20 THINGS YOU'D BETTER KNOW ABOUT THE NEW TAXES
If you don’t want to lose your shirt
I. H. ASPER
There’s nothing you can do about the 1971 income-tax returns you're just getting around to facing about now. Nothing except fill them out, much as you’ve always done, and get them in before the April 30 deadline. But next year. Next year it’s a whole new tax game. And if you don’t know how to play it, you could end up in chill penury — or close enough to it to hurt.
But first let us make one thing perfectly clear: the returns you’re faced with now are for last year’s income — the last returns under the old tax — and in a way they’re a eulogy to the Grand Old Postwar Tax System that gouged us so efficiently from 1948 through 1971. It came in during the era of New Look, the Ink Spots, Harry Truman, C. D. Howe and the Israeli War of Independence, and went out during the era of Unisex, Bob Dylan, Richard Nixon, Pierre Trudeau and Vietnam. You won’t have the old tax to kick around anymore.
And let us make another thing perfectly clear: you’re living under the new tax rules now. You have been since the first of the year. So if you’re going to be in any shape to play the tax-return game in April, 1973, there are some things you should be doing this minute (such as saving the receipts from your child’s nursery school or keeping a detailed record of your moving expenses if your company transfers you). Because the big thing about playing the new game will be avoiding taxes — not evading them, that’s illegal — but making sure the tax man gets exactly what’s coming to him, and no more. And that’s not only legal (ask any judge) but moral (ask any clergyman’s accountant).
Now we had some questions ourselves about the new tax (to begin with, what’s it all about?) and we asked them of I. H. Asper, the Winnipeg tax lawyer, syndicated newspaper columnist and author of The Benson Iceberg. He gave us some very clear answers which should give you a good idea of what you’re up against — but, he insists, they shouldn’t be taken as the final word. Remember there’s no substitute for reviewing your tax problems with a professional adviser. Remember, too, that tax reform may make things a little better, but it never makes them less complicated.
WHAT ARE SOME OF THE MAIN CHANGES THAT WILL SAVE US MONEY ON OUR 1972 RETURNS?
First, if you’re single, your individual exemption has been raised to $1,500 from $1,000; if you’re married and your wife doesn’t work, it’s been raised to $2,850 from $2,000. You can still claim the $300 exemption for each dependent child who gets family allowance and the $550 one for each child who doesn’t. The standard $100 medical and charities deduction also remains.
Second, there’s a new employment expense deduction of 3% of your pay up to $150. This one recognizes the cost of traveling back and forth to work, keeping your clothes in shape and things like that. You don’t need receipts to claim it.
Third, because Canadians move on the average of once every four years, often because of a job change or transfer, such moving costs now become deductible — provided your employer hasn’t paid them and you can meet some reasonable tests set out in the new tax rules. To qualify, you’ll need receipts for such expenses as traveling costs, meals, hotels, storing furniture, transporting your household goods and the cost of canceling an apartment lease or selling your old home. This can mean a big saving — but, remember, you can’t claim this deduction if you move simply because you want to.
THAT SOUNDS AS IF WE’RE GOING TO SAVE PLENTY. ARE WE?
No, you’re not. The saving is generally modest — but nonetheless worthwhile — for most people. That’s because the tax rates on your taxable income (your income after all deductions and exemptions have been taken off) are quite different, and generally higher, than the old rates. Just how well you make out will depend on the amount in deductions you can take advantage of. The point is, if you don’t get everything that’s coming to you, you could pay a lot more tax than you should.
DO MARRIED MEN GET A TAX BREAK?
Yes, provided their income is entirely from wages or salary. Take a married man with two children under 16. He used to start paying tax at $2,700; now he doesn’t start until $3,753. Look at his deductions on an income of $3,753 a year: $2,850 married, $600 children, $100 medical and charities (if the standard deduction is used), $114 employment expense, and $68 Canada Pension contributions. Under the old law he would have paid $157. Now he pays nothing. The greatest savings for married men are at the lower and upper ends of the income scale. A
$5,000-a-year man with the same deductions saves $122, a $13,000-a-year man $48 and a $20,000-a-year man $112. A $100,000-a-year man saves $1,181 (though at that level he’s probably got capital gains which weren’t taxable last year but are now).
