Alternate Tax Shelters

Chimo’s Financial Newsletter Theme: Alternate Tax Shelter Investments In this issue: 1. Chimo Says 2. What can we do for you? 3. Humour section 4. Tip of the month 5. Feedback 6. Link—The unknown Tax Write-off   Chimo Says A Tax Shelter is something most investors consider from time to time. No one wants to pay more taxes than necessary and certainly not more than one’s fair share. Traditionally, many taxpayers do much of their tax planning in the last part of the year. In fact, many people scramble for the deposits for their registered retirement income savings plans to meet the end of February deadline. For taxpayers in the top marginal tax bracket, a tax shelter can be a significant method of saving or deferring taxes. Tax shelters may provide either absolute income tax savings by way of deductions in the year of purchase, or deferrals in the year of purchase to be followed by income to be realized at a later time. People with a large one-time income problem may find a deferral type of tax shelter extremely attractive. In effect they reduce the tax bite by deferring taxes from a high-income year to a time when income will be lower. Another form of tax shelter may involve a significant business risk with no predictable income. There is usually an absolute tax deduction allowed. Real estate, software, and movies may fall in this category. In evaluating a tax shelter investment it is wise to consider it in the same way one would evaluate a non-tax sheltered investment. This is especially true if there is a business risk associated with the investment. Legal and accounting advisers should be consulted and the investment should be considered from the point of view of its risk and return potential. Even though you may receive a tax write-off it may not be a good investment if you lose your investment capital. Also one should understand the nature and structure of the investment. One consideration is the potential for future cash flow requirements. It is essential that you have the ability to meet the required payments on an ongoing basis. Otherwise it may come as an unpleasant surprise if you are required to make future payments at a time when cash flow is not so great. I know this from first hand experience. I have been there—done that. Always consult a professional who has experience in evaluating this type of investment.   It is also important to keep in mind that tax shelters can and do become the targets of Revenue Canada. A good rule to follow is the old adage, "If it looks too good to be true, it probably is." Most investors are looking for a tax-shelter investment that provides a reasonably quick return of investment capital by way of income tax refunds, with the added prospect of a good yield on the investment.   Revenue Canada defines a tax shelter as any investment that the promoter claims will provide deductions and benefits in the first four years that are at least equal to the investments made. CCRA has released a list of important considerations. Is it a real business? Does the business have a reasonable expectation of profit? Are the business assets properly valued? Will the anticipated tax losses be less than the investment at risk? It is wise to know with whom you are dealing. Always ask for a copy of the prospectus and any other pertinent documents. Read them carefully. Get professional opinions detailing income tax consequences. If the promoter makes verbal assurances ask for them in writing. If there have been advance rulings from Revenue Canada ask for copies. Sometimes investors get caught up in the tax sheltering aspects of an investment and they fail to consider the investment merits. You should review the potential investment merits carefully. You should pay particular attention to underlying assumptions used for income projections. Consider the liquidity of the investment. Will you be able to cash-in or sell it at a later date? Consider also the possible taxable aspects of the investment when it is sold. If you have deducted most of your investment in the earlier years, most of the subsequent recovery of your investment dollars will be taxable. The most common tax shelter would have to be Registered Retirement Savings Plans (RRSP). Most financial institutions offer at least one type of RRSP. Many offer a whole range of plans from Guarantee Investment Certificates (usually fixed interest) to Mutual Funds. Nearly everyone has an RRSP or a pension plan. Many people have both and the general awareness of them is high. It is not my intent to review RRSPs in depth in this newsletter. Perhaps I will do that in a later one. My intent here is to make you aware of some concepts. However, I cannot pass up this opportunity to mention Segregated Funds. Some people refer to them as guaranteed Mutual Funds. Where else can you invest in market securities