The Five Pillars of Tax Planning are these: Deducting, deferring, dividing, disguising and dodging to save tax. A couple of these sound illegal – but they’re not. Let me explain.
Deducting: This is the idea of claiming tax deductions or credits that you might not have fully or even partially claimed in the past. By making a few changes, you could create the opportunity to claim some of these deductions or credits.
Deferring: It may be possible for you to take a tax bill that might otherwise be owing this year, and push it off to a future year. While you might not eliminate the tax, paying it in the future is better than paying it today thanks to the time value of money. For example, if you can defer a $100 tax bill for 10 years, the true cost of that tax bill is just $68 (in today’s dollars), assuming you can earn 4 per cent annually, after taxes, on your money over those 10 years.
Dividing: You’ll save tax if you can move income from the hands of one family member who will pay tax at a higher rate to another who will pay tax at a lower rate. By dividing up the income differently – often called “income splitting” – you’ll be keeping more of your hard-earned income. In a perfect world, you and your spouse or other family member would structure your affairs so that you have equal incomes. This isn’t always possible, but you can move in that direction.
Disguising: I’m not talking about putting on some costume or getting plastic surgery so that the taxman won’t recognize you walking down the street. No, I’m talking about converting one type of income into another type that is subject to lower tax rates. Not all income is taxed equally.
Dodging: Don’t worry. I’m not talking about tax evasion here. “Dodging” to save tax is the idea of structuring your affairs so that some of the taxable amounts currently showing up on your tax return might not have to be reported on your tax return going forward. Moving from amounts that are taxable to non-taxable benefits or tax-free cash flow can leave you much better off