Blog Income & Taxes – Taking The Money Out

In my last article on blogging and taxes, I stated that I run my blog as a corporation for income tax purposes. In the eyes on the tax man, the blog and me are two completely separate entities. The blog’s corporate structure qualifies it for a special tax rate of 17% on net income up to $400,000. As a person, I am not entitled to such a low rate. If I were to make $400,000 as an employee, I would pay over $160,000 of it in income tax. When you compare that to the $68,000 the corp would pay, you can see why I run things the way I do.

Because the corp and me are separate, the income made by the blog belongs to the corp and not me. I can take out money from it by paying myself a salary or dividend. This money will then be taxed in my hands. The problem is money on personal income is taxed at a much higher rate than corporate income. If I were to pay myself a salary of more than $25,000 or dividend of more than $33,000, I would owe more taxes than if I just left the money inside the corp. Because of this, many business owners pay themselves the minimum amount and leave the rest in the corporate retain earnings. The question then is, how do I live the dot com mogul lifestyle on only $33,000 a year?

You need to remember the $33,000 a year dividend is tax free. In other words, I net the same as an employee earning $44,000 a year. Last time I checked, $44,000 a year is still higher than the average income for a Canadian or US citizen. Here are some other tax free ways to transfer money from corp to owner.

Mixing Business with Pleasure

Whenever possible, I try to have the company pay my expenses. There are limits to what you can do so you need to check with your professional tax adviser first. For example, you can’t have the company pay for a new set of golf clubs (unless you’re a professional golfer). As long as it has something to do with company business, chances are the company can pay for it even if you draw some personal use out of it.

For example, the company pays for all my travel because of the trade shows I cover. I have lots of personal fun while in the new city but I’m also there for business. It’s really the ultimate way to travel. First class tickets, $5,000 a night hotel rooms, limo services, etc. I wouldn’t be able to do this with my limited personal income, but I’m not the one paying for it. The company is.

You need to keep in mind the “reasonable” expense part of the tax act. Chances are, the tax man will rule a $5,000 a night hotel room as unreasonable and disallow it. However, if that hotel room was used to host a party for clients and customers, the picture changes. It’s just a small bonus that I get to stay there. ๐Ÿ˜ˆ

50 Cents Per KM for Driving

The income tax act allows companies to reimburse employees for using a personal car to do company business. The current rate is set at 50 cents per KM. So, that 500KM trip I took to Seattle for the Seattle Blogger Meetup netted me $250 cash. I pretty sure I didn’t spent $250 in gas to get to the meetup but that is the rate the corp is allowed to pay.

Because I work from home, most of my driving is business related and I always try to mix business with pleasure. The ultimate is when I go for a dine out. Not only does the corp pay for the dinner, I also make 50 cents/KM for driving there.

I Have Some Really Cool Tech Toys

One of the cool things about running The TechZone is almost every computer product I buy can be paid for by the company. If there is a new toy that I really want and if the manufacturer won’t give it to me to review, I’ll have the company buy it and then review it. The cost of the product can then be written off or capitalized. Either way, I don’t have to spend any of my $33,000 net income on toys for boys.

The Company Bank

This is something you can do if you’re in the market for a really big ticket item (like a house) and don’t have enough cash to buy it but the company does. Rather than withdrawing the funds from the company and having the money added to your personal income, you borrow the money from the corp instead. The money would not be taxable because it’s a loan. You will have to pay the money back and have your lawyer do all the paper work so it’s legit.

You can structure the loan anyway you want. For example, you can set it up so the full loan amount plus interest get paid off in 10 years. Then you can try to sell the company in year 9 and have the loan “forgiven” as part of the buy out.

Company Paid Life Insurance

This maneuver has to be one of the best tax free way to transfer wealth from corporation to owner. Because I am a company director, TTZ Media Inc. maintains a multi-million dollar universal life insurance policy on me. If something were to happen to me, the corp would receive a huge payout and that money would pass tax free to its remaining shareholder (that’s Sarah).

With the exception of term insurance, all life insurance policies are made up of two components, the insurance component and an investment component. The key here is the investment component. While the money is inside the policy, it’s allowed to grow tax free, just like a RRSP. Knowing this, many investors put way more money than they have to into their policy.

For example, a 37 year old non smoking female has to pay $622.50 a year to get $1 million of life insurance. If all she does is put $622.50 into her plan, all sheโ€™ll have is insurance. Anything above that amount goes into the investment component. To prevent people from putting in their life savings, the government sets limits on the maximum amount you can pay into a policy and still keep its tax shelter status. In this example, the maximum is $41,847.61 a year. The higher the insurance needs, the higher the limit.

