Trevenens.org

I am going to make a stand this year and soundly trumpet the following…

It is the right and our duty, of every citizen to structure their financial affairs to pay as little tax as possible and to avoid paying taxes whenever possible.

Tax avoidance is not illegal, tax evasion is. The two are completely different from each other. Avoiding income tax is not the same as evading it. If you have ever contributed to an IRA, 401K or rothIRA, you are in fact avoiding income tax. There are many ways to avoid income tax.

I would strongly suggest knowing what IRA’s are how to use them.

Do you know what a SEP is?

Do you know how to trade in the currency market?

Here are more methods used by the rich and powerful to avoid tax.

Don’t Make Income

This is not as stupid as it sounds. Out of all the things the government taxes, employment income is at the very top of the list. Therefore, if you want to avoid the biggest tax hit, don’t make income. How do you live with no income? You borrow it.

If you make $100,000 at a job, it gets taxed because it’s income. If you borrow $100,000 from the bank, it’s tax free because it’s not income. At this point, most people will say, “Ya, but you have to pay it back!” I say you have to be more creative. The next two examples should help illustrate this.

The Real Estate Equity Play

In this situation, our asset rich real estate developer put mortgages on his properties to the point where the rental income equal all expenses. If we assume he can borrow 75% of his equity and still be revenue neutral he would be able to borrow a nice chunk of cash to live on. If our mogul has $1 million of income producing real estate, he would borrow up to $750,000 tax free to do with as he pleases.

The money is not taxed because it’s not income. The rental income covers the cost of servicing the debt and other expense so the net income from operation is zero. So no income tax on that either. As the value of the real estate increases, the investor will be able to borrow more.

Borrowing against assets is a way to realize unrealized gains. Instead of selling the asset to realize the gain and getting taxed on it, the owner borrows against it to get the money out without paying any tax. It’s a lot easier to borrow $1 million than it is to make $1 million. It’s also tax free.

The Life Insurance Wrap

In this scenario, our tax avoiding friend has a life insurance policy with a big cash surrender value (let’s say $1 million). If he takes out the $1 million, he would lose the insurance and the money would be added to his income and be taxed at nearly 50%. It’s not a good deal and only a fool would do that.

What you would do in this is this situation is borrow against the cash value of the policy. A bank will lend up to 90% of the cash surrender value. That’s $900,000 to spend as you please. You can take it all at once or have it paid out over time. Because the money is a loan, it is not income and therefore not taxable. Furthermore, the bank will capitalize the loan so you will never have to pay it back.

How does the bank get its money back? When you die, the death benefit will pay off the bank loan plus accrue interest and any money left over will go to your beneficiary tax free.

if you need more proof check out the buyout king Henry Kravis from KKR he does this and has built a business off it and is doing quite well for himself.

In a nutshell, a tax shelter allows your investments to grow free of tax. Many people think tax shelters are only for the rich but the biggest users of tax shelter is the middle class. When you buy a IRA or 401K you are in fact buying a tax shelter. The money made inside is allow to grow tax free until it’s taken out.

Another way to shelter income is by using life insurance. Life insurance proceeds are passed tax free to your beneficiaries. That’s good for your beneficiaries but what if you want the money? All whole life and universal life insurance policies have a cash surrender value that you get if you give up the insurance. If you take the cash, your beneficiaries get nothing and the money taken out gets taxed. Not a good deal. However, there is a way around this.

With the exception of term insurance, all other life insurance policies are made up of two components, the insurance component and an investment component. The key here is the investment component. While the money is inside the policy, its allowed to grow tax free, just like a IRA. Knowing this, many investors put way more money than they have to into their policy. For example, a 37 year old non smoking female has to pay $622.50 a year to get $1 million of life insurance. If all she does is put $622.50 into her plan, all she’ll have is insurance. Anything above that amount goes into the investment component.

