Tax SheltersTax shelters have grown incredibly over the years. But be very careful do not get involved with the ones considered abusive, don’t become a victim of a fraud. If the tax shelter you get involved with is disallowed by Canada Revenue Agency (CRA) you lose not only your investment, but you have to pay the Tax, interest and penalties, plus you could find yourself facing jail. Canadians have four that are solid and meet CRA criteria. Anything else must be thoroughly checked before getting involved and still you could windup getting burned with an abusive tax shelter. The good onesYour HomeA principle residence (your home). Buy a house, pay it off and when you sell it any and all profit goes in your pocket - there is no tax on a principle residence.Can a principle residence become taxable at sale? Yes, if you have used the home as a rental property in any way. Example your rented of the basement apartment to help pay down the mortgage or you worked overseas for a period of time and rented out the complete house while you were away. If this is your situation be sure to speak with a (really good) accountant before completing any sale of the house. Your RRSPRRSPs are tax-sheltered only while the cash remains inside your registered plan. Once you begin withdrawing money it will be taxed at your full marginal rate. By law you will be forced to begin withdrawals at age 71 whether you need the cash or not.Many people discovered to their chagrin these forced withdrawals drive up the marginal tax rate causing them even more Tax and at the same time inflation-indexed-government benefits are clawed back. It works out to system of double taxation. If you have a million dollars in an RRSP by age 71 your minimum withdrawal amount will put you in the second highest marginal tax rate. You will pay full tax and see some or all of your government benefits clawed back. If you have a pension on top of this you will pay the highest marginal tax rate-MTR and most of your Old Age Security-OAS will be taken away. A great number of advisors and think tanks are now recommending you “Meltdown” your RRSP before age 71 to avoid this. Your Universal Life Insurance (UL)Is the best Income Tax shelter available. Once you put the money into a UL the account is Tax sheltered and creditor proof. The only caveat being, if you have committed fraud to get the money in there don’t expect it to be creditor proof.Because a UL falls under the jurisdiction of the Beneficiaries Act it can be used in a number of different strategies to achieve your ends. Personal Bank. You put your cash into a UL it grows Income Tax Sheltered. When you need some cash for a project. You borrow it at 10% - Wait don’t yell! There’s more. The Insurance company guarantees a rate of return on the borrowed amount of 8%. Your net cost is 2%. Suppose you borrowed the cash to renovate some rental properties you owned. That is a legitimate business expense and you are allowed to write off the cost of the loan, which is 10%. Your real cost is 2%. Yes, it’s legal! The dubious ones:Charitable Donation Schemes
"Everyone has a right to reduce their taxes legally . . . Until it actually happens, we can't rule on it." Gentes-Hawn CRA (Canada Revenue Agency)Things thing pop up every few years with a slightly different take. Gentes-Hawn admits the CRA is usually playing "catch-up" every time a new income tax shelter scheme emerges. Example you buy Art, which has been appraised at $10,000 value, for $1,000. Then donate the Art to a museum or church or whatever and receive a $10,000 charitable donation receipt to apply against your taxable income. The CRA has three years to challenge an income tax shelter and Gente-Hawn said the agency will go back several years and reassess the returns of anyone who claimed the tax break. It doesn’t work! CRA has crushed every one of these schemes over the years. If someone offers you this an “aggressive income tax shelter” using a charitable donation. Check the contract for any mention of a “Legal Opinion” This is a red flag. Also look for any money from your investment to be held in a “Legal defense fund” This is a huge “Red Flag.” This means the scheme is playing fast and loose with the rules. CRA has access to “General Anti-Avoidance Rule” GAAR, which allows it to go after and shut down any tax planning strategy, although technically correct, which violates the sprit of the Tax laws. So far every one of these schemes that have gone to Tax court have lost! “If you are going to sin, sin against God, not the Taxman. God will forgive you the Taxman won’t.”Borrowed from a quote by Admiral Hyman G. Rickover Legit charitable donations are great! Great for the charity and great for the Tax payer, but your main goal has to be your desire to give to charity. Aggressive Income Tax Shelters offered by an accounting firmLarge well known and respected firms can get involved with income tax shelters, that are abusive and fraudulent.On 29 August 2005, nine individuals, including six former KPMG partners and the former deputy chairman of the firm, were criminally indicted in relation to the multi-billion dollar criminal tax fraud conspiracy. Labour Sponsored FundsI don’t like these things and I don’t recommend them. I have yet to see one that has made a profit.Yet people still buy them for the large tax credits and deductions when included into an RRSP, but when they fail to make any sort of profit. Why would you want one in your retirement account? The most successful income tax shelters, are with Life Insurance products. No abusive income tax shelters here. They work and they are legal. Period. Top of Page
Terry Johnston CFPJ C Mitchell Financial Services Inc. Phone: 866-721-7781 ext. 232
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