Tax Quarry

On January 23, 2006, Canadians decided to end 12 years of Liberal leadership in favor of a new Conservative regime.  Although the Conservatives were only elected with a minority of the seats, they will yield sufficient power to implement the changes they had promised under their platform.  The Conservative platform, entitled Stand Up For Canada, includes the following key commitments for reducing tax for all Canadians:

1.  Reduction of the GST from 7% to 5% over a five-year period.

2.  Elimination of capital gains taxes when reinvesting

3.  Increasing the threshold and reduction of the small business tax rate

4.  Implement the new apprenticeship job creation tax credit

5.  Implement textbook tax deduction and raise scholarship income exemption

6.  Implement the new physical fitness tax credit

7.  Implement the new affordable housing tax credit

8.  Implement the new transit pass tax credit

9.  Eliminate capital gains tax on charitable contributions

These commitments will have a significant impact on every Canadian if implemented.  Large corporations, small businesses and both low and high-income individuals will immediately benefit from a reduction in the GST.  If Canadians respond to this reduction by purchasing more goods and services that are subject to the GST then, presumably, the government would be able to cover any shortfalls in the government coffers by increased spending.  However, if there is no change to Canadians’ spending habits, then the forgone revenue will have to be replaced by other forms of taxation such as increases in each taxpayer’s income tax obligations.  The commitment sounds promising but it’s largely based on the government’s ability to stimulate spending, which comes with no guarantees and is likely to be influenced by many non-tax factors.

Promises to eliminate capital gains taxes for reinvestments and for charitable contributions are expected to encourage Canadians to invest in property that will produce capital gains and to donate more to charitable causes.  Although the goals are admirable, these commitments have a bias towards higher income taxpayers.  It is unlikely that these proposals, if implemented, will benefit lower income Canadians since they are less likely to own investments that will produce meaningful capital gains and also less likely to have such property to donate to charity.

The Conservatives have also committed to providing various credits that essentially should reduce the burden of funding higher education.  Depending on the income or spending qualification thresholds used, the textbook tax deductions, apprenticeship tax credit and the transit pass credits should help those pursuing higher learning to defray some of their costs.  However, similar to the capital gains and charitable donation tax relief commitments, higher income students will benefit more than lower income students because they will be able to take larger deductions from their pre-tax income and apply more credits to their after-tax income.  This concern can be alleviated if the government allows students to carry-back or carry-forward deductions or by making the credits refundable, otherwise the proposed commitment will be inequitable.  The increase in scholarship exemption is certainly a step in the right direction for the new government and for students with limited financial means who must rely on scholarships for funding their education.  These students will be able to accept scholarships fear that a portion of the money awarded for purposes of paying for their education will be taken away by the government in the form of taxes.

Small businesses will also see a reduction in their rate and increase in the threshold for each rate level.  Again, if these commitments help small businesses to generate more taxable income, Canadians as a whole come out on top.  However, any shortfalls will have to be offset by increasing taxes in other areas.  Lets hope for the best!

For detailed financial information about the Conservative tax commitments visit http://www.conservative.ca/media/20060113-FiscalPlan.pdf.

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In March 2005, the British Columbia government commissioned a report to determine the impact of the provincial Film and Television Production tax credits on government expenditures and the economy.  It is entitled, Film and Television Industry Review and was completed by InterVISTAS Consulting.  The final result of the report was a recommendation that the government should either reduce the value of the incentive or eliminate it completely. The report finds that BC is paying more to administer the credit than it is recovering in taxable revenue generated by production activity in the province.

Essentially, the government's concern is that taxpayers are on the hook for whatever the government does not recover because the money must come from other spending programs or through increased taxation.  The stakeholders, however, criticize the report and the government for appearing to give minimal weight to the indirect benefit that other industries such as hotels, local convenience stores, catering businesses and other service companies obtain from having films produced locally.  Also, considering the current level of competition for film production business coming from other provinces, various states in the US and internationally, opponents believe it is unwise for the government to take this course of action.  In Playback Magazine, Editor Mark Dillon in his comment entitled, Cutting B.C. tax credits is suicide, says … "To mess with the tax credits now would be devastating for the local industry".  According to Dillon, it does not seem logical that at a time when the Canadian dollar is so low that the government would even consider changing its tax policy in a way that would adversely affect an already struggling industry.