To prevent people from dumping in their life savings, the government sets limits on the maximum premium you can pay into a policy and still keep its tax shelter status. In the above example, the maximum is $41,847.61 a year. The higher your insurance needs, the higher the limit. Let’s assume that the above put $41,000 a year into her policy for 3 years and then stops after that. After paying for insurance cost the rest will go into the investment component, where it will grow tax free. If we assume an 8% yearly rate of return the policy will have a cash value of $1.3 million and death benefit of $2.15 million when our 37 year old female reaches 65. If she takes the cash, it gets taxed and she loses the death benefit. How can she take cash out, keep the death benefit and not pay taxes? By borrowing against the cash value.

A bank will lend up to 90% of the cash value on an insurance policy. So our investor can borrow up to $1.17 million from the bank to spend as she feels like. The money would not be taxed because it’s not income. The bank would capitalize the loan so she doesn’t have to make any payments. How does the bank get its money back? When she dies, the death benefit will pay off the bank loan plus accrue interest and any money left over will go to her beneficiary tax free.

So here you have an investment strategy that is completely sheltered from tax, allows you to take money out of the plan tax free, and allows you to transfer your estate to your heirs’ tax free. As with all investments, you should seek out the advice of an experience financial planner before proceeding.

The Principal Residence Flipper

I have a friend who likes to buy the cheapest house in the best neighborhood. While living in it, he would fix it up and renovate it. After the renovations are complete, he would sell the house and walk off with a gain of $35,000 to as much as $100,000. Then he would move on to the next one.

Mortgage interest is tax deductible and if you sell your principal residence and buy another one of equal or greater value within 180 days, there is no capital gains tax. It’s a fantastic way for build wealth tax free. When the time comes to finally take the money out, you can do the real estate equity play mention above

The Perpetual Traveler

Canada taxes its citizens based on residence and not on citizenship. If you no longer live in Canada, you are considered a non-resident and therefore not subjected to Canadian income tax. You are a non-resident when you live outside the country for six months plus a day (you can live in Canada for up to 182 days and still maintain non-resident status). You are allowed to keep your Canadian citizenship if you become a non-resident. There are other rules to follow – simply leaving the country isn’t enough. Internet publishers are ideally set up to take advantage of this because we can run our sites from anywhere in the world.

By dividing your time between three or more countries, it’s possible to be avoid all income tax. For example, you can spend five months in Canada and then divide the rest of the time in countries that welcome Canadians without a visa – there are tons of them. The amount of time you are allowed to stay in each country varies. For example, Taiwan lets Canadians stay 30 days visa exempt while the US will let them stay six months. The US actually doesn’t care how long Canadians stay. Every time I go into the US, they don’t brother to stamp my passport.

The US taxes its citizen based on citizenship and not residency. It doesn’t matter where a US citizen is in the world, your income is taxable. However, Uncle Sam understands that if you’re not living in the good old USA, you should get a break. The first $75,000 of income is tax free if you become a US non-resident. This is one of the reasons why Mr. 4-Hour Workweek, Tim Ferriss, is now partying it up in Costa Rica.

The Offshore Corporation

This is the favorite playground of the rich. It is estimated that one-third of the world’s wealth (over $5 trillion) is held offshore. This is a very BIG business. The world’s largest banks are all involved. Barclays Bank’s (11th largest bank in the world) most profitable branch is in the offshore jurisdiction of Jersey, Channel Islands. The Canadian Imperial Bank of Commerce (CIBC) earned most of its $1.69 billion profit from its Caribbean operations. The Cayman Islands handles more deposits than any other country, except the US and Japan. There are 418 banks licensed to do business in the Bahamas. By comparison, Canada has 84. Once the exclusive domains of the super rich – the legal fees cost a fortune – offshore investing in the global economy is now available to people with as little as $10,000 to invest.

In the case of a web publisher, he would set up an offshore International Business Company (IBC) and this new company would own the websites. It’s pretty simple and straight forward to tell Google and the other ad networks to send payments to this new company. You are now earning all your Internet income tax free because the IBC is set up in a country with no income tax. There are about 45 countries that do not have income tax, capital grains tax or estate tax. Other offshore markets, like Panama or Costa Rica, do have income tax but have legislation exempting IBCs or they allow the IBC to earn income tax free if it’s earned outside of their country.

