Can tax really be avoided?

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Grant Gilmour
Grant  Gilmour
Grant Gilmour

Question:

What do they mean when they say avoid tax? Can it really be avoided or is tax just a zero sum game like accounting?

Facts:

The Income Tax Act has options for calculating and paying income tax. Tax is not a zero sum game. There are options to what rates are used. There are options to what number is used to calculate the tax. These options can reduce your taxes paid.

Tax = rate times taxable amount.
Rates are optional.
Taxable amounts are optional.

Discussion:

One way tax reduction is achieved is by changing the rate of tax. We see this built into our system of taxation in Canada through the use of tax brackets. If you have less overall income you are at a lower tax rate (lower bracket) than someone with more overall income. Businesses for example have two brackets:

  1. the 13% bracket (active business income below the small business deduction limit); and
  2. the 26% bracket (active business income above the small business deduction limit).

$100,000 times 13% = $13,000
$100,000 times 26% = $26,000

To control the tax you need to control which bracket you are in.

Another way to achieve tax reduction is by choosing options that lower the rate used to calculate tax. Consider $100,000 of income as business income versus the same $100,000 as investment income or the same $100,000 as capital gains.

$100,000 business income times 13% = $13,000
$100,000 investment income times 45% = $45,000
$100,000 capital gains income times 7% = $7,000

The point is that the formula is always the same, but the tax changes depending on what type of income you have. It makes sense to always try to reduce your taxes by picking the type of income with the lowest rates.

Grant Gilmour, BSc (Hons), MBA, CPA, CA, CICA – ITC
Partner, Gilmour Group CPA’s
Email: faqs@gilmour.ca
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