Let’s spring into tax season

BY JAY BRIJPAUL

I was told that paying taxes is a good thing because the person in the wheelchair can eat. I came across a quote by Lao Tzu, a famous philosopher, who stated: “The people are hungry: it is because those in authority eat up much in taxes.” John Calhoun, America’s seventh Vice President, remarked in one of his speeches that, “Our Government is deeply disordered, its credit is impaired; its debt increasing; its expenditures extravagant and wasteful; its disbursements without  efficient accountability and its taxes enormous, unequal and oppressive to the great producing classes of society.”

If you are currently renting and have a sizeable income, contribute as much as possible to your RRSP. Buying an RRSP will reduce your tax bracket and you will receive a credit. When you are ready to buy your first home, you can borrow up to $35,000 from your RRSP to use towards your down payment. I prefer opening a self-directed RRSP where I can invest the money myself.  I bought TD Stocks and they did well. Avoid buying mutual funds — the fees are enormous. Start investing in RRSP when you are young. As your wealth grows, you can contribute less to RRSP. At retirement, when you withdraw, it is considered a taxable income.

If you are a homeowner and have over 50% equity in your home, use some of that equity to build more wealth and save on taxes. Open a Home Equity Line of Credit (HELOC). If you have money in a savings account, use it to pay down your mortgage and make your HELOC larger. You can now use a portion of the HELOC as a down payment on an investment property. I usually take 20% down payment from my HELOC and the remaining 80% as a mortgage on the investment property. The rental property is therefore 100% financed and the interest earned is a tax-deductible expense against my combined income.

Open a separate account for investment properties. Proper bookkeeping is critical. Any expenses associated with the rental property must be documented. I usually pay contractors only when they issue an invoice. That way I can attach a copy of the invoice to the method of payment. Investing in real estate is tax sheltered. Over the years, the mortgage owing decreases while the value of the property increases. What is appealing is that you can withdraw some of the equity and invest it without triggering the tax. With this strategy, you can reduce the amount of taxes paid to a minimum and do not need more RRSP. At retirement, you are being taxed on the amount of income you have received and not on the value of your assets.

Your best investment is your principal residence, the home in which you live. The profits here are not taxable. If you are using a part of the property for rental or claiming a portion as a home office, then consult an accountant. The tax rules are complex, and you can land in hot water if not done correctly.

Selling an investment property will trigger capital gains tax. Capital gains tax is pleasing to the investor because of how it is structured. Let’s assume that after selling your investment property, you net $96,000. You can keep 50% of the profit and the other 50% is considered as your income. If you are on a 33% tax bracket, then, you will pay only $16,000 in income tax. You can defer a portion of the tax by taking a Seller Take Back Mortgage. The trick is that you still have an interest in the property. Let’s assume that you lend the buyer $48,000 as a second mortgage; For that tax year, your tax will be reduced to only $8,000.

Benjamin Franklin, one of the founding fathers of the United States, surmised that “In this world, nothing can be said to be certain except death and taxes.” Knowing that we must be certain that when it comes to taxation, if you fail to prepare, then you must prepare to fail.