The problem comes when you try to bring the money back into the home country. The easiest way to do it to set up a company in the home country to do “consulting” for the offshore company. You can have the offshore company pay you enough to cover living expenses. You will get taxed on this money but if you don’t need much to live on, you should stay in the lower tax brackets. The other way to bring money back is to fly to the offshore district, take out $9,999 in cash and fly back home. As long as you not bringing home more than $10K, you don’t have to declare it.

The Offshore Subsidiary

The offshore subsidiary is a move multinational corporations do to avoid high corporate taxes in their home country. Let’s say Canada Mega Corp posted $10 million in net profits. They would need to pay 47% tax on that earning, leaving only $5.3 million for the shareholders.

What Canada Mega Corp would do is have their subsidiary in Barbados (Barbados Mega Corp) invoice them for $10 million worth of services. Suddenly, Canada Mega Corp has a net income of zero. The Barbados subsidiary now has a net income of $10 million, which will be subjected to the Barbados corporate income tax rate of …… 3%.

The Barbados subsidiary would then send the money back to Canada Mega Corp as a tax-free dividend because Barbados and Canada have a tax treaty. The money has already been taxed and therefore shouldn’t be taxed again.

The final score: Canada Mega Corp shareholders – $9.7 million, Barbados government – $300K, Canada Revenue Agency (CRA) – $0. Now you know why most of the Canadian Imperial Bank of Commerce’s $1.69 billion profit came from its Caribbean operation (the corp tax there is 3% as well).

The Letter of The Law vs. The spirit of The Law

While the above strategies may satisfy the letter of law, some would say they go against the spirit of the law. Let’s see. Which do you think is more corrupt: government buying votes with your money, or the efforts of every citizen to deny the government as much money as legally possible so as to force it back on the road to financial responsibility?

There a framed letter (in both English and French) in every CRA office that lists the rights of the taxpayer. One of the things the letter states is that you have the right to arrange your financial affairs to pay as little tax as possible. I’m just following the letter, do you want to follow it to?

The neat thing about the tax system is government favors certain groups while completely putting the screws to other groups. For example, if you’re a smoker, you get screwed over pretty bad. The biggest cost on a pack of smoke is taxes. If you’re a middle class employee, then you are screwed the most. Government can’t really tax the poor because they have no money. And they have major problems taxing the rich because they have tax lawyers to help them legally avoid taxes. That leaves the middle class who must bare the biggest tax burden. The system isn’t fair but it’s how it works. Knowing that the government favors certain groups, the key to lowering your taxes by joining the groups the government favors.

Sandy Botkin has the best ideas on how to make sure you put yourself in the best group.

My Definition Of Financial Freedom

Many people equate financial freedom to being rich. This is simply not true. I know many “rich” people who are not financially free. The US government considers you rich if you make more than $250,000 a year. The point is being rich is associated with some dollar figure. However, you can be financially free with zero income.

My definition of financial freedom is when your passive income equals your monthly spending requirements. Passive income means money earned without your input. Examples include rent from properties, interest from bonds, dividends from stocks, self running businesses, etc. For example, if your cost of living is $2,000 a month and you have $2,000 of passive income, you are in fact financially free. You can have all the earned income in the world but if none of it comes from a passive source, you’ll never be financially free. A corporate CEO making a $1 million a year and no passive income is not financially free. If he loses his job, he takes a huge lifestyle cut.

It Is Not Hard To Get Financially Free

Think financial freedom is a dream? Think again. It’s really not that hard. How much is your monthly expenses right now? That is how much passive income you need to earn to be financially free. For example, if your monthly expenses are $2,000 a month and you have a $240,000 earning 10% return; you can technically quit your job and live off that 10% since it will make you the same $2,000 a month. However, few of us have $240,000 sitting around to do this so the object is to find other ways of making passive income. This is where the internet comes in. The internet is ideally suited for creating passive income without a huge investment on your part.

Or you could do like he does…

http://en.wikipedia.org/wiki/Henry_Kravis