Class 20 - Introduction to Tax Planning

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Accounting & Financial Management
AFM 361
Kevin Markle

Class 20-Introduction to Tax Planning Friday, August 02, 2013 4:43 PM Notes on Supplement S1900-1945 - Tax compliance often occurs after a transaction is complete, and so the structure and timing of the transaction are fixed ○ Tax planning occurs before the transaction, the structure and timing can be managed to get a favorable outcome - for the client ○ 3 things to consider while tax planning 1) Calculations 2) Timing, character and parties to the transaction 3) Additional costs to consider Review of Tax Calculation Tax = Tax Base * Tax Rate - Tax base = Taxable Income The tax rate varies - the base is divided into segments as the rate increases.  Progressive tax - because the tax rate increases as the base increases  Proportional tax - the rate does not change as the base increases. Ex: GST  Regressive tax - rate decreases as base increases - not as common ( violates vertical equity) - Assume Federal personal credits = 2100 and Provincial = 700. the total tax is net of this amount. Tax Brackets ( Federal and Provincial 2012) Measures of Tax Rates - Marginal Tax rate = tax rate that applies to the next increment of the base - If income change is small, taxpayer usually stays in the same bracket. When the income change is large, then do full calculation i.e. determine new federal plus provincial tax amounts, then calculate the large, then do full calculation i.e. determine new federal plus provincial tax amounts, then calculate the MTR. - Average Tax Rate = taxes owing  Used to estimate the tax burden - Formula to compute the Pre-Tax Amount - Used when an employer is estimating how to much to pay an employee in allowance. Enough to cover tax etc. Forms of Tax Planning - Individual vs. corporate - Investment vs. business plans, domestic vs. multinational plans - Unilateral planning - Goal to maximize after-tax profits or rate of return - Taxpayer can choose among alternatives - Fairly straightforward - Other factors important: likelihood of getting audited by the CRA - Three forms i. Altering the timing of tax payments ii. Altering the character of the receipt or expenditure iii. Shifting income from one party to another to reduce the total tax payments -particularly suited to multilateral planning arrangements Strategies involving Timing Time value of money - Earning a Dollar today is better than a dollar tomorrow. - How much better ? - Future value = Present Value
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