Managerial Tax Planning: A Canadian Perspective

Article excerpt

Managerial Tax Planning: A Canadian Perspective Daniel B. Thornton. Rexdale, ON: John Wiley & Sons Canada, 1993, 632 pp.

Intended as a practical guide to managerial tax planning, this book is current to the 1992 federal budget. Although several budgets have been brought down since (with many changes in tax rates and the elimination of the capital gains exemption) the basic principles in this book still apply and should be useful for several years.

The book is well indexed to facilitate reading it by subject. The contents of each chapter are listed at the beginning of each one, along with the key concepts. The book comes with a diskette that contains spreadsheets, allowing readers to perform tax calculations even if their math and/or tax knowledge is not strong. These spreadsheets allow the user to (a) perform sensitivity analyses; (b) use actual tax rates (rather than the assumed 50%); and (c) see how changes in the tax parameters affect managerial tax planning.

Formulas introduced in the text include two that compare the after-tax income of a CCPC (Canadian controlled private corporation) engaged in an active business with the after-tax income of an unincorporated business operating in the field.

The author has undertaken to update the spreadsheets every year with suggestions from colleagues and students. It is my hope that the author also undertakes to update the spreadsheets for changes to income tax legislation.

Each formula that appears on the spreadsheet is initially introduced in the relevant chapter. Although the spreadsheets are well done and should prove indispensable to the reader, they could have been better developed in the text. Specifically, comprehensive and complete examples to introduce and explain each formula would enhance future readers' understanding and use of the formulas.

The book is divided into thirteen chapters. The introductory chapters show the importance of managerial tax planning to the practice of management. The author attempts to accomplish this by (a) showing managers that it is more important to understand the reasoning (government's intent) behind tax rules than to have an encyclopaedic knowledge of tax legislation; (b) showing managers how taxes fit into the "big picture"; (c) making them understand that they will need professional tax advice (that they do not know everything in the field of taxation); and (d) showing them how to communicate effectively with tax professionals.

The author introduces the notion of government as a business partner. The government is an uninvited party to every contract undertaken by business. It shares in profits and losses sustained by the business. Although I agree with the "government as partner" concept in the context of sharing profits, I do not agree with the author's contention that "the objective of managerial tax planning is not to look for loopholes in tax legislation" (p. 16). The author contends that "exploiting such loopholes, infers that managers are thwarting certain objectives that the government wishes to achieve" (p. 16). A manager's objective is to maximize shareholders'/owners' return on investment. If an increase in return on investment is accomplished through a brilliant and legal tax strategy, so be it. We must remember that the government does not adjust its "partner's" tax rates to reflect the fact that the partner's international competitor operates in a lowtax jurisdiction. In other words, the playing field is not level and managers must do what they can, within the law, to level it.

The book introduces the concept of implicit taxes: "An implicit tax rate is the percentage discount in the pretax expected rate of return from investing in a tax favoured asset, compared with the pretax expected rate of return from investing in a similarly risky, fully taxed asset" (p. 16). It is important that managers understand that looking at tax rates is not sufficient in the analysis of investment options, in fact, a good understanding of tax legislation is important. …