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Here is a detailed description of the law on this subject, of interest to tax lawyers and tax accountants.
This eliminates your obligation to pay income tax, not just in the way just mentioned, but in another way, because even if the deemed interest provisions of IRS Publication 535 mentioned at the "USA" tab in the left margin of this page, or, in Canada, if Section 80.4(3) did not exist, the consequences of Section 80.4(1) would be very mild, as shown here:
Disregarding Section 80.4(3), if you earn $50,000.00 per year, for example, you have a taxable income of about $800 (3% per annum on $50,000 advanced throughout the year, with an average duration of each installment being 6 months). Since you have a Basic Exemption on your income tax for over $8,000, you do not have to pay any income tax at all.
The next year, you have a taxable income of $1,500 in respect of the first $50,000 earned (3% of $50,000) and of another $800.00 for next years earnings. Again, your taxable income of $2,300.00 does not incur any income tax liability.
Eventually you reach the point where you become taxable, but the amount is extremely small:
For the first six (6) years, you would owe no income tax at all (on taxable income of $1,500 x 5 + $750 = $8,200). Thereafter the income tax liability would increase so that after eleven (11) years, your income tax payable would have risen to $1,500.00 per year, based on deemed income of $15,750.00 ($1,500 x 10 + $750 = $15,750).
But even this small amount only applies if you do not invest any of your earnings. If you invest any of your earnings, the deemed 3% interest is deductible from your taxable income. If you invest all of your earnings, you pay no income tax at all unless you have taxable income from those investments.
Moreover, the small amount of tax that would be payable would not have to be paid unless you wished to pay it. It is not a tax that is withheld from any money you are paid, and we show you how to become judgment proof so that paying income taxes becomes optional. (You decide whether you want to subsidize the government's bailout programs, not only the ones you have heard about, but the ones you haven't heard about because the government has been successful at keeping them secret.)
But all this is merely an addition to your first layer of protection, since under the deemed interest provisions of IRS Publication 535 mentioned at the "USA" tab in the left margin of this page, and, in Canada, in Section 80.4(3) of the Income Tax Act, there would be no deemed interest and so no income tax liability at all.