The Role of Taxation in the Decision Process

Chapter Objectives
Be able to:
 Explain what tax planning is.
 Differentiate between tax planning, tax avoidance and tax evasion.
 Explain the three types of tax planning.
 Provide examples of the different types of tax planning.
 Explain the seven skills required for tax planning.
 Outline the nature of specific and general anti-avoidance rules.
 Define tax avoidance transaction.
What is Tax Planning
Tax planning is the legitimate arranging of one’s financial activities in
a manner that reduces or defers the retained tax cost.
Tax evasion is the commission or omission of an act with the intent to
deceive and is easily distinguished from tax planning.
Tax avoidance is the grey area between tax planning and tax evasion
and involves transactions which, while legal in themselves, are planned
and carried out mainly to avoid, reduce or defer tax payable under the
law. In some cases, the transactions do not reflect the real facts of the
situation and may be regarded as an abuse of the system.
When the CCRA perceives tax avoidance transactions to be abusive, it
will attempt to deny the resulting benefits.
Types of Tax Planning
Tax planning will follow into one of the following categories:
1) shifting income from one period to another
2) transferring income to another entity or alternative taxpayer
3) converting the nature of income from one type to another
Expenditures should also be considered.
When carrying out tax planning, it is important to consider factors
other than just income taxes, such as: the time value of money,
financing requirements, and anticipating future events.
Tax planning does not consist of a definitive list of rules and, thus, one
must test alternative courses of action with a view to achieving specific
financial goals.
Skills Required for Tax Planning
In order to implement tax planning activities, it is necessary to develop the
following skills: Ability to
 Understand tax system fundamentals
 Anticipate an investment’s complete cycle from beginning to end
 Be flexible in considering different courses of action
 Speculate on unanticipated events
 Apply compound interest concepts
 Put the tax factor into perspective as one of many factors
 Use a global approach including all affected parties
Restrictions on Tax Planning
The ITA specifically prohibits a number of activities and these
prohibitions are called anti-avoidance rules.
The ITA also has a general rule that attempts to state, in general terms,
what is considered to be unacceptable activity.
The tax authorities are particularly concerned with transactions
between non-arms length parties since they are often not motivated by
normal market forces.
The general anti-avoidance rule (GAAR) stipulates that when a person
is involved in an avoidance transaction, tax will be adjusted to deny the
benefit that would have resulted from the transaction or series of
A transaction will not be considered an avoidance transaction if its
primary objective is for bona fide business, investment or family