tax question

[philelmo]

My textbook has the following sentence

Significant tax savings are available if an individual pays cash from savings for personal consumption items like houses, cars, etc., and borrows to purchase acceptable investments such as stocks, bonds and real estate and deducts the interest from taxable income.

what is it talking about? what kind of tax savings are available from buying a car/house?

[pitz]

Read the thread concerning the "Smith Manouevre". Essentially, the trick is to buy consumption items with cash (like a car, house, computer, etc.), and borrow to buy investments.

Basically put, if you borrow to buy a functioning business or partnership, you can deduct the interest expense associated with such borrowing from your taxable income.

So, for instance, you have $40k of stock, and you want to finance a $40k car. Essentially, you sell the stock, buy the car with the cash, and then take out a loan to repurchase the stock. Voila, you have a tax-deductible loan.

This is better than just buying the $40k car on financing (and often less expensive as well, since car loans are typically more expensive than secured stock loans)

[philelmo]

can i loan money to my spouse at the CCRA rate to split income?

[pitz]

can i loan money to my spouse at the CCRA rate to split income?

Sure. Just make sure you have a proper promissory note drawn up, use the prescribed rate, and be diligent about collecting the loan payments as scheduled (ie: make a paper trail).

Alternatively, you could just pay all the household expenses, and let the spouse do the investing with the entirety of her income.

[philelmo]

Sure. Just make sure you have a proper promissory note drawn up, use the prescribed rate, and be diligent about collecting the loan payments as scheduled (ie: make a paper trail).

Alternatively, you could just pay all the household expenses, and let the spouse do the investing with the entirety of her income.

Hi, could you tell me a little bit more about method B?
if I use method B, how would i split the income? if i'm at the higher bracket, wouldn't i still be paying the same taxes?

[cloudycanada]

what pitz meant was

you pay the expenses --> you have less money to invest and your spouse will have more money to invest because she doesn't have to pay living expenses
your spouse doesn't pay the expenses --> she use the money to invest, and gets investment income

this way, the household's investment income moves to your spouse who is in the lower bracket and get taxed at a lower rate.

[sunnybono]

My textbook has the following sentence

Significant tax savings are available if an individual pays cash from savings for personal consumption items like houses, cars, etc., and borrows to purchase acceptable investments such as stocks, bonds and real estate and deducts the interest from taxable income.

what is it talking about? what kind of tax savings are available from buying a car/house?

In a nutshell, try to be personally rich & business poor. That is, have most of your debts for business purposes as the interest expense can be written off, whereas personal expenses like your principal property mortgage cannot be written off.

sk