Secret 7: The Best Tax Sheltering in Canada

Don't you judge a book by its cover? And title? I picked up The 15 Secrets The Taxman Doesn't Want You To Know by Dwayne Daku at Costco.

The Mysterious Author
Who is the author? An accountant or tax lawyer? There's no biography of Dwayne in the book. Nothing meaningful online either. That's strange. Why hide? Publicity sells more books and boosts credibility.

There are no online reviews of the book either, despite the intriguing title.

Let's look at the suggestions on their own merits. After all, many Canadian financial bloggers are anonymous but have readers.

The Conventional Suggestions
You'll find the usual tax planning ideas like

• splitting income with a lower income spouse
  
• contributing to RRSPs
• looking at after-tax investment returns

You'll also see newer ideas like the

• $5,000 Tax-Free Savings Account (TFSA) (see CRA)
  
• $500 tax credit for children's fitness (see CRA)
  

What Is The Best Tax Sheltering?

"... you can shelter your money and let it grow within the RRSP without any tax liabilities until you take the money out ... Life Insurance Tax Shelters ... will not only permit your money to grow tax-free, but if structured properly, will permit you to access the funds without tax ramifications. So instead of just a Tax Deferral you can have Tax-Free money." (pg 63)

This "secret" is cash value life insurance, generally universal life. You've read about the advantages here before

• tax-sheltered growth
• tax-free income
• tax-free death benefit
  

It's nice to have an outside source agreeing.

Tax Shelter vs Tax Sheltering
Technically, life insurance provides tax sheltering (which is good) but is not a tax shelter (which can lead to extra scrutiny from the tax authorities --- see CRA definition). You'll often see imprecision in common usage. In the book, the chapter is titled "The BEST Tax Shelter".

What About Buy-Term-and-Invest-The-Difference"?
For the first $5,000 you invest each year, you'll probably use the Tax-Free Savings Account. You can cover your insurance needs with term insurance and then invest the rest of the money in a TFSA. However, wealthier Canadians have much larger amounts to invest, which makes life insurance an attractive investment vehicle to consider.

Links

• How Pink Floyd's Insights On Mortality Help You (the rationale for the tax incentives)
  
• The Original And Overlooked Tax-Free Savings Account
• The Overlooked Advantages of Universal Life
• Does Warren Buffett Buy-Term-And-Invest-The-Difference?
• ISBNdb.com info
• CRA Denies $2.5B in tax shelter gifiting (CRA Tax Alert)

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