Because the old tax scale had become somewhat distorted in favor of middle incomes, an attempt has been made to produce a more graduated scale in the new law. The result is that for most married men with children the biggest tax breaks are for those making less than $10,000 a year or more than $15,000.
WHO GETS THE MOST HELP UNDER THE NEW TAX?
People on low incomes. Most families making less than $4,000 a year, for example, will pay no tax at all. The same goes for single people earning up to just under $1,800. And between $1,800 and about $9,000, there’s still a saving. A single man earning $1,800 used to pay $102; now he’ll pay $31.
WHOSE TAXES ARE SURE TO GO UP?
Those of single people — and those taxed as single — in the middle-income range, though they’re not being hit very hard. For those making just under $9,000 up to those making about $20,000, the new tax is slightly higher than the old. A single woman making $11,000, for instance, will pay $2,556 on her 1972 income, compared to the $2,483 she paid before.
HOW ABOUT WORKING MOTHERS? ANY HELP FOR THEM?
The new child-care allowance should provide some help, but just how much is another matter. One thing a working mother doesn’t get is any relief from the heavy tax her husband pays on the first $1,350 of her earnings. In effect, because he loses his married allowance, the joint income pays tax on those first earnings at the husband’s top tax rate. Nevertheless, the child-care allowance should be a benefit to any family where the mother works because she wants to; it should be an even greater benefit to low-income families where the mother works because she has to.
Actually, this new allowance is available to single women and men as well as married couples, as long as they’re responsible for looking after children under 14. It’s based on the expenses laid out for child care and cannot exceed $500 for each child. The maximum is $2,000 in any year for any one taxpayer. The child-care expenses include baby-sitters, day-care nurseries and boarding schools. The allowance is also available for children over 14 if they’re dependent on their parents because of mental or physical illness. In all cases, you’ll need receipts.
ARE WOMEN'S RIGHTS RECOGNIZED IN ANY OTHER WAY?
Well, there are the rules for the new capital gains tax. When the head of a family makes a gift of a capital asset to anyone — say, his child — he will have to pay a capital gains tax when he transfers it to the child, if the value of the asset has gone up since he acquired it. But if he makes the gift to his wife, there will be no capital gains tax until she sells it and makes a profit. This provision is designed to give some tax recognition to the financial partnership that in fact exists in many marriages today.
ARE THERE ANY NEW BENEFITS FOR SENIOR CITIZENS?
Some progress has been made toward granting tax-free status to older people with modest incomes. If you’re 65 or over you can now claim a special additional exemption of $650 (under the old law you had to wait until you were 70 and then the additional exemption was $500). So, for a married couple over 65, the first $3,600 of income is taxfree (married exemption $2,850, standard medical and charities $100, senior citizen exemption $650). The tax for a married man with an income of $4,144 ($4,000 plus $144 guaranteed income supplement which is not taxable under the new law) is $86, compared with $354 under the old system. So his saving is $268.
A LOT OF PEOPLE ARE SAVING HARD FOR A RAINY DAY OR RETIREMENT. WILL THEY BE BETTER OFF NOW?
Yes, they will. There are now higher limits for contributions to pension and deferred profit plans and retirement savings plans. These are very important tax savers. Under the old law, a company could contribute a tax-deductible maximum of $1,500 for each employee in a pension plan. The employee’s contribution was also limited to $1,500 a year. But he could add to that by going to a life insurance or trust company and taking out a supplemental or personal retirement savings plan. To the private plan, he could contribute the difference between what he was paying to the company plan and 20% of his income or $1,500, whichever was less. Then his contributions to both plans were deductible.
