What do the world’s richest men like
Jeff Bezos, Elon Musk, Warren Buffet,
or Mark Zuckerberg have in common?
They all know how to play the tax game
and only pay a fraction of taxes
compared to their wealth.
In this video,
I want to talk about how they do it
and what can we learn from them?
No matter who you are,
death and taxes are something
you cannot escape from.
We all have to pay our taxes,
especially here in Canada where we pretty
much have to pay 1/3 of our paycheck.
But did you know you can reduce the
tax when using the right strategies?
While the tax laws in Canada and the
United States are different,
there are also a lot of similarities.
So, it’s worth it to look at some
of the strategies the billionaire
uses to keep their wealth.
A couple of years ago,
the IRA collected information on
the 25 richest Americans and saw
their net worth rise a collective
$401 Billion from 2014 to 2018.
But they only paid 13.6 billion in
federal income taxes for those years
which amounts to a tax rate of only 3.4%.
For example, Warren Buffet whose fortune
is worth around $110 billion only paid
$24 million in taxes from 2014 to 2018.
And Jeff Bezos who is worth $168 billion
only paid 0.1% in taxes.
So the question is how do they
get away with paying so little?
Now we might not be able to copy of all the tricks,
but I want to share the general strategies
so we can learn from them.
Let’s get started!
The rich are largely able to lessen their taxes
because their sources of income are
different from the average person.
To understand how the wealthiest use tax provisions,
you first have to understand
how they earn their money.
The thing is,
the biggest tax avoidance strategies
arise when you have different types of assets.
Most Canadians don’t have that many assets.
They might have a house, RRSPs and TFSAs,
but they largely depend on their income
from their employer to pay living expenses.
And if you look at someone
who has assets like a corporation,
they are able to unlock different areas of
the tax code that most people cannot access.
To keep it simple,
I will say everything breaks into
one of three different tax buckets.
Tax now
Tax-deferred
Tax-free.
An example of tax now is your employment salary.
You pretty much have to declare everything as
income tax in the same year you receive them.
While the rich diversify into other types of
assets and investments that the tax codes
don’t consider to be tax now income.
An example of this is a lot of billionaires get paid
in company stock that fit into the tax-deferred bucket
instead of getting paid in a straight salary.
This meaning even if the value
of the stock portfolio goes up,
you don't owe tax on those gains
until you sell that stock.
And in Canada, only half of those profit will be taxed.
Now let’s go back to Warren Buffet.
He pays less tax on a percentage
basis than his employees.
The reason?
Again, most of his wealth comes from
his stock holdings not his annual salary.
Now you might say the billionaires in the United States
get away with this but surely not in Canada.
Let’s look at Tobi Lutke who is the founder of Shopify
which is now one of Canada’s
most profitable and largest companies.
The thing is that Lutke holds 7% of Shopify stock.
In 2020 his compensation was $15.1 million,
based entirely on stocks.
In other words,
he doesn’t have to pay tax on these until he sells them.
By shifting the money,
he earned from salary to stock,
and like other CEOs are able to decrease
the amount of money they pay in taxes
and control when they pay it.
This is something the average person can’t do
because they don’t have extra money lying around that
can help them get through until they sell their stocks.
Another way rich people pay
less tax is through corporations.
In 2018 Amazon pulled in $232 billion in
global revenue and yet its federal tax bill was $0.
In 2020, at least 55 of the largest Corporations in America
including FedEX and Nike didn’t pay any federal income tax.
The rich all tend to be business owners and
they are able to write off much of their expenses
through their company, lowering the income on the books.
Here is the cashflow structure:
as an employee they first received their income,
then pay tax. With what’s left,
they pay their expense then they do the saving.
But as a business owner,
they receive their income and they first expense,
then the remaining income goes to saving or pay the tax.
For example, Tom makes $100,000,
he first has to pay 30% tax then use
the remaining 70,000 to buy a computer.
But if Tom owns a corporation,
then the computer could be an expense
which is then a tax writes off.
