The above is how the rich avoid paying tax in US. Just heard that again on the new NPR Planet Money podcast – My favorite tax loopholes. 😊
Because the personal tax is based on income rather than wealth, so the key is to minimize income. Also, buying assets such as stocks, bonds, properties, etc. do not generate income. However, the selling of them can if there is capital gain but the Rich can hold on to those assets without selling them to avoid the capital gain. Or they can arrange to have some capital loss to offset the capital gain if they need to adjust their investment portfolio.
The rich use cash to invest in all kinds of assets. Then use them as collateral to borrow money from the bank to pay for their lavish lifestyle. Of course, the banks are more than happy to lend them money because they are rich which means the risk of default is low. See how much money the banks lend to Elon Musk to buy Twitter even if they know that is a bad deal. Overpriced and the company is not profitable. It is very hard to turn it around too. That’s why Musk tried so hard to back out of the deal but he can’t.
Also, the interest rate of the loan is still much lower than tax rate. It makes sense. Then, when they die, the tax on the capital gain of selling the assets can be wiped away thanks to a rule called step-up in the cost basis. Of course, the heirs can also inherit the assets without selling them too.
Estate tax is paid by the dead. Inheritance tax is paid by the heir. There is no inheritance tax in either US or Canada. Estate tax got a shield of $11.4 in 2019 in US. That is very high exemption ceiling.
There is no such thing as step-up in the cost basis in Canada. “When a person dies, the Income Tax Act considers that the person has disposed of certain property at its market value right before death—although the assets were not actually sold. The Canada Revenue Agency calls this a deemed disposition. It applies to most property except rollover to spouse and principal residence.” The original purchase price and the current market value will be used to calculate capital gain to be taxed.
It seems Canada tax code is fairer relatively compared to the US.