The new tax almost doubles both limits. The company pension limit has been increased to $2,500 each for the company and the employee. The employee can supplement his company plan with a private one up to a total of $2,500 or 20% of his income, whichever is less. This makes saving through a pension plan of one type or an-
other the best tax-reducing device available to Canadians. Contributions are entirely deductible, and though you’ll pay tax when you withdraw your pension funds you’ll probably do so at lower rates. Besides, a dollar of tax deferred is a dollar of tax actually saved, because the money you would have otherwise laid out in taxes — had you not contributed to the pension plan — is earning taxfree income until the day you draw it out.
ARE THERE ANY BONUSES FOR GIVING TO CHARITY?
Yes, the amount you can give has been doubled. The old law allowed you to deduct charitable gifts up to 10% of your income. You can now deduct up to 20%. But there’s a catch: you have to give to a charity that is recognized by the Department of National Revenue. Better check.
MORE AND MORE PEOPLE HAVE AGED OR AILING RELATIVES TO SUPPORT. DO THEY GET ANY BREAK UNDER THE NEW TAX?
If a relative, say your mother, is dependent on you, you can include in your medical-expense deduction the actual cost of full-time care in a nursing home or, if she stays at home, the cost of one full-time attendant. But the relative, your mother in this case, has to be confined to bed or a wheelchair for the whole year because of her illness. The nursing-home deduction is also allowed if she is certified by a doctor to be in a mental condition which makes her dependent on others for her personal needs and care. This generally will cover senility. Unfortunately, many doctors have been reluctant to give such certificates, but it’s hoped that in the near future the Department of National Revenue and the medical profession will take steps to make it easier for taxpayers to get this kind of relief. Some provinces may soon start paying nursing home costs from their public medical plans and, where they do, the cost will not, of course, be deductible for tax purposes.
NOW THAT WE HAVE A CAPITAL GAINS TAX, WILL WE HAVE TO REPORT CASUAL PROFITS FROM OUR HOBBIES?
The kind of casual profit you might make from a coin or stamp collection will not likely be taxable. This is covered by the rule that says that no capital gain is taxable if you sell an item of personal property for less than $1,000. If you’ve been saving rare coins or collecting antique jewelry, and sell your collection for $900, there’s no tax to pay even if this does produce some gain for you. But if
your actual cost was $700 and
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you sell for $2,000, you have a capital gain. However, the tax man will “deem,” as he calls it, that the cost has been $1,000, so you then have a gain of $1,000. Under the general rules for capital gains, half of this ($500) has to be added to your income and will be taxed. On the other hand, if your hobby is making things — weaving baskets, for instance — you treat it just like a little business; the difference between your receipts and your costs is income and will be taxed as such.
ARE STOCK OPTION PLANS STILL AN ATTRACTIVE BENEFIT FOR EMPLOYEES?
You were taxed on gains from these under the old law, but there was an income averaging rule which allowed you to spread the income over a number of years to keep it from pushing you too high up the tax scale. This helped in situations where you made all your stock profit in one year. But the old averaging rule is being phased out and the new one is far less generous. This doesn’t mean that stock options are no longer attractive; it’s just that they’ll be taxed a little heavier. Senior employees should check with their companies to see if they’re making any changes to ease the tax burden.
ARE THERE ANY GOOD TAX DEALS LEFT FOR THE SMALL INVESTOR?
It depends on what you mean by “small” investor. Perhaps the most reasonable definition is someone with less than $100,000 capital. He gets a little better deal on his dividend income with the new dividend tax credit rate (unless he makes over $14,000 or so on his investments and then he’s slightly worse off than he was under the old law). And he can probably think himself lucky that capital gains tax is charged on only half his gains.
Probably the best tax deal is realestate investment. Though the benefits have been reduced, they are still attractive. Take the investor who has $20,000. If he buys 7% bonds and
has already $11,000 of taxable income, his $1,400 interest will be taxed at, say, 40%. If he takes the $20,000 and buys a small duplex, paying $60,000 for it and gets a mortgage for $40,000 (which is normal mortgage lending practice), his position will be a lot different. Assume the rents from the duplex bring in $6,000 a year ($250 a month for each unit). He deducts interest on the mortgage, say $3,200 if the interest rate is 8%. Then he deducts local taxes and repairs, say $1,800. Now he gets a deduction for depre-
ciation of up to 10% of the cost of the building (not the land) if it’s frame, 5% if it’s brick. This deduction is more than he needs to wipe out any tax liability for quite a number of years.
