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tax matters

A gentleman visited me recently for some tax planning. "Tim, I've been cheating on my taxes and I'm feeling guilty about it," he said.

"So, what would you like to do about it?" I asked. "Well, I've already done something about it. I wrote a letter to Canada Revenue Agency," he replied.

He then pulled out a copy of that letter to show me.

It read: "Dear Sir/Madam, I have been evading income tax for the last five years and can no longer sleep at night. Please find enclosed a cheque for $50. P.S. If I still can't sleep at night, I'll send you the rest."

The fact is, dodging the taxman doesn't have to involve tax evasion – which is illegal.

Today, I want to talk about legally "dodging" to save tax – the fifth pillar of tax planning (see my introduction here).

"Dodging" is simply the act of arranging your affairs so that amounts that might otherwise show up on your tax return don't have to be reported as income at all. Consider these six ideas.

1. Negotiate non-taxable benefits

Instead of receiving your entire compensation at work in the form of taxable employment income, why not speak to your employer about including non-taxable benefits as part of the package? Certain benefits such as education costs, membership fees, interest subsidies and discounts on merchandise can be free of tax if certain conditions are met. For more on this, check an earlier column here.

2. Ask for a tax-free death benefit

Your surviving family members can benefit from up to $10,000 in tax-free cash at the time of your death if your employer agrees to pay a death benefit to your heirs upon your demise. As long as the payment(s) don't exceed $10,000 in aggregate and are paid after your death in recognition of your service as an officer or employee, then the payments can be made tax-free. Hey – this should just about cover the cost of your funeral.

3. Utilize an exempt life insurance policy

You can build up investments inside an insurance policy on a tax-sheltered basis – similar to a registered retirement savings plan. You can't generally claim a deduction for insurance costs (there are some exceptions where the policy is collateral for a loan), and there are limits as to how much you can accumulate, but these limits are generous. In addition, it's possible to transfer assets from one generation to the next – or perhaps down two generations – free of tax using a cascading strategy (see my article dated Aug. 4, 2001, at

4. Change the ownership of a second property

It's no secret that you can generally sell a principal residence free of tax thanks to the principal residence exemption (PRE). The problem? Each family unit (you, your spouse and any unmarried children under age 18) are entitled to shelter just one property using the PRE. It may be possible to avoid tax on more than one property by giving ownership of a property to your adult children (who are entitled to their own exemptions). Make sure you get legal and tax advice before doing this, however, since there could be a tax cost on a transfer and asset-protection issues to think about.

5. Use a secondary will to avoid probate fees

Probate fees are, by any other name, a tax. These fees apply at the time of death in most provinces and can add up quickly since the fees are often a percentage of your assets on death. You may be able to avoid probate fees on certain assets by using a second, separate, will to deal with assets that don't require probate (such as private company shares), and a general will to deal with everything else subject to probate. Speak to a lawyer in your province about this planning.

6. Extract money from your corporation tax-free

You can dodge the taxman by taking money out of a corporation as a repayment of shareholder loans owing to you, or by borrowing money from your corporation for certain eligible purposes, such as buying a vehicle for use in business, or (re)financing your home. You can also pay yourself capital dividends or withdraw "paid-up capital" that you might have put into the company. Speak to a tax pro about these ideas first. Your company can also pay you rent for use of space in your home. You'll have to report those rents, but you may have enough expenses to fully offset that income, making this effectively a tax-free withdrawal from your company.