Uncommon Cents: In defence of taxes

Before some readers mob the Martlet office looking for my head, let me explain. In general, people don’t like taxes. Businesses, corporations and individuals all tend to feel that they pay too much tax to governments (municipal, provincial and federal).

However, taxes pay for government services — everything from infrastructure (like roads and sidewalks) to police, firefighters and soldiers to universities and colleges to the social security system that we enjoy and depend upon as Canadians. Ask yourself what you would do without any of the above or other services supplied by our tax dollars.

Though some people would like to have taxes pared down to the bone, which means wiping out much of what we value in our society, most of us would be content to ensure that our governments are using our money to good effect and as efficiently as possible.

Still, there are legitimate ways in which a citizen can save taxes. One of the most important activities of financial planning is taking advantage of all possible tax savings.

Registered Retirement Savings Plans (RRSPs), which I addressed in my last column, save you tax when you put money in them (and you save even more money if you put the tax refund you get back into the RRSP account, too). You save again when you withdraw the RRSP monies for income in retirement at a lower tax rate.

You can also save taxes by not paying them at all through Tax Free Savings Accounts (TFSAs). With these accounts, you save tax on the growth of what you put in. If you have been 18 years old or older since 2009, you can put a total of $25 500 ($5 000 for every year since 2009 plus $5 500 — the new TFSA limit for 2013) into a TFSA this year. Any growth on that amount is tax free.

There are other financial instruments by which you can defer, reduce or pay for tax liabilities when you die. (When you die, your last tax return, called your terminal tax return, takes account of any taxes you owe to government.)

For example, you can defer taxes by making use of a special account called a corporate account in which you can move money around different “pots” without triggering a tax consequence. Since this account is only for non-registered monies (e.g. not RRSPs), you would ultimately pay taxes only on the growth in the investment (not on the principal). In addition, these investments can have a preferential tax treatment in that you pay less tax when you finally take an income stream from them. So, by using this instrument, it is possible to both defer and reduce your taxes over time. And don’t be fooled by the name: these corporate accounts can be used by individuals, not just businesses.

There is no way to completely avoid taxes, but there are ways to pay without it coming from your estate. This way, you maximize what remains in your estate for heirs. One of the most important ways of doing this is through insurance. If you have a $250 000 bill that will be attached to your terminal tax return, you can get a small life insurance policy (preferably early enough — around age 50 or so) that will cover that payment, thus leaving all your hard-earned assets to your heirs.

Yes, taxes are important, but if you are looking for the most important things in life, like love and meaning, look to your partner. Unlike taxes, hopefully you’ll never want to avoid them.

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