What he ends up with, then, is an after-tax return of $1,000 from the duplex, compared with the $840 he would have got on the bond. Also, his real - estate investment is openended; that is, his return will increase as inflation over the years pushes rents up. And, of course, it’s more
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than likely the resale value will increase, too, if he’s made a wise choice of property.
IS THERE ANY TAX HELP FOR PEOPLE WHOSE INCOME SUDDENLY GOES WAY UP AND PUSHES THEM INTO A HIGHER BRACKET?
There are two new income-averaging systems to take care of situations like that. One averages backward, the other averages forward. The backward method — general income averaging — is available to all taxpayers on all income. Under the old law, one man could go along for five years making a taxable income of $10,000 a year and his basic tax over the five years would total about $11,000. Another man could make the same total amount over the five-year period but in varying amounts and wind up paying more tax. Say he made $6,000 a year for the first four years and $26,000 in the fifth, as might happen with a young doctor or lawyer, then his total tax for the five-year period would have been about $13,500. Same total income, but $2,500 more tax. General income averaging helps rectify this situation. There are a number of rules to abide by and the mathematics are very complicated but, fortunately, you don’t have to worry much about that. The Department of National Revenue has said that both the qualifying and the calculations will be taken care of automatically by its computers which have your tax history stored in their banks. You won’t even have to ask. Remember, though, the backward-averaging method won’t be available until the 1973 tax year, when 1972 will be used as the base year.
WHAT ABOUT THE PERSON WHO MAKES A WINDFALL PROFIT, A 0NCE-IN-ALIFETIME “BIG HIT”?
The new and somewhat unique forward income-averaging plan should bring him a major tax saving. It covers most big windfalls that are likely
to come your way, including capital gains, a single payment from a pension plan, a lump-sum retirement payment, proceeds from the sale of a business, benefits under a stock option plan, or sudden income from a literary or other artistic work or from making it as an athlete, musician or entertainer.
Take the case of the $12,000-a-year man who has been working for his employer for 20 years. During that time the company has built up no pension plan for him. The company is bought out and the employee is retired, but the new owner feels the man has some recognition coming for his past services and gives him a lumpsum retirement payment of $50,000. Ordinarily that retirement allowance is taxable that year. But suppose the average effective rate of tax for the employee over his 20 years with the company was 30%. One might expect that the lump-sum retirement allowance ought to be taxed at something close to the employee’s average tax rate for the period during which he earned it. Without forward income averaging, the tax rate on the $50,000 lump sum payment would probably be over 50%, making the payment worth less than half its nominal value.
The answer for this man is to take advantage of the forward incomeaveraging rules which permit him to defer the tax on the payment if he is prepared to invest the money in what is called an “income-averaging annuity.” Here’s how it works. The employee has until 60 days after the end of the year in which he got the money to decide whether or not he wants to pay tax on it in that year. If he doesn’t he goes to an insurance company and buys an income annuity for himself with as much of the money as he wishes to defer paying the tax on. Then he calculates his income and is permitted to receive a deduction for the money he spent buying the annuity, less the first year’s income expected from it. The annuity may be for as short as five years, or may provide for guaranteed payments up to 15 years, or for the life of the person concerned. As he receives the annuity payments, he pays tax on both the principal and interest at each tax year’s appropriate rate. It’s safe to predict that this technique will bring major tax savings. Anybody who anticipates being in that kind of position at some time in the near future should take a close look at the rules under which forward averaging is allowed. A decision to use this technique will sometimes be difficult, and a fairly substantial sum will be involved in most cases, so get some expert advice.
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CAN EXECUTIVES STILL EAT, DRINK AND MAKE MERRY AT THE EXPENSE OF THE TAX DEPARTMENT?
