense (such as the
>mortgage interest on your rental property.)
Could you post a few more specifics here? My wife & I (both students)
bought a house and feed the mortgage from rental income on some of the
bedrooms. I had already understood that deducting mortgage interest
would cost me the principal residence exemption, but I was unaware
that renting endangered it as well. What are the rules regarding
renting the building vs. losing the principal residence exemption 'in
part'?
Thanks,
Crispin
>David Sherman
>--
>Moderator, mail.yiddish
>{ uunet!attcan att utzoo }!lsuc!dave da...@lsuc.on.ca
----------------------------------------------------------------------
Login name: sccowan In real life: S. Crispin Cowan
Office: DC3548 x3934 Home phone: 570-2517
Post Awful: 60 Overlea Drive, Kitchener, N2M 1T1
UUCP: watmath!watmsg!sccowan
Domain: scc...@watmsg.waterloo.edu
"Everything to excess. Moderation is for monks."
-Lazarus Long
Kegham Redjebian
>Second, if you rent part of the building, you may lose the principal
>residence exemption in part. Third, the general capital gains exemption
>is indeed $100,000, but that's combined with all other capital gains.
>Fourth, you can lose access to the exemption if you deduct
>certain passive losses including interest expense (such as the
>mortgage interest on your rental property.)
>David Sherman
Assuming that you've exhausted your $ 100,000 limit, you're better
off applying all eligible deductions to reduce your income, where the
deductions are applied at a 100% and later pay taxes on 66% of your
capital gains, the only way you could lose in this scenario is if the
capital gains catapult you in a higher tax bracket than at which you
applied operating expense deductions.
ex. property bought at 100,000, depreciate it down to $ 0.0 (over
many years) if your tax bracket was 50% you recovered $50,000.
later on you sell for what you paid 100,000 , now revcan recognizes
a cap-gain of 100,000 since it was depreciated to 0.0 but the taxes
paid on 100,000 x 66% = 66,000 x 50 % = 33,000. you wind up with a
net gain of 17,000.
Brian Thomson
>ex. property bought at 100,000, depreciate it down to $ 0.0 (over
>many years) if your tax bracket was 50% you recovered $50,000.
>later on you sell for what you paid 100,000 , now revcan recognizes
>a cap-gain of 100,000 since it was depreciated to 0.0 but the taxes
>paid on 100,000 x 66% = 66,000 x 50 % = 33,000. you wind up with a
>net gain of 17,000.
Wrong. What you describe is an example of what Revenue Canada calls
'recapture', basically regaining depreciated value. Recapture
must be taken directly into income, and cannot be treated as a capital gain.
In the example given, it might still make sense to do this, since you
would be delaying collection of that tax for many years, and eventually
paying it with inflated dollars, if:
1) you can cough up the tax when RevCan wants it. It may be
that you will have to pay by installments on account of your
$100,000 non-withheld income.
2) you are not pushed into too high a marginal tax rate.
This is not easily determined, because 'many years' from
now the continual process of incremental blood sucking - er,
I mean tax reform - may make your final marginal rate 80% rather
than the 50% you expect given today's rules. There is a
certain element of risk involved.
--
Brian Thomson, CSRI Univ. of Toronto
utcsri!uthub!thomson, tho...@hub.toronto.edu