Outstanding issues: What’s not in the budget

(February 23, 2005) For the first time in three years, the budget makes no mention of Tax Pre-paid Savings Plans and warns that a new proposal on interest deductibility is in the works.

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Under TPSPs, investors could contribute after-tax earnings yet withdraw them without triggering a tax event. (Click here to learn more about TPSPs.)

Jamie Golombek, vice-president, tax and estate planning at AIM Trimark, says he’s disappointed with the government’s failure to act on TPSPs, but notes that he got the impression from talks with finance department officials that raising RRSP limits was enough.

On the controversial issue of interest deductibility, the budget warned that a new proposal is on the way, one more “modest” than draft rules released in October 2003, but which will nonetheless bar investors from deducting loan interest in pursuit of capital gains.

In the budget document, the government says, “‘income’ had been understood to be a net amount comparable to profit, and to exclude capital gains. The court decisions, however, took a different view: income was read as the equivalent of gross revenue, and the distinction between income and capital gains was blurred.” In response, the Finance Department introduced the concept of tying interest deductibility to a “reasonable expectation of profit,” in October 2003.

The 2003 proposals, the Finance Department concedes, were a little too sweeping, and “might inadvertently limit the deductibility of a wide variety of ordinary commercial expenses.” Still, the department intends to “achieve” the government’s objective of excluding capital gains from the interest deductibility equation.

“Revisiting this [reasonable expectation of profit] is good news for investors because they won’t have to question whether they can deduct those expenses they’ve been incurring for buying investments,” says Dave Clarke, tax manager at Collins Barrow in Ottawa. “A lot of innocent bystanders were going to get whacked by this so I’m glad they’ve gone back to the drawing board.”

Tim Cestnick, managing director, national tax services, AIC, attributes the Finance Department’s reconsideration to having gotten “an earful” from the tax community. “I think what we’re going to get is some reasonable assurance that when you borrow money to invest you will be able to deduct you’re interest fully, provided you have a reasonable expectation of earning an income,” he adds.

Golombek had also hoped Ottawa would move to eliminate the capital gains tax on charitable donations, something not mentioned in this year’s budget.

Filed by Scot Blythe, Advisor.ca, scot.blythe@advisor.rogers.com

(02/23/05)

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Scot Blythe