and have your deposits guaranteed? One of the advantages of RRSPs is that you can write-off the deposits against current taxes and shelter the growth until the money is withdrawn. An RRSP is a good idea but some people tend to put the emphasis on the tax write-off. The main purpose of an RRSP should be to provide a secure future income in retirement. Another tax-sheltered investment, not so widely known, is using a Universal Life policy for the purpose of saving and postponing taxes (indefinitely) on the interest earned accumulation in the plan. I have recently finished a book that covers a number of ways of achieving tax-savings. It is entitled "The Ultimate Tax Shelter~ How to Buy Term and Invest." You can find it for sale as an e-book at: http://www.lyaltapublishing.com in the Lyalta Bookstore. Limited partnerships, joint ventures, flow-through shares, and royalty trust units are used to offer special tax incentives. These are offered to encourage individuals to risk capital for the exploration and development of oil, gas and minerals. Through these vehicles individuals may be eligible to deduct specific exploration expenses. Most people are not too familiar with this type of investment, so I have asked my acquaintance, Larry Darling, to contribute an article on this topic. You may find his article entitled, THE UNKNOWN TAX-WRITE-OFF at Tax Write-off   Please Note: The purpose of this newsletter is the dissemination of information. It is not an attempt at general advice. Always consult a properly qualified agent for individual advice. We cannot accept any responsibility for your decisions based on the article above. Some of this information may not be appropriate for some individuals. Please contact me for any assistance you may require.       What can we do for you?   This is the third of our "Chimo Says" newsletters. Our plan is to publish every month, time permitting. We will provide information on financial matters of general interest. Whenever possible we will point to articles or information that may be valuable to our readers.   "Chimo Says" is strictly opt-in. You must sign up to receive it. You can do that by going to our Chimo Web site. Visit our website to discover lots of useful information. Free articles may be found on our site. Do your own private needs analysis, for retirement planning, life insurance, disability income, and critical illness. Get a confidential quote. No one will even know you were there unless you ask for someone to contact you. We have associates all over North America, but especially in Canada. If you are from the USA and you want a quote contact us and we will give you a source for your own private calculations.   What Can You Do For Us? Wow. I thought you would never ask. Thank you. Thank you. Seriously you can help us and we need your assistance. Our request is simply this. Send this newsletter to five friends who you think might find it interesting. That’s all. Humour Section: Boxing fans know Cassius Clay by the moniker of Mohammed Ali. Ali went around introducing himself as the most beautiful fighter in the world. He would say, "I have speed and endurance. If you fight me, increase your insurance. I don’t ask what boxing can do for me. I say what I can do for boxing. I’m so fast that when I get ready for bed and turn out the light, I’m in bed before it gets dark. When Mohammed Ali was boxing champion of the world, he was traveling in the first-class section of a commercial jet. A few minutes before take-off, the flight attendant came by and asked Ali to fasten his seat belt. Ali told her, "Superman don’t need no seat belt." The flight attendant paused momentarily and then said, "Superman don’t need no plane either." Tip of the Month: The more I know, the more I know there’s more to know that I need to know.   Opt-in Newsletter. How to subscribe: If you have not subscribed but would like to do so and receive your free Financial Planning Strategies article, go to http://www.chimofinancial.com This is an opt-in newsletter. If you received this newsletter by mistake or if you do not wish to receive future copies, please go to the link below.   Privacy ~ We respect the privacy of our subscribers and we will never make our mailing list publicly available.   Input We welcome your thoughts and ideas. Please contact us with your impressions of this newsletter. Do you have any ideas for future newsletters? Anything you would like information about? If you know anyone who could benefit from this newsletter or the information on our website please forward it to him or her. Contact us at: lyle@chimofinancial.com   Chimo Financial Services Inc. 4903 Benson Rd. NW. Calgary Alberta, T2L 1R9 Phone: 403 233-2550 0r 1-888-322-2558 (Canada only) E-mail: lyle@chimofinancial.com Web site: http://www.chimofinancial.com Also visit: http://www.lyaltapublishing.com