Yesterday we looked at government tax strategy.
You probably noticed that the government’s strategy and yours don’t coincide. Until they control spending, it will remain the case. You should not put yourself in a position where their “revenue tool” methods affect you needlessly.
Year end tax planning advice is available everywhere just now.
Most of it is trivial because all of the ideas are obvious and presented without context. Everything about tax is contextual. What works for one will fail for another.
- If you have securities that are presently positioned with a loss, you should dispose of them in December instead of January so you get the tax advantage sooner. If you don’t intend to sell for other reasons, ignore loss harvesting.
- If you intend to make significant donations, December is better than January because you get the credit sooner. Unless of course, you don’t have enough income to claim it all.
- Pay expenses that are deductible before the year ends.
There are more, but the theme will be the same. They work. In theory. When everything else is equal.
It never is.
Assess your own tax strategy
Tax loss harvesting is a good idea, but it is Tax 101. The fact that you are resorting to logistics to make your tax return work points to structural failings. You should address them.
Good tax planning uses structures rather than a year end checklist.
- Interest paid that is not tax deductible is bad interest. Paying interest may or may not be bad for you. That is a different discussion. It is less bad if it is deductible. In Canada interest is deductible if there is a legal requirement to pay, the amount is reasonable, and the proceeds of the loan were use used to acquire income producing assets. (RRSPs and Tax Free Savings Accounts don’t qualify.) By changing the order of events, sometimes you can make the third condition appear. Use your cash to buy personal assets and borrow to buy investments is a common tactic.
- Should you incorporate your business? Recent ppgovernment proposals make the question look more problematic than it is. Don’t be deceived. Incorporation is nearly a necessity. There are advantages that require a corporation.
- Deductible group insurance for yourself.
- Ability to pay non-deductible expenses with corporate money where the expense relates to business. Life insurance on key people for example. Corporate after tax dollars are 85 cents big while personal after tax dollars look more like 50 cent dollars. Talk to your accountant about what expenses could be put into the corporation instead of thinking about what you take out.
- Build a pension plan. Personal Pension Plans have been available since 2012. Their earlier variant the Individual Pension Plan has been around since the the early ’90s. They provide profound advantages over RRSPs. Again contextual. This is not a do it yourself project. There are limits but if you have free cash flow and care about retirement capital, these are not to be missed. They might not turn out to be right for you, but if you are not doing one, you must be able to write down the reasons why you are not. Lethargy is not enough. More on PPPs below.
- Understand income splitting and limits on it. The government is concerned about this and they only care about things that work for you. Investigate your options.
- Understand deferred income. A dollar paid 10 years, or better yet 40 years, from now has a present value much lower than the dollar you pay today. Understand your need for capital and accumulate it in ways where the government allows you to defer recognition of the income. Life insurance is a powerful tool.
Strategic tax planning requires a long view
Year to year tax planning is a mistake. The problems you have today are a function of the mistakes you have made in the past. Clean that up and the future will be easier to cope with.
A Personal Pension Plan is not news.
It does seem though, that some have not read the memo. Here is an old article about it. A Structured Retirement Income Option. To modernize that in the context of the recent government attack on strategic tax planning, you might want to notice that the government dislikes holdcos, trusts, and some income splitting, but seems unconcerned about creating retirement income with a pension plan. They will eventually get it right on the other stuff, and it will be harder for you to use your corporation as your pension. Ergo, avoid their grasping strategy. Optimize your retirement income.
J.P. Laporte, CEO at INTEGRIS Pension Management, recommends, “Every business owner should set up a pension plan. Do the simple stuff first. Don’t complain about teachers retiring early on a full pension, copy them by setting up your own PPP through your business. The law allows it, so why end up paying more tax?”
Strategically taxes matter. Here’s how much.
When the Dutch bought Manhattan Island for $24 in 1626, who got the better deal? The Dutch? Seems not. A five-year-old blog article, First We Sell Manhattan, deals with the outcome.
Seems the Canarsie won big if there were no income taxes and lost big if there were. The same outcome will apply to you. If you pay more tax, you will have less capital and that reduces your retirement income.
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