Tips on winding down NISA accounts

The Net Income Stabilization Account and Canadian Farm Income Program are coming to an end, with 2002 being the last year of coverage under the existing programs.
The NISA Fund 1 interest bonus of three percent paid by government ends Dec. 31 this year.
Producers now must decide how to wind down their existing Fund 1 and Fund 2 accounts. Under rules in place until March 31, 2004, Fund 2 or taxable amounts must be withdrawn first on a triggered withdrawal or voluntary opt out.
Depending on how you do this and the amounts on deposit in Fund 2, your tax liability can be significantly altered.
There are several timing strategies for winding up your NISA account that you may wish to discuss with your financial advisor before the end of this year.
For instance, if you close your NISA account and opt to withdraw all your funds after the 2002 NISA transactions are complete, you will trigger additional taxable income equal to your Fund 2 balance in the 2003 tax year, assuming a calendar business year-end.
This might be a suitable strategy if 2003 is a terrible financial year with significant offsetting losses.
A more gradual approach is available under the new rules that come into play after March 31, which might be a more appropriate strategy if you don’t have offsetting losses.
The new rules will permit matching withdrawals from Fund 1 and Fund 2 over a five-year period beginning March 31, 2005 and ending March 31, 2009. A minimum withdrawal of 20 percent is required.
For example, if your total account balance is $100,000 on March 31, 2004, you are allowed to withdraw $20,000 in equal portions from Funds 1 and 2 to make up your annual withdrawal.
In this case, only $10,000 would be taxable each year, assuming you have $50,000 in each of your funds.
If you have current offsetting losses, you may want to reduce your account by more than the 20 percent per year minimum. If, for example, you have a really bad year in 2004, you can deplete your account by 40 percent, or $40,000 on a $100,000 account.
This means you would incur tax on $20,000 from the Fund 2 portion.
If your financial performance improves significantly the following year, you won’t need to make a withdrawal because you already have reached your two-year cumulative minimum withdrawal of 40 percent.
In year three, however, you would have to make the minimum 20 percent or more withdrawal.
The new Canadian Agriculture Income Stabilization Program introduced for 2003 combines income stabilization and disaster protection. Consider this new program in your risk management strategy.
To qualify for protection in 2003, you must complete an application, open an account with a participating bank or credit union, and make a deposit. The new program will replace the current NISA and CFIP programs after the 2002 coverage year.
Following the 2003 initial launch year, CAISP will be similar to crop insurance because you must:
•decide to participate early in the year, by March 31;
•deposit funds by Dec. 31; and
•trigger a claim based on your production margin decline after year-end, with reference to your tax return and supplementary forms.
Unlike crop insurance, however, your deposits earn interest and the deposit is refundable at your discretion if you do not receive a benefit.

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