Is tax avoidance wrong? To listen to the cries over Donald Trump and the probability that he paid no personal federal tax, you would assume so. I think most tax practitioners would argue that there is no prohibition to organizing one’s affairs so that the least tax is exigible. Who then is right?
Let’s begin with the difference between tax avoidance and tax evasion. Evasion is the outright doing of a deed specifically prohibited by the statutes. Failure to report income for example. Claiming a deduction that was in fact not incurred. Generally what you would think.
Avoidance on the other hand is more subtle. Is there a way to receive a given income in a form that is less tax costly? Rent is cheaper than interest because there are more deductions you can claim. Dividends look cheaper but truly are not. Salary costs more than capital gains. For most of us, there are few options.
The key to serious avoidance is to have enough to avoid and enough capital to set up the structures required. Apple Inc. is not in Ireland because they love the beer. Incorporated businesses exist, at least in Canada, because it is cheaper to accumulate money to grow the business. Income splitting is attractive because of marginal tax rates escalating so quickly.
Taxes are serious impediment to growing investable capital and smart people see that limit as optional.
On the ethical side of that, we can notice that the governments make the rules and change them when they want. The argument that anyone has a moral duty to pay tax is fatuous. They take taxes. It might have a little more validity if governments felt some moral duty to spend the money they take wisely, efficiently and effectively.
Suppose I come upon a business that makes $200,000 per year pretax and is for sale for $1,000,000. My tax payable in Ontario on $200,000 is about $72,000, while a corporation would pay only $30,000. Should I incorporate? Maybe. Suppose further I require the business to pay me cash after taxes in my hand of $128,000, the same as if I earned the $200,000 directly.
Instead of buying myself, I incorporate and loan the corporation the $1,000,000. The corporation earns $170,000 after it pays its taxes. But I still need my $128,000. The corporation pays me a cash dividend of $41,000 and pays back $87,526 of the principal on my loan. I pay $526 tax on the dividend and nothing on the loan repayment. I have the same cash available to me and the total tax paid drops from $72,000 to $30,526.
For $42,000 a year in tax saving, most people would incorporate. Does that make them bad people or does it mean that a successful business has $42,000 to invest in growth, hiring, purchasing materials from other suppliers and supporting local kid’s baseball teams. Is that better than our beloved government’s ideas about how to spend it?
The government needs the money, but once they have exceeded their reasonable purpose, it is impossible to construct a moral argument in their favour.
There is a saying in New Hampshire, “It is illegal to pay too little tax and immoral to pay too much.” In my experience, most people pay too much. Talk to your professional advisors
Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario. In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.
Please be in touch if I can help you. firstname.lastname@example.org 866-285-7772