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Do the little things right to save tax this year

You've got to have a good sense of humour to be a tax pro.

Want proof? Consider the definition of "capital dividend account" in subsection 89(1) of Canadian tax law: "Capital dividend account of a corporation at any particular time means the amount, if any, by which the total of the amount, if any by which the total of all amounts each of which is the amount if any, by which the amount of the corporation's capital gain from a disposition" and so on.

There you have it. Action, intrigue, scandal, romance and humour -- all in one book.

The good news? You don't have to delve into complex areas of tax law to pay less tax than ever before. It's simply a matter of doing the little things right. Let me explain.
The simple solution

One morning during rush hour in the Greater Vancouver area, a large moving van became stuck under an underpass. The driver had guessed wrong when calculating the height of his truck and whether it would fit through the underpass. He was off by a few inches and the truck was stuck. Traffic was at a complete standstill. The police arrived and a large crowd gathered. Engineers were called in to advise on the best way to free the truck. In the midst of all the noise and excitement, a small girl made her way to the truck driver. "I can tell you how to get out, Mister," she said.

"Okay! Okay! So everybody's an expert around here!" growled the frustrated driver.

"Just let some air out of the tires," the girl said.

A few minutes later, that was the conclusion arrived at by the engineers. Those few inches made a difference and the truck moved smoothly through the underpass. The solution to the problem was so simple that it had been overlooked.

The point is, the solution to any problem can often be very simple. Too many people think that saving tax requires finding that one strategy that's going to save them thousands of dollars every year. Hogwash.

The successful person never becomes bored with fundamentals. Successful people practise those fundamentals over and over until they perfect those skills -- and then they practise them some more. This is called mastery. You can be sure of one thing: Those who manage to pay less tax than ever before will have taken many of the simplest, easiest, tax strategies and will have put them into practice.

The five pillars

What are those simple things you should be doing to pay less tax? I couldn't possibly mention them all today. In fact, I've been writing about many of those ideas in this space over the past six years, and I'll continue to write about others in days to come. I will say this, however: Regardless of the specific tax strategy, it's going to fall under one of the five pillars of tax planning (these come from my book, The Tax Freedom Zone):

Pillar 1: Deducting to save tax. Any strategy under the deducting pillar involves claiming deductions or credits to save tax.

Pillar 2: Dividing to save tax. Dividing is simply the concept of income splitting. It involves moving income from the hands of one family member who will pay tax at a high rate, to another who will pay tax at a lower rate.

Pillar 3: Deferring to save tax. Deferring is the concept of pushing a tax bill from the current year to a year in the future. Other things being equal, this will save you tax since effective tax rates are expected to fall each year as tax brackets and credits are indexed to inflation. Besides, the time value of money itself suggests that paying tax later is better than paying sooner.

Pillar 4: Disguising to save tax. Don't worry, disguising is not about putting on a fake mustache and fleeing the country. I'm talking about disguising, or converting, one type of income that is taxed at high rates (interest income, for example), to another type that is taxed at lower rates (say, capital gains).

Pillar 5: Dodging to save tax. Again, there's nothing unethical or illegal about dodging to save tax. I'm simply talking about structuring your affairs so that certain transactions that might otherwise have to appear on your tax return do not have to be reported at all. Want an example? Converting some of your salary to non-taxable benefits will dodge tax.
The resolution

This year, make it your New Year's resolution to pay less tax than ever before by doing a lot of the little things right to save tax.
Tim Cestnick, CA, CFP, TEP is author of The Tax Freedom Zone and Winning the Tax Game 2003. He is managing director, Tax Smart Services, at AIC Ltd.

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