Finance from A to Z: Week 20 (T)

In last week’s edition, we took a look at shell corporations with respect to their uses, significance and specifically their efficacy as a vehicle of tax evasion. Of course, this is very much an illegal practice. Apart from the moral obligation of paying taxes, they are also a federally mandated process by which all individuals must yield to.

That being said, there are few that would actually want to pay more taxes that they have to. Hence, in this week’s edition, we will take a look at tax avoidance, or, what an individual can do within legal confines to minimize their tax contributions! (Note: some governments make the distinction between tax avoidance and tax planning, but the terms will be used interchangeably in this article)

T is for Tax Avoidance/Tax Planning

What Is Tax Avoidance?

The use of legal strategies to reduce an individual's or a company's income tax liability is referred to as tax avoidance. This mostly entails using the tax system in a single region legally for one's personal benefit, which is typically accomplished by claiming all permitted deductions and credits. It can also be done by giving tax-beneficial investments a higher priority, such as purchasing tax-free municipal bonds.

However, it should be highlighted that tax avoidance is not the same as tax evasion, which relies on unethical practises such fabricating deductions and underreporting income. In spite of the fact that both tax avoidance and tax evasion are techniques to avoid paying taxes, they are extremely different from one another.

Tax avoidance is entirely legal, however tax evasion is not. Both tax planning and tax avoidance in Canada entail tax reduction agreements that may comply with the precise language of the applicable statute. Effective tax planning, according to the Canadian government, takes place when the outcomes of these arrangements are in line with the goals of the legislation.

Types of Tax Avoidance 

The pursuit of tax avoidance can be done in a variety of ways, all of which are clearly lawful. Shell corporations were introduced to you in the previous article. The U.S. Tax Code has loopholes that let businesses and high-net-worth people (HNWIs) transfer money to countries with laxer rules, more favourable tax regimes, lower financial risks, and anonymity. These tax-paying entities might escape paying (higher) taxes in their native nations by opening subsidiaries or bank accounts elsewhere.

The inclusion of workplace expenses, notably the tax deductions that can be taken advantage of through the workplace, is another method of tax evasion. On your annual tax return, you might be eligible to deduct some costs that are deemed necessary for you to perform your work but aren't covered by your employer, thereby lowering the amount you owe.

These costs can include a wide range of things; some examples include personal automobile travel, union dues, or tools you would need to employ.

Retirement savings are perhaps the most overlooked method of tax avoidance, though probably not for the reasons you might expect. Saving money for retirement is not only a responsible thing to do, but there are also several legal ways to do it.

Everyone who makes contributions to a retirement plan offered by their company or makes investments in an IRA is avoiding taxes. Roth plans are a common type of retirement savings since they let individuals save after-tax funds and provide a tax credit in the form of tax-free savings after they reach retirement age.

With Roths, the investor can permanently avoid paying income tax on the earnings their contributions generate during the year.

That’s all for this week’s edition. Thank you for reading and see you in the next one!