Path: utzoo!utgpu!attcan!lsuc!dave
From: dave@lsuc.uucp (David Sherman)
Newsgroups: can.general
Subject: income tax tips #22: interest accrual
Message-ID: <1989May22.195737.16996@lsuc.uucp>
Date: 22 May 89 23:57:36 GMT
Distribution: can
Organization: Law Society of Upper Canada, Toronto
Lines: 56

The April 27, 1989 federal budget did not include very many
income tax changes, but there were a few.  A budget wouldn't be
a budget without adding some more complexity to the Income Tax
Act, after all.

One proposed measure which has not received much publicity is
the new rule on interest accrual for individuals.  This one may
catch a fair number of people, beginning in 1991.  The time to
start planning around it, to the extent you can, is now.

Before 1981, individuals had a choice as to how to report accruing
interest (on, for example, multi-year term deposits or compound
Canada Savings Bonds).  For any given investment, the income could
be calculated and reported annually, or it could all be reported
when the investment matured (which might mean a large amount of
interest, pushing the taxpayer into a higher tax bracket).

In 1981, the rule was changed to require accrual at least every
three years.  The government was concerned about the deferral of
tax for many years on long-term investments.

Now, it is proposed that all accruing interest be reported annually.
This will apply to investments acquired after 1989, so the hit will
be in the 1991 taxation year (tax returns filed in 1992).  The
government's goal is not only revenue enhancement: as noted in the
budget papers, "confusion has arisen because information slips
reporting the accrued investment income have not been generally
available to taxpayers".  Under the new system, you will get a T5
for accrued income on investments, accruing on the anniversary of
the investment.

So, if you buy a three-year term deposit in January 1990, you
will be deemed to have received your first year's interest in
January 1991.  To some extent this will mean that you may have
to pay tax on income you haven't yet received.

To avoid this rule, acquire long-term investments before the
end of 1989.  Note, however, that the existing three-year rule
will apply, so you'll still be taxed in 1992 on investments of
longer than three years.  Be careful also that you don't bump
yourself into a higher tax bracket with this maneuver.

In general, of course, when acquiring T-Bills or term deposits,
one should always keep the maturity date in mind.  If you buy a
7-month T-Bill today, it will mature in 1989 and you'll have to
report the income on your 1989 tax return.  If you choose a term
of 8 months, you will recognize the income in 1990 and not report
it until you file a return on April 30, 1991.  But if your 1989
taxable income will be $25,000 and your 1990 taxable income will
be $30,000, you definitely want the 8-month term.

David Sherman
Tax Lawyer
-- 
Moderator, mail.yiddish
{ uunet!attcan  att  utzoo }!lsuc!dave          dave@lsuc.on.ca