No — and they never could. The idea of clamping down on expenseaccount living was a red herring the tax - reform authors dragged out to convince us they were out to redress some great raid on the treasury by high-living executives. The law has always said that you can only deduct entertaining and promotion expenses that are reasonably related to earning a living. The new law just tightens it up. No matter how well a businessman can show that by having a yacht or a camping lodge he is promoting his business, the expenses of maintaining these operations will no longer be deductible. What’s more, he can’t claim dues for social and recreational clubs anymore, but the cost of entertaining business associates at his club is still deductible. All entertaining and promotion expenses will now be more carefully scrutinized by the Department of National Revenue. If you’re planning to claim them, keep more detailed records of how you spent your money, on whom and with what results.
ARE THERE ANY TAX TRAPS AWAITING THE UNWARY?
All tax laws are complex, intricate and sometimes difficult to comprehend. So much so that it’s easy for you to miss taking advantage of provisions intended for your benefit, or for you to do something that provokes an unexpected tax. For example, look what happens under the
capital gains when you convert personal property to “business” use. The new rules say that when you have an item of property that you’ve been using for personal enjoyment and you convert it into an income-producing asset, you are considered to have sold it at its fair market value and, if that involves a “paper profit,” you may have to pay a capital gains tax. Say, for instance, you own a summer cottage. You built it at a cost of $8,000 and you and your family have used it for a number of years. Then you and your wife decide not to use the cottage personally any longer, but you want to keep it until your children get married. So you start renting it to others each summer. At this time, the cottage is worth $20,000. When this change of use from personal to business (renting) takes place, then you will be considered to have sold the cottage, made a capital gain of $12,000, and may have to pay tax at full rates on $6,000 — that is, on half of the gain. There is no refund when the property is returned to personal use.
WHAT HAPPENS TO THE HUSBAND AND WIFE WHO WORK TOGETHER IN THE FAMILY BUSINESS?
There has been no change. When the husband employs his wife, her wages are still not deductible. This creates a serious tax inequity. The way round it is to incorporate the business. Then the family business corporation can employ both the husband and the wife, and deduct both salaries. There are significant tax savings here. Equally important: once the wife becomes an employee, she can contribute to the Canada Pension Plan. If she works and contributes for the requisite number of years, she and her husband will double their pension when they retire.
DOES THE NEW TAX AFFECT INHERITANCE?
Yes. Under the old law, the federal government and certain of the provinces charged duties on an estate at death, but the federal government has abolished its duties. And it , now looks as though the provinces that didn’t impose succession duties in the past will do so this year. But the new federal tax law gets back at you another way; it now says that when a person dies all of his capital assets must be valued. Now whether they are sold or not, if they have appreciated in value since the date he acquired them (or since Valuation Day) a capital gains tax is charged on the “paper profit.” This can produce great difficulties. The problem arises because the tax is payable, even though the assets haven’t been sold, and often the family won’t have the ready cash to meet it. Often they will have to sell the asset. But this was also true with the former death duties. Many people are taking steps to avoid the problem. For example, if they sell their assets to a trust for their wives and children, then when they die there will be no death capital gains tax because they don’t own the assets. Under the tax treatment of trusts, each trust will have its assets revalued every 21 years and the capital gains tax on the increase is payable only then — and even this can be deferred. Others are now selling their assets to corporations that are owned by their wives and children in order to defer the death capital gains tax until the children die. In these cases they may have to pay capital gains on transfer of their assets, but in the early days of the new tax system, before assets have had a chance to appreciate much, this will be negligible. ■
Editor’s Note: All tax calculations include provincial tax at 30% of the basic federal tax, as used in the federal government's published examples. This rate is equivalent to the old provincial rates used in British Columbia, Ontario, Prince Edward Island and Nova Scotia. Quebec has its own income tax and the combined result of federal and Quebec tax may provide quite different results. The other provinces will probably — as in the past — use higher rates than are applied in the article, but generally our comparisons between old and new total tax will be as close as anyone can come for these provinces. Apart from assumptions made about provincial taxes, other assumptions have been made in calculating examples given in this article so that we could present a broad picture of the effect of the new tax. But almost every case is different in at least some particular, and you should not expect the figures for taxes quoted to correspond exactly to your own case, however similar that may look at first glance.