Tax Shelters

Improving yield matters

John Maynard Keynes once commented that tax avoidance was the only remaining intellectual pursuit that offered a monetary return.

There are ways to look at the thought.

First, most tax plans are ridiculously simple so not much intellectual challenge. You should know about those and use them when appropriate.

Second those that are not simple, are mind boggling.

There are few in the middle.

The basics of tax alpha

Tax management involves some fundamentals.

In progressive rate systems income splitting is powerful. Two people earning $50,000 each pay much less than one person earning $100,000

Type switching is nice if you make ordinary income into a capital gain with tax payable at half rates. Sometimes there are deductions available for one kind of income that are not there for another kind. Business income versus salary, or interest versus rentals. Usually hard to do though.

Deferral works. Paying tax later makes its present value lower.

There are three forms of process driven shelters

  1. Ones where the capital is deductible and future income is taxable. These are useful to move income from one year to another.
  2. Ones where the capital is not deductible and future income is untaxed.  Like life insurance and tax free savings accounts.
  3. Ones where capital is deductible and income is untaxed. Like pension plans or an RRSP.

The third is clearly the best, but always structured by the government. So limited availability. Low thresholds and eventual taxation.

The first is great but complicated. They are most valuable in the beginning. They wear out.

The second format is most valuable over a long time. Tax free savings accounts have small limits so not terrific. Life insurance grows and grows and the tax due on a withdrawal disappears at death. In some cases the tax gain on death is enough to pay taxes otherwise due. In effect, paying them with their own money.

Yield and time together magnify your wealth.

Notice how long it takes to double using the rule of 72. Money growing at 8% and taxed at 50% yields 4% and doubles in 18 years. 72/4.

Suppose by careful management you reduced your tax rate to 25%. Now you net 6% and money doubles in 12 years. 72/6. In 36 years you could have two doubles at 4%, 4 times your money or three doubles at 6%, 8 times your money.

Having twice as much money by managing taxes is the easiest way to have twice as much money. Certainly easier than earning 12% taxed at 50%. Far better than waiting to year 54 for the third double.  Even easier than beginning with twice as much capital.

Tax shelters are processes.

Seek out the simple ones first and let them run.

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. don@moneyfyi.com  866-285-7772

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