Tax Loopholes 2

The Tax Department Has Their Own Loopholes

We generally think of loopholes as the fine print in the tax legislation that lets one get out of paying one's “fair share” of tax. But the government has found just as many loopholes that benefit them – and they use them. We rarely hear of these government loopholes, but here are a few examples.

Let’s say you build a house and put it on the market. Your asking price is $1,200,000, but there are no takers. The real estate agent informs you that, in the current market, you will only get $1,000,000. However, if you can hang on for a year or two, the market should rebound. Unfortunately, the house is costing you $3,000 a month with mortgage payments, insurance, electrical and other running costs. You might be able to keep this going for a few months, but you don’t have that kind of income to hold on for two years. The solution is to rent it for a while. You may not make any money renting it, but at least you will be able to cover your costs – or nearly cover them.

In Canada, the GST Act (Goods and Services Tax) says that you have to charge sales tax on the sale of a new house; fair enough. However, the fine print in the act says that you must pay the GST upon sale of the house or when you first use it. This means as soon as you rent the house, you owe the government $50,000 (5% of 1,000,000). It’s far worst in other parts of Canada where the GST is 12%. If you don’t have enough cash to support the $3,000 a month running costs, where are you going to get 50,000? The government doesn’t care. They will take whatever action the can to get that $50,000 from you.
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An Investment or an Expense?
(Depends on What Benefits the Tax Department)

Suppose you have a manufacturing company and after working hard all year, you are $60,000 in the black. This just happens to be the price of a new machine which, if you bought, would allow you keep up with your competition and avoid slowly going bankrupt. If you buy it, you will break even for the year, but with no bonus to the owner. The tax department looks at the fine print and says that the purchase of the machine is an investment – not an expense. Sorry, you can’t use that to decrease your taxes. You owe us taxes on that $60,000. The same can be said of accounts receivable; Just because you haven’t collected the money doesn’t mean that the tax department doesn’t want its full tax. The result of this “tax loophole” is that any company that is growing will likely face a 100% effective tax rate.

An Investment or an Expense? (It Depends on What Benefits the Tax Department)

“Profits” Can Begin Before You Actually Make Any Money

Imagine, you build an apartment complex and it takes you a few years to sell all the units. You won’t start to see a profit until the final 10% of units are sold since all of the contractors want to be paid right away and the bank will want their money back before you pay anyone else. The tax department, reading the fine print, says they don’t have to wait until you get your profits. They can and will calculate the profit on each unit sold and will demand payment on that basis. If that forces you to dump the final 10% of units to get the cash to pay the tax, that is your problem.

The Tax Department Has
Their Own Loopholes

An Investment or an Expense?
(Depends on What Benefits
the Tax Department)

“Profits” Can Begin Before You
Actually Make Any Money

Tax Loopholes.

Con Buckley

Email: con@conbuckley.com
Phone: (1) 778 988 8020

Tax Loopholes.

Con Buckley

Email: con@conbuckley.comPhone: (1) 778 988 8020

Email: con@conbuckley.com
Phone: (1) 778 988 8020