How Much Is A Tax Advantage Worth?

Most people underestimate the value of tax efficiency

I recently saw a case where a retired couple were not taking advantage of the pension transfer capability in the income tax law. In their case it was based on some confusion about the rules, but once clarified became more valuable. There was some details to deal with and a wait for the government to respond. Their first response was, “What is it worth?”

Only a little?

A little is a relative idea. Suppose it was worth $2,000 per year. Not exactly life changing, but useful.

Another way to think about it.

It is after-tax spendable income so to replace it, they would need another $3,000 or so of taxable income. It is not subject to normal market risk so if the alternative was a high grade bond that paid 3%, they would need $100,000 of capital to make it work for them.

If any of you want to put $100,000 in my account, I will be happy to have it.

Tax savings are easy money

Not everyone has easy situations, but the advantages are real. When you prepare your taxes, or if you have them done, be sure to ask what could have been different if I organized my affairs differently.

In Canada, the easy ones are:

  1. Spouses with unequal income. Income splitting with Canada Pension, other pension plans and RRSPs, or using loans to transfer investment income from one to the other.
  2. Investment income while having unused Tax Free Savings Account room
  3. Excess capital and children with conventional mortgages
  4. Unused Registered Educational Savings Plans while having education savings in conventional investments.
  5. Non-deductible interest on debt coupled with investment income

There are some that are more complicated and have higher setup and maintenance fees. There should be a cost advantage to do anything. You want to manage the after tax, after cost, income. Pretax, pre-cost is not so important.

Tax Alpha.

It is often easier to get more after tax income by rearranging the tax than it is by finding investments that pay better. There is a saying in Vermont

“It is illegal to pay too little tax and it is immoral to pay too much.”

Take it to heart.

I help business owners, professionals, and others understand and manage risk and other financial issues. To help them achieve their goals, I use tax efficiencies and design advantages to acquire more efficient income and larger, more liquid estates.

In previous careers, I have 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. 705-927-4770

One Comment on “How Much Is A Tax Advantage Worth?

  1. It is the Tax Season in South Africa and we have an influx of clients that need help with their tax submissions. The problem is that we advise that Tax Planning is part of the broader Financial Planning as such is not a destination but an ongoing process that has to be carefully managed as the tax regime changes constantly over time. The current assessment only caters for the income earned in the last tax year and there is nothing we can do to guarantee a refund or a fair assessment, however, we can be proactive and plan for the next tax year using the current information. We have deductions in South Africa that underutilized or not used at all by taxpayers that we can explore and only those that are part of our practice are enjoying such. As is the case in your own words Tax Matters are not a DIY thing. Thank you for your timely contribution we are better advisors and our clients are benefiting

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