Here’s the key. Insurance premiums are paid with after tax money. In order for me to pay $41,847.61 a year in premiums I would need to withdraw almost $70,000 from the company because 40% of that would be eaten up by income tax. However, the company gets taxed at 17% so it only needs to earn $50,418 to pay the premiums. That means more money to invest into the investment component.

What you are doing is transferring large chunks of corporate retain earnings into life insurance. Over time (and with tax free growth), this policy will have a cash surrender value in the millions. If I take the cash, it’ll get added to my income and taxed at nearly 50%. Plus I would lose my death benefits. That’s not a good deal and only a fool would do that. Here’s how to get that money out tax free.

A bank will lend up to 90% of the cash value on an insurance policy. If the cash value of the policy was $5 million, I can walk into any bank and borrow $4.5 million to do with whatever I want. I can take the money all at once or have it paid out over time. The money would not be taxed because itโ€™s a loan and not income. The bank would capitalize the loan so I would never have to make a single payment on it. How does the bank get its money back? When I die, the death benefit will pay off the bank loan plus accrued interest and any money left over will go to my beneficiary tax free.

With this strategy, I can invest corporate income, have it grow tax free, withdraw most of it down the road tax free by borrowing against it and have the rest pass to my heirs tax free. As with all investments, please see a qualified professional. What is best for me may not be best for you.


87 thoughts on “Blog Income & Taxes – Taking The Money Out”

  1. Small Potato says:

    This is definitely eye-opening. When people say, “Set up your own company to pay yourself,” I didn’t understand it until now. Also, I’m surprised by how flexible the system is. Of course, you have to stay within reasonable limits.

    1. Fat Man says:

      This is one of your most useful, informational posts thus far this year. thx.

      1. Both this post and last post are repeats I believe. I recall reading this on here long ago but I am sure its much easier to post it again than to have people dig it up.

      2. Matt Jones says:

        Yes definitely, I’ll be saving this on delicious so I can keep coming back to it

        1. Wonderful post John!

          1. Hood Workout says:

            Agreed great post. This also points out that you should do what you want in your job. Do things you enjoy (so the company can pay for them)…

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        I agree with Fat Man, this is great content. John, what college did you go to? โ“
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    2. Will says:

      Yea this is a very good read.

    3. RacerX says:

      The insurance piece is brilliant. My only question would be that since the Corp owns the Insurance policy, I can see the Corp taking a loan against it, but not sure how you can.

      Great post! Very interesting insight. To you point though you can get whacked (especially by the IRS – the CCP is probably nicer!) if they feel the business expenses are excessive.

      1. John Chow says:

        I can borrow against the insurance policy because I own the corp and I can change the name of the beneficiary to the bank.

    4. lilpappy says:

      One comment about the dividend vs. salary. I’m in the U.S. and have set up a professional corporation. One of my colleagues did as well. He decided to pay himself a small salary and a large dividend. Well, the IRS audited him and they told him what his salary should be given the years in his profession and what someone in his business should be paid in the private sector. (and in my opinion they were accurate with their estimate). He now has to pay taxes and penalties going back five years. Anytime you come up with a good idea to avoid taxes, check with a tax attorney to review it.
      With that information, I made certain my salary was commensurate with the average salary posted for my experience and then take the dividend on what is left. This achieves the tax savings (75000 in salary and 50000 in dividends) while giving me protection from the IRS.
      I did enjoy the post, however. While not agreeing with all of the points I love opportunities to take things from a thoughtful perspective and consider their application for me. I’ll be back to your blog.

  2. Emanuele says:

    About the 50 dollar-cents per km, and about this sentence ” I pretty sure I didnโ€™t spent $250 in gas to get to the meetup but that is the rate the corp is allowed to pay.”, this may work only for you according to the price of the gasoline in your Country and the car you are driving.
    My company is allowed to pay me 70 euro-cents (more than a buck) for business driving because I drive a 2000cc and the gasoline here costs about 1.3 euro per liter.
    Also, it’s wrong to calculate the expense only considering gasoline, what about tires, brakes, motor, insurance, risks… are you sure $0.50 is enough?

    1. John Chow says:

      The 50 cents per KM is suppose to cover the total cost of operating the car. Whether it does or not will depend on the car you’re driving.

