Taxes, after all, are dues that we pay for the privileges of membership in an organized society.
—Franklin D. Roosevelt
WHEN PEOPLE ASK ME WHAT financial planning is, I explain that most of it is really about the management of our tax system and processes. When preparing a financial plan, the majority of my time is spent dealing with tax-planning tools, such as RRSPs, tax-free savings accounts, dividend tax credits, capital gains exemptions, trusts and corporations, life insurance, tax shelters, and so on. These are all tools that are used to manage and minimize taxation.
Principle of taxation: the government always gets paid!
Once you accept this principle and keep it in the back of your mind while thinking about financial- and tax-planning strategies, most of these strategies will begin to make much more sense. Tax-planning strategies are used to reduce the tax payable in high-income years by deferring them to low-income years or from a high-income taxpayer to a low-income taxpayer. If you believe there's a way to legally avoid paying tax, you are wrong. The government has general anti-avoidance rules (GAAR), which allow it to claim the taxation and penalize you for avoiding paying it in the first place. However, there is good news: the government has put in place a series of tax-management tools to help individuals decide when to pay their taxes and how much to pay (with many restrictions). The first trick is to know that these tools exist; the second ...