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How To Pay 17% Tax On Net Income of $400,000

written by John Chow on August 8, 2007

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The neat thing about the tax system is government favors certain groups while completely putting the screws to other groups. For example, if you’re a smoker, you get screwed over pretty bad. The biggest cost on a pack of smoke is taxes. If you’re a middle class employee, then you are screwed the most. Government can’t really tax the poor because they have no money. And they have major problems taxing the rich because they have tax lawyers to help them legally avoid taxes. That leaves the middle class who must bare the biggest tax burden. The system isn’t fair but it’s how it works. Knowing that the government favors certain groups, the key to lowering your taxes by joining the groups the government favors.

The Best Group To Be Part of

One group that my government favors extremely well is the Canadian controlled private corporation. They like them so much that they’ve been lowering the tax rate on them for the last five years and no one complains about it. The tax rate on a Canadian controlled private corporation used to be 29% on the first $200,000 of net income. Then it was lowered to 21% on the first $300,000. Then lowered again to 17%. This year the rate is still 17% but the income has increased to $400,000. In other words, a Canadian controlled private corp pays the same tax rate as a person making less than $30,000 a year.

If you were an employee who pulled down a $400,000 salary, you can expect to pay nearly $170,000 of taxes on that earning. By comparison, a Canadian controlled private corporation earning that much would pay only $68,000 in taxes. The tax is on the first $400,000 of net income, not gross. The money is taxed only after the company deducts all the expenses associated with running the business. Expenses like throwing a huge blow out party at CES. :twisted:

What Is A Canadian Controlled Private Corporations

A Canadian controlled private corporations means a private (its shares are not listed on a stock exchange) company that is at least 51% owned by Canadian citizens or Maple Card holders. The company has to be in the business of providing goods or service and cannot be a holding company. Because it meets all the requirements of a Canadian controlled private corporation, TTZ Media Inc. pays 17% tax on its net income. That’s worlds better than 50%, which would be the case if the money was taxed in my hands.

$750,000 Tax-Free Capital Gain

To encourage more people to start businesses, the government not only offers a low tax rate, but they also provide up to $750,000 of tax-free capital gain should you sell the business. It used to be $500,000 but they raised it again. The tax-free gain is per shareholder. If the company has two shareholders (me and my wife) we each can claim $750,000 of tax-free capital gain. The net effect is I can sell the company for a $1.5 million profit and not pay a cent of tax on it.

It is because of this low corporate tax rate and tax-free gain that I still run TTZ Media from Canada. People complain all the time about being taxed too much. However, if they spend some time to get to know the tax system, they’ll find as many ways to lower taxes as there are ways for the government to raise it.

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