      1. So it is safe to assume that you probably won’t be getting that Bugatti Veyron :mrgreen:

  3. Bruce Cat says:

    One of your best posts in a long time ๐Ÿ™‚

  4. Anuj Seth says:

    Such articles are so much better than the reviews that are covered here ๐Ÿ˜‰

    The strategy you’ve adopted is the work of a brilliant mind. Outstanding! and in your own words…Evil ๐Ÿ˜ˆ

  5. Jim Murdoch says:

    Thanks JC, This is a big help. I have my own company in its second year now, and I have been puzzling over exactly these things. Your advise is very helpful and I am sure it works similar here in Switzerland. I must get an advisor.

  6. HostingCow says:

    John, now I really understand why are you called “the root of all evil”. This is some pretty interesting stuff.. My favorites are the loans and company which is getting sold.. There are always some holes in a law, you just need to find them.. ๐Ÿ˜ˆ

    1. Will says:

      Yea I don’t think I would have ever thought of all this.

  7. Jack says:

    In the US, I can personally make up to around $40,000 federal income tax free ( I have 2 kids, student loans,etc). I actually control a couple corps and also have Sole prop businesses. My corp tax rates are 0% ( your tax is on Profit, it’s easy to lose money but still stay in business) and 15%.

  8. ViralKing says:

    Thanks John Nice post. Will need to see how this applies to Aus tax law though, will run it past my accountant

  9. A John Chow impostor site โ“

    Hi John,

    I just sent you an email about this, but wanted to comment about it here as well so that it doesn’t slip through the cracks.

    I just came across a blog that appears to be totally stealing your blog content and profiting off of your name and such. ๐Ÿ‘ฟ The URL to that blog is in the email.

    From the looks of things, the person is copying all of your blog posts (word-for-word and graphic-for-graphic), and publishing them on a blogspot blog entitled “John Chow News,” and calling it the “John Chow Newsletter.” In addition, he/she is running AdSense ads on the site to make money…off of your content. ๐Ÿ‘ฟ

    Anyway, just wanted to give you a heads-up on it in the event that you weren’t already aware. Hopefully this person will pay dearly for such underhanded nonsense!

    Shine on,
    Aaron

    1. He is probably just scraping John’s rss feed. Legal but not ethical.

    2. John Chow says:

      Ya, I know the site. He is scraping my RSS. This is one of the reason I serve ads in my RSS feed.

      1. Simon says:

        Just report to AdSense team then the site’s AdSense ads will be banned ๐Ÿ˜ˆ

  10. Poker Sharks says:

    You can tell you used to be an accountant John ๐Ÿ’ก

  11. Steven Finch says:

    Very interesting post John. I might have to do this with my personal site. http://crenk.com

  12. Some good general advice in there but before anybody copies John remember that each country has their own rules and regulations on this sort of thing. John isn’t exploiting any holes in the law, he’s just taking advantage of running a corporation in Canada so before you decide to setup in business for yourself you’re best constulting a local accountant.

  13. Darius says:

    Hi John,
    even if I live in Romania, Europe, I think that I can find similar loopholes in my country’s tax laws.
    Thanks for a great article!

    1. RacerX says:

      One misconception here is that these ar loop-holes…They are there 100% on purpose, which is why if you want to creat real wealth, you have to own your own business!

  14. Dan says:

    John, you are a gold mine. I’ve learned a LOT here in just a week, and your ideas range from common-sense to brilliant. I read about you in Entrepreneur magazine over coffee last week, and it’s totally changed my outlook, and given me an entirely new reason to continue blogging. (Not to mention a ton of ideas to improf the quality of my posting.) Thank you.

    Dan

  15. Simon Lau says:

    I was waiting for this post after reading the last one you wrote and it did not disappoint.
    I don’t know if you’d be willing to share how much your corporation makes vs how much you end up expensing each year for what you do. Or perhaps a more anonymous question would be “what percentage do you generally expense out of your income”? You consistently mention that it has to be reason, which is true, but what have your accountants told you? Don’t spend more than 5% -10%?

  16. Andy says:

    I got a good understanding here: travel to an exotic place where there is a business-related conference going on, organize an evening meal and party in a luxury resort hotel and claim it as a business necessity.

    Photos on a blog are the proof :mrgreen:

  17. Very well explained. Your company can also pay $20,000 (or may be more) for your little kid for being model for your posts and she allowing to use her photos :mrgreen: . Kids parents can decide to make that earnings into tax protected plans. Imagine your company paying 35K into kids RRSP/RESP. If you don’t touch that money, by the time your kid is 20 or 25 , She/He can be Millionaire ( Assuming reasonable 10% to 15% return growth Mutual funds).

