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Financial Freedom Is Merely Organized Common Sense
The Essence Of Tax Planning and Avoidance
In my experience, there are three immutable rules in tax policy and tax avoidance
The first of them involves policy.
“The art of taxation consists of plucking the goose as to procure the largest quantity of feathers with the least possible amount of hissing.” Jean-Baptiste Colbert
That is becoming a very narrow line anymore. With the top income tax rate at 53.53% in Ontario, few will accept an increase without altering their behaviour. Hissing alters policy. Pay attention.
The second involves taxpayer expectations.
“if it is good, it will go away; if it is bad, it will get worse.”
So long as governments judge their relevance by how much they spend, there is little reason to believe their tax need will shrink. Given that they cannot increase taxes indefinitely, they must find more specific and narrowly focused ways to get it. So the good aspects go away, and the bad things get worse.
The third demonstrates how the taxpayer should behave.
In a 1977 Tax Review Board Case Titley and Carvell, the judge offered a thought;
“Íf you try to drain the last drop out of the stein, the lid will fall down and hit you on the nose.”
Don’t be greedy. If a structure of some kind offends the spirit of the law, the government always has a way to attack it. GAAR is common. The General Anti-Avoidance Rule. If something is too cute and might embarrass the finance department or the CRA, be very cautious. Think of art swaps, offshore health and welfare trusts, writing off home expenses against a small amount of AMWAY revenue, hobby farms, and hundreds more. You’ll get the lid on the nose treatment.
Thanks to Chuck Rotenberg for the quote. It appeared in his latest newsletter that deals with some possibilities in the federal budget, appearing on 7 April 2022. You should go here and subscribe to his newsletter. Rotenberg Consulting
What to look for in the budget, according to Rotenberg
A potential increase in the capital gain inclusion rate. The last time they did that was 1988, and gains accrued before the effective date were not exempted from the higher inclusion rate.
He expects that Capital Gain Stripping will go away. It might be difficult to get one organized by midnight on 6 April. Talk to your tax advisors if you are already working on it.
Be aware of the low-rate spousal loan rules. The second quarter remains at 1%, but rates are increasing, and once the loan is set in place, the rate remains at 1% even if rates rise in future.
The bits to take away
Tax planning is a useful process. Even a small incremental increase in after-tax income compounds to become large sums over one’s lifetime. “The avoidance of taxes is the only intellectual pursuit that still carries any reward.” John Maynard Keynes. That thought is closing in on 100 years old.
Don’t be greedy. Avoiding tax by using highly structured tax shelter arrangements can be costly.
The government is broke. They will tax everything except your memory. They have already taxed our patience to the breaking point. Pay more attention and avoid where you can do so legally.
Use what they have created and/or specifically permit. RRSPs, TFSA, Registered Education Saving Plans, Registered Disability Saving Plans, Life insurance.
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I build strategic, fact-based estate and income plans. The plans identify alternate ways to achieve spending and estate distribution goals. In the past, I have been a planner with a large insurance, employee benefits, and investment agency, 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. I have appeared on more than 100 television shows on financial planning. I have presented to organizations as varied as the Canadian Bar Association, The Ontario Institute of Chartered Accountants, The Ontario Ministry of Agriculture and Food, and Banks – from CIBC to the Business Development Bank.
Be in touch at 705-927-4770 or by email at don@moneyfyi.com.
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