Tax Shelter F.A.Q.
Everyone likes to pay the least tax possible. Canadians regard paying as little in taxes as possible as both a duty and an obsession. We all hate to give up huge chunks of our hard earned money to the government in taxes.
There is a very distinct difference between tax avoidance and tax evasion. One is a way to minimize your taxes as much as possible and is legal. The other is trying to fool the taxman by not reporting your income fully and is illegal.
For the purpose of reducing your tax bill your best recourse is a tax shelter. Using your tax shelter to minimize your tax bill is perfectly legal and is used by smart people everywhere.
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Why is this legal? Does the CRA agree with these programs? Why doesn’t everyone do this? Final Thoughts |
WHAT IS A TAX SHELTER?
A tax shelter is defined in the Income Tax Act as any property for which a promoter represents that an investor can claim deductions or receive benefits which equal or exceed the amount invested within four years of its purchase.
WHY IS A TAX SHELTER USED?
One attractive feature of tax shelters is that they provide you with deductions without requiring cash contributions on your part because assets are being purchased with borrowed funds.
HOW DOES A TAX SHELTER PROGRAM WORK?
Step One: Make a donation to charity and receive a charitable donation receipt. Your receipt is worth (in Saskatchewan) 44% in tax credits on your Income Tax return. Eg. if you donate $1,000, you will receive a receipt for $1,000 which equates to a $440 tax credit.
Step Two: You apply for a loan with the intention of purchasing goods to be donated to charity. If accepted, the charity will issue a charitable receipt for the goods donated.
Step Three: Claim your charitable receipts and enjoy the tax credits on your return [available to be carried forward for up to 5 yrs].
HOW DOES THE CANADIAN TAX SYSTEM WORK?
It is important to understand that a tax CREDIT in not the same as a tax DEDUCTION. An RRSP is an example of a deduction. So is a business expense. A deduction reduces your income from the top down, therefore reducing your taxes payable on that extra chunk of income. It also means that as your income drops below certain thresholds [approx $60K and $30K] your “return” is less and less for every dollar spent on purchasing deductions.
A CREDIT can be seen as a tax COUPON or VOUCHER…For every $1 of credits you own, you are entitled to save $1 dollar of tax!
WHY IS THIS LEGAL?
In 1996, Paul Martin, in his role as Finance Minister, opened the opportunity to allow you to donate up to 75% of your income to charity and receive a nice tax break.
The folks behind various Tax Shelter Programs are the same people who are often hired by the very wealthiest Canadian families to help them mitigate their tax liabilities. These people know what they are doing. If it’s good enough for the rich, why would it not be good enough for you?
DOES THE CRA AGREE WITH THESE PROGRAMS?
Why of course NOT!! By giving yourself a large tax refund, you are depriving the taxman of his taxes! Why would you expect him to be happy?
Every conceivable loophole in these programs has been critically examined, probed and corrected. Had the government’s lawyers been as thorough when they were writing the tax laws, there would not exist today the opportunity that allows these types of programs to operate freely and legally as they do. But we all know that the brightest minds go work in private practice for 10X the money.
WHY DOESN’T EVERYONE DO THIS?
Lots of reasons. Just because it’s legal does not mean that CRA is happy about the program. NO! After all, their job mandates them to collect revenue! However, they are still bound by the same laws all tax programs adhere to. However, this does not prevent CRA from using whatever tactics are at its disposal; from fear and intimidation, to lengthy legal challenges, in an often very successful attempt to scare off potential donors.
Do you like to be intimidated, bullied and pushed around? Most of us say NO, but let it happen anyway!
It behooves us to understand their motives, to stand with the laws of Canada as they are written, and to follow the Supreme Court’s own advice, that it is every Canadian’s own responsibility to minimize the effects of our onerous tax .
FINAL THOUGHTS
Over 20,000 Canadians donated to these particular group of registered charities last year and saved a lot of money in the process!
“IT’S YOUR LIFE . . . IT’S YOUR MONEY . . . HOW DO YOU WANT TO SPEND IT?”