    Ofcourse Digital Camera used to take picture is Corp’s digi Cam ๐Ÿ˜ˆ

  18. Ty Brown says:

    Good tips. Anyone know any good tax sites that have tax tips that are easy to understand for the idiot like me?

    1. Get an accountant…atleast for a consultation, and get your ideas from him.

  19. John…this is great advice, basically find ways to write almost everything off! I hope you have a good investment plan for your corporation…your a young guy you should have all of your money in solid bluechips and you can afford some risk….you should open your books and sell your income summary and income statements…similar to what public corps have to provide for free…I’m sure people here would pay $50 or so to see it!! Think about it John…

  20. Randomguru says:

    Thanks so much for the great information. I just incorporated this year, so I’ll have to apply your suggestions for next year’s taxes.

  21. John, you say you can borrow (withdraw those 4.5 million) from the bank. And the bank will take back the money when you die…this does not include natural death right? Because if not (and if I understood correctly) the bank would be most likely f… up if the person that withdraw the money will die from natural death and not accident or something.

    Maybe I got a bit confused..

    1. John Chow says:

      It doesn’t matter how you die. Just as long as you die, the insurance company will pay out whoever is named in the policy.

      This is an extremely safe long for the bank. They can’t lose because they know you’re going to die one day. The bank would rather you live for a good long time so the interest can keep building. The amount they loan you is based on the cash value of the policy and not the death benefits. If the cash value is $5 million, the death benefits will be almost twice that so the loan is extremely secure.

      1. Ok its all clear now and makes sense. Thanks for explaining that out. It was weird that it looked to me like the “bank” has a chance to “lose” something thats why wanted to get it explained.

        Thank you.

      2. RacerX says:

        Outside of Suicide. Most Life Insurance has high-risk closure as well…so no driving 200MPH ๐Ÿ™‚

        1. John Chow says:

          Most insurance policy now cover suicide. However, you have to wait at least two years before killing yourself.

  22. That’s interesting reading! I’ll be researching this more, but I need to do a little more research about local Tax Laws here.

    Kenneth ๐Ÿ˜†

  23. The best part about this post is that not only can a Canadian use these tactics, but most of it can be used here in the US also, maybe to a greater extent. Awesome post, and absolutely informative.

  24. KiwiPulse says:

    I’m sure you can pay less tax by giving a part of your money to charity donation. As a corporation im sure you can claim a charitable donation. Way to be more evil ๐Ÿ˜ˆ

  25. Hugo Vincent says:

    Excellent post John, Being a canadian I find this post an absolute gold mine, would it be a possibility for you to go into details on the tax filing costs involved, I appreciate your blog / others sites netting over 30k a month but is the math worthwhile for lower paying outfits.

    thanks for the information,

    1. John Chow says:

      Most accountants charge $1,500 to $2,500 to file a corporate tax return. The more complex your situation, the more it will cost because it will take more time.

  26. Jake Cohen says:

    Wow! This is really eye opening. How did you figure this all out, were you once a tax consultant? Honestly, this is amazing stuff.

    TalkPrice.net
    Jake Cohen

  27. Paolo Gaspar says:

    since your companies aren’t in the regular business of providing loans, wouldn’t you still have an imputed interest benefit from the shareholder loan due to the fact that it would not be done at arm’s length?

    1. John Chow says:

      If the loan was interest free or made at an interest rate much lower than market, then yes there would be a taxable benefit to the shareholder. However, if the loan was made at a rate close to market, there’ll be no problems.

  28. Tom Beaton says:

    You sure are milking that degree in accountancy and over working your financial advisors.

  29. Robert says:

    Nice work, John. We all appreciate this insight into your finances. Knowing how to take advantage of the corporate structure is essential to maximizing our profits. Any path to wealth involves taking advantage of these concepts.

  30. Patrick says:

    This is the first post that I see quality on it from you. Good job…

    1. There are alot of quality posts on the blog, just check back a little due to the fact that recently they are food posts/guest posts. However, there is still alot of quality around the place.

  31. Thanks for tons of good info in this post John.

  32. This is exactly how alot of the big corporates do such a thing, the enrons, the warren buffets, the dicks chaneys. I am not saying its wrong but its the way the current US tax and corporate system is built.