The BC government has committed to factoring the results of this report into its decision about whether or not to continue offering the film tax credits as they currently exist.  It is likely that unless the stakeholders involved can justify the existence of the credits at the current level that the province will make some changes.  Unfortunately, what it is going to come down to is the bottom line.  How much tax revenue is the BC government able to attribute to the presence of these productions within its borders? And how much longer can they sustain tax revenue shortfalls at the expense of the average taxpayer in order to benefit the film industry?  If any changes must be made, any fiscally responsible government would not do a cold turkey amendment.  Instead, a phased in approach would likely give some comfort to producers with productions currently planned to be filmed in BC and will also allow others to find alternative ways of making production seem more attractive in BC.

No one likes change, but sometimes change is necessary.  What the BC government needs to really consider is what type of changes would benefit it’s citizens and it's businesses the most.  This requires canvassing the tax and non-tax advantages and disadvantages of the current film tax credit.

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Subsection 248(35) was introduced as an amendment to the Canadian Income Tax Act with the intention of eliminating the incentive for taxpayer's to engage in "buy-low", "donate-high" arrangements.  Essentially, these arrangements allow an individual to purchase property, such as pharmaceuticals or art at wholesale prices and almost immediately donate them to a registered charity at substantially inflated prices.  The individual then files a claim for a charitable donation tax credit based on the inflated price.  The new provision provides that the value of this property will be deemed to be the acquisition cost where a donation is a part of such a gifting arrangement.  It will also apply where the donation is not part of a gifting arrangement if the property is donated within three years after acquisition, or if the individual intended to make a gift at the time of acquisition and does so within ten years of acquisition. 

Subsection 248(35) is effective as of 6:00PM (EST) December 5, 2003.  There a severe penalties for non-compliance with the new provisions, so consult a legal professional or your financial advisor for more information about how this may affect you specifically.  You may also review the Gifts and Income Tax Guide for a discussion about how gifts of capital property are treated or read the Interpretation Bulletin dealing with the same issue.  For a general search on Charities, visit the CRA website link under the Resources Heading.

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A few weeks ago, while reading an article about retirement strategies I came across a paragraph that discussed the benefits of holding a mortgage in an RRSP.  Before this time I had no idea that this could be done, so I decided to do a little bit of research.  Apparently, if you hold your mortgage inside your RRSP, you get to make your monthly mortgage payments to yourself.  It sounds like a great idea, but the process is very complicated and has some clear disadvantages.

To get started, you must open a self directed RRSP and you must have a substantial amount of equity in your home.  Next you must transfer the equity of your home into your RRSP.  Mortgage equity held in an RRSP is not subject to RRSP contribution limits.  To go any further, you must have cash or cashable investments in your RRSP equivalent to the mortgage that will be transferred.  Once the structure is completed, you will have to make your mortgage payments to your RRSP and not to the bank.  Practically speaking, it would work something like this:  With a $100,000 mortgage on your home, and $100,000 available in your RRSP, you can take the money from your RRSP and pay the bank for the outstanding amount of the mortgage.  Now you have a $100,000 RRSP mortgage, and will be required to pay the RRSP instead of the bank.

One advantage of holding your mortgage in your RRSP is that you are able to capitalize on the mortgage amortization to maximize growth in your RRSP. The idea is to lengthen the amortization period and then charge the highest possible interest rate.  Having a very high interest rate is beneficial in this situation because you are able to deduct it.  Also, you have an option to structure it as an open mortgage to allow for early repayment without penalty.

There are disadvantages as well. For example, there are sizable fees, such as appraisal, legal, registration, mortgage insurance and trust fees involved with the set up.  You will also have to pay a few hundred dollars a year in fees to maintain the structure.  For someone with limited cash flow, it may not be worthwhile to do this since paying an higher than normal interest rate would have the effect of reducing immediate cash flow.  When mortgage interest rates were higher than 10% this option was more attractive because it provided an opportunity to deduct more in the long run in the form of interest payments.  However, with the current low interest rates it may not be as beneficial.  It may make more sense to pursue other investments. 

Before considering this option, ensure that you speak to a financial advisor and get all the facts.  It may be a good idea for you.  Or maybe not.

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