My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. My posts are blunt, opinionated and even have a twist of humour/sarcasm. You've been warned. Please note the blog posts are time sensitive and subject to changes in legislation or law.

Tuesday, June 14, 2011

The Income Tax Planning tail wagging the Tax Dodge

It is said that the biblical verse "Render unto Caesar that which is Caesar’s", commands people to respect state authority and to pay the taxes the state demands of them. In modern day Canada, this phrase often seems to be interpreted as: render unto Stephen Harper the absolute minimum in income tax payments, even if the consequences of minimizing one’s income tax payments are at significant personal detriment.

Why the new modern day interpretation? I find that many people are so averse to paying income taxes that they dive into very short-sighted income tax plans oblivious to the consequences. I believe in minimizing income taxes to the greatest extent possible, however, you cannot tax plan in isolation.

Enough philosophy, lets get to some examples.

In many Canadian families, the high income earner either contributes to their own Registered Retirement Savings Plan ("RRSP") or makes a spousal contribution; in both cases the high income earning spouse receives the income tax deduction at their marginal income tax rate. However, over the years I have seen many people so focused on the the potential income tax savings a RRSP contribution will garner, that they also make RRSP contributions for their stay at home spouses, to utilize their spouses RRSP contribution limits (these are not spousal contributions). But, because the spouse has minimal or no income, no income tax refund is generated and the RRSP deduction is not utilized (it can however, be carried forward to a future year).

The ultimate example of the tax tail wagging the tax dodge is the purchase of a Flow- Through Limited Partnership (“FTLP”) unit. These tax shelters are condoned by the Canada Revenue Agency and certainly have income tax benefits, but also have investment risk. In simple terms, you purchase a FTLP for say $5,000, obtain an income tax deduction for $5,000 and then have a mutual fund of small cap resource stocks with a nil cost base that you can sell two years hence. People become so enamoured with the income tax savings that they don’t realize they have over allocated their portfolio to risky small cap resource stocks (I call these people, tax shelter junkies) and in some cases, in the ultimate irony, they purchase such a large amount of FTLP's, that they create alternative minimum tax, defeating their original intent of saving on income taxes.

Now, let’s next look at some probate misplanning.

Probates taxes in Ontario are for all intents and purposes 1.5% of your estate upon death. Yet people blindly transfer stock investments to their children to avoid these taxes. These people are very pleased with themselves, as they have saved 1.5% in probate fees. However, their chest thumping quickly seems to abate when I inform them they may now owe 23% capital gains tax on the deemed disposition they caused by transferring their investments to their children.

Many Canadians also commonly open a bank account with joint ownership and the right of survivorship with one of their children for ease of administration as they age and to avoid probate tax. The parent typically assumes that the monies in joint ownership belong to their estate to be shared by all their children. However, the child they opened the account with often considers those funds to be theirs alone. Thus, the parent may have saved 1.5% in probate tax, but they also may have been the catalyst for litigation amongst their children.[I have an all encompassing blog discussing various probate issues including income tax, legal and estate issues such as the Pecore case (which has applicability to the joint ownership transfer above) in progress, that I hope to post in the next week or two].

In conclusion, care must be taken to ensure your income tax planning does not leave you barking up the wrong tree.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.


  1. Great post. I couldn't agree more that people sometimes focus on taxes to the exclusion of all other considerations. I've looked at FLTPs myself because I've got a huge backlog of capital losses related to some stock option nonsense, but the risk of the FLTPs kept me away.

  2. Michael, thanks for your kind comments.

    The use of a FTLP when you have capital losses effectively provides for downside protection of almost 50%, thus, I would re-consider that strategy.

    Personally I use the “patient” FTLP strategy (one of the only investing area I do have patience in). I only buy in years after oil or gold have been massacred and thus, feel my risk is minimized. I find buying FTLP in those years you get better companies in your basket of stocks as money is tight and the better companies are willing to accept flow through funding that they would not typically accept, and since you cannot sell for two years minimum, you usually get a bounce back in commodity pricing, that in conjunction with having better companies gives you a better investment risk. This strategy obviously means I do not buy FTLP’s very often, but it has worked for me.

  3. Return on capital products are also a means to
    postpone tax. Gains can be offset with realized
    capital losses. It works for me. Dividend tax credit is another sourse of tax avoidence. Joint
    accounts avoid probate. ETC ETC. My goal in life is to pay as little tax as possible, it should be yours too.

  4. Anon, thanks for your comments. I cant argue your point to pay as little tax as possible, but as I note in the blog, if you have tunnel vision on taxes, you may cost yourself more overall if other areas are not considered.