  33. Will says:

    Interesting. I like how you write so much stuff off as a business expense.

  34. Jovan says:

    Great post one of the best in a while…

  35. This really is one of the best posts I’ve read on JohnChow.com for a while, coming very very tight to be the top blog post I’ve read on the internet, actually. ๐Ÿ˜†

  36. John, could you also make your wife a shareholder of your corp so that you could have a combined tax free income of $66k?

    1. John Chow says:

      Of course you can and she is a shareholder. Here’s another cool thing. If you sell the business, you are allowed the first $750,000 of capital gains tax free. This is per shareholder. If the company has four shareholders, you can sell it for a $3 million profit without incurring any tax liability.

      1. Syed Balkhi says:

        now this is someting sweet …

        i need to get some shareholders in my companies :p

  37. I bet you get some really cool tech toys to play with for a review huh? Dang… I’m jealous!!

  38. This is probably one of my favorite posts on this blog. I’ve often wondered on the best way to tax shelter ๐Ÿ™‚

    1. I agree, as a pf blogger, i’m really interested in how John uses the $30k / month.

  39. Play Game says:

    These are some great tips. I probably would buy a very expensive car like the new bugatti and then use it for my buisness purposes for a hug tax write off…..thats if I make that much. ๐Ÿ˜ฅ

  40. robert says:

    so i’m a bit confused when you say ‘the company’ its YOUR company right?

  41. Mr.Nice Guy says:

    Great post John. It’s kind of new information for many bloggers who are yet to enjoy their income. My congratulations… ๐Ÿ˜€ ๐Ÿ˜€ ๐Ÿ˜€ ๐Ÿ˜€

  42. Hi John, I have many questions about all this if you have time to answer them, I’d really appreciate it. I am a Canadian full time blogger, and I am looking to reduce my tax exposure as much as possible.

    #1 – How much did it cost to become a corporation?
    #2 – Would you recommend doing all of this for someone only bringing in 35k in blogging related work?
    #3 – What are your biggest/best write-off tips?
    #4 – How do you deal with GST in all of this?
    #5 – What is the process for paying yourself a dividend and does it have to be a certain percentage of the income generated by the company?

  43. Tobi says:

    Hi there,

    your post is really interesting, but unfortunately very, very difficult to realize in german tax laws. But it was nice to learn something about the canadian laws… maybe interesting in a few years… ๐Ÿ™„

    Best Regards from Berlin

    Cheers
    Tobi

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  45. Eva White says:

    Just one word ‘OUTSTANDING’ post

  46. JoNathan says:

    As always … excellent information!!

  47. I am sorry to burst your bubble John, but in the US if you are the sole owner of the corporation and you paid yourself more than the prevailing wage for a manager of a blogging corporation,then the IRS will come after you and make you claim it as salaried income. This is a very subjective matter, because what is the prevailing wage for a blog manager in USA?
    As far as using a company to pay your own personal expenses, IRS could also always challenge your claims. The only way that you can deduct those from the corporation is if business was discussed/business was the main purpose for the trip.
    I do agree that it is possible to incorporate, because this significantly decreases your liability.
    Good luck to you and your business!

  48. Alex Axon says:

    John with the Company Paid Life Insurance plan why do the premiums need to be paid out of retained earnings (after-tax dollars)? Isn’t it a business expense of the corp

  49. B Unit says:

    Long time reader, first time poster.

    I just asked my accountant about paying myself a dividend, it’s a great idea, however, he pointed out that since it’s not considered earned income you can’t contribute to your RSP. So how do we get this almost tax free income and buy RSP?

  50. AC says:

    In regards to the dividend payout, I was advised against this by my accountant.

    As most small business in Canada are Canadian Controlled Private Corporations, all dividends are taxed in the company’s hands at the large corporation rate because it is considered “non-eligible”. So, even while personally, you’re getting income that’s not taxed, your company is baring the brunt of the tax.

    To get around this, I think you can declare your corporation as a non-CCPC, however, you lose the small business deduction benefit.

  51. Dave says:

    John,

    You mention combining business with pleasure and taking advantage of such perks as First Class travel and expensive hotel rooms, the latter of which you justify by throwing a party for clients, etc but how is traveling First Class on a ticket that costs say $3000 versus coach which costs say $800 considered a ‘reasonable’ expense in the eyes of the IRS? And what about limos, when a plain old taxi will suffice?

    Excellent series of posts by the way, keep it up!

    Cheers,

    Dave

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