Let’s say at the end he can deduct $10,000 in tax write-offs.
He then lower his taxable income to $90,000,
which he can save $3000 in taxes.
Mark Zuckerberg was the best example I can think of.
According to the USA Today Dec 2020,
His salary was only at $1
Because he managed to write off
over 2.34 million dollars of expenses.
There’s a lot that can be written off from real estate,
to cars, to security system or even his hair cut.
He can claim it as expense.
So what can learn from this?
If you are self-employed,
you might consider incorporations.
That way you get to have a different tax system
and maybe able to write off tax money to work for you.
Or even if you are a salary employee.
If you have a lot assets like multiple real estate,
you can open up a holding company
and put your assets within the company.
The CRA allows Canadian-controlled private corporations
to pay a lower rate around 12% of tax on their
first $500,000 of active business income.
So now you might think,
if the top 1% don’t pay themselves.
Where else can they do it?
And this is what all rich people know.
Loan and debt.
Let’s say If today, Jim Pattison,
one of the richest people in Canada,
needs some money.
Will he sell of some of his stock?
No. So then what will he do?
He will go to the bank and say:
Hey bank, I am Jim Pattison.
You know who I am right?
I am tight in cashflow right now and
I hope you can give me a loan.
I use my stock or real estate as colleterial.
The bank will look at the billions of diversified assets
Jim Pattison can use as collateral
and happily approve the loan.
And even he maxes out this limit from the bank,
there are a ton of other avenues he can pursue
like private lenders or his insurance company.
That’s right, based on my study,
pretty much all the big players will have some sort
of saving component with an insurance company.
To them it is another way to invest,
but instead of looking for the highest return.
They rather looking for protection and guarantees.
For example, you can take out a life insurance policy
with a high cash dividend and borrow against that
from a bank or the insurance company itself.
They will say:
Oh this policy has a steady growth,
if the person dies, we can the lump sum payout.
and there are no tenant or maintenance problem.
Sure I will lend you no problem.
Now you get the cash, but in the tax code,
it's not considered income or
a capital gain so it’s tax-free.
Now you might say,
hey Thomas, is there any tax-free strategy
that we can use as well.
And Yes, in Canada there are
3 kind of tax-free item that you should.
First one being the Tax-free savings account.
When you invest in this account,
everything will be tax free.
For example, if you are 18,
and you invest $6,000 in
a regular account with a 5% return.
And every year say you need to pay
20% tax on interest.
After 30 years, by the time you are 48,
you will have $350,000 and then
you still have to pay the capital gain
for the amount that you can take it out.
Versus you will have around $420,000 if you
invest in a TFSA without any tax consequence.
So you can still consider a low-income retiree
but you have a million dollars in your TFSA
by the time you are 65.
The other one is your principal residence.
When you sell your principal residence,
you don’t have to pay any tax.
It becomes so powerful when you have
a property many years ago,
and then you downsize it for retirement.
It becomes a tax-free fortune
to fund your retirement
And will not affect your retirement benefits.
And the last tax-free vehicle is your life insurance.
According to the tax law,
insurance is not an investment,
so therefore any equity
you build inside is tax shelter.
And when you pass away,
the insurance company will
pay out a huge lump sum tax free.
This is extremely important for estate planning.
Because what a lot of people concern
tax about the current income or
their current investment gain.
But they forgot our government
make the most on our death.
When we pass away, without planning,
we can easily give up half of our
entire saving to the government.
And that’s why you always hear about the
billionaire making trusts, donation, Or lawsuit.
If you guys like to know more about estate planning,
comment below,
and I will make a video about that!
so to wrap it up, this is just some of the general ideas
that how the rich can keep their wealth.
But I want to say,
there are lot of things that we can learn from them.
The question is are we learning?
Are we being receptive?
it’s important to keep learning,
get to know what’s out there.
Then one day you will be the top 1% too!
Thanks so much for watching!
Make sure you smash the like button
and click the little red button down below
for more videos like this.
This is Thomas and I will see you in the next video!