In taxation, form matters. For example, in Canada, a person who receives $10,000 may have to pay tax on all, a portion, half, or none of the amount. The difference between these different tax treatments of the same amount of money received by the same person is the legal form, or nature, of the receipt. Other factors, such as the type of payor or the relationship between the person paying and the person receiving, also come into play. Given this difference in tax liability, doesn’t it make sense to try to arrange your affairs to pay the least amount of tax possible? This lowering of tax payable is called tax planning.
There are four pillars of tax planning. The first is called income deferral – where you delay the recognition of taxable receipts to later tax years (an example is using a holding company). The second is called expense acceleration – where you arrange to have deductible expenses recognized as soon as possible. The third is called character alteration – where you change the legal nature or classification of an amount from one that is subject to higher taxes to one that is subject to lower or no tax. A fourth is called income splitting or division – where you spread income amongst members of your family and over tax years. The exact details of how this is done and which, or which combination of, methods are used depends on a person’s unique circumstances. There is no one-size-fits-all solution.
A caution. It’s important to differentiate between tax planning that results in legal tax avoidance, and what is illegal tax evasion (for example Here). Many Canadians have fallen for fraudsters’ claims of good tax outcomes only to find out that they were illegally evading tax (for a more detailed analysis, see Here). Tax planning is often complex and success depends on meticulous execution. If an outcome seems too good to be true, it may not be real. Always seek the help of an expert and, where appropriate, a second opinion.
In many cases and for most people, transactions can be done in one or a multitude of ways and by taking different paths that lead to the same destination. Often, the difference between paths taken is the amount of total amount of tax payable. The experienced tax planners at Faris CPA can show you the best tax route for you