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.