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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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{ 62 comments }

Allen Young August 8, 2007 at 12:44 pm

I think that’s capital gains, not “grain”

Unless, its a Canadian tax term I am not familiar with.

Still, its good information, particularly for for Canadians, but there are “loopholes” in any tax structure if you take the time to study, and attack it rather than just accept it, or complain about it.

KingJacob August 8, 2007 at 2:50 pm

Its not really a loophole, its just following the law perfectly :wink:

Chris August 8, 2007 at 12:44 pm

Hey John,

How does this work out for paying yourself a salary? Do you pay 17% on the income brought into the company and another XXX% on every dollar you pay to yourself?

John Chow August 8, 2007 at 1:25 pm

If you draw a salary, the company deducts the salary as an expense and you pay personal income tax on it. The key is to not pay yourself too much. You can effectively split the income between you and your wife. Instead of paying yourself $80K, pay each $40K to keep both of your in the first tax bracket.

Another option is pay yourself dividend. The money will come from after tax dollars but you can get the first $30K of dividend tax-free if you don’t have any other personal income source. There is also no CPP or EI on that money.

Michael Kwan August 8, 2007 at 1:39 pm

Hey John,

Can you give more information about paying yourself dividends and the exact process one (i.e., me) would need to go through to do that? CPP is killer, because I have to pay both sides (employer and employee), effectively plunking a 9% rake for no real reason. We all know that the CPP fund will be dry by the time I retire.

Geedos August 8, 2007 at 9:15 pm

Can I ask a stupid question, I’m not from Canada – what is CPP? Some kind of employee pension fund or something?

Nabloid.com August 8, 2007 at 11:43 pm

Canada Pension Plan… you were dead on the money.

Ashish Mohta August 9, 2007 at 7:48 am

I don’t know how it works all around the world, but In India we can put money into government schemes and you get rebates. They money you put in comes back after 3-4 yrs and thus u have some savings too

Terra Andersen August 8, 2007 at 1:04 pm

Wow, canadian taxes are so different than the U.S. either way,.. good post!

limeade August 8, 2007 at 1:04 pm

There are similar structures in the US, but you have to know how to play the game. It’s not only about making a lot of money, but “how” you make the money as well. Good information for people to consider.

Jack August 8, 2007 at 1:22 pm

Haha, back to my good old days in M&A Tax. Terms like CCPC and Non-CCPC all over every document handled. :p

Gene August 8, 2007 at 1:47 pm

Great post John! However, your assertion that the middle class bears the biggest tax burden is just plain false. Generally the top 5% of taxpayers (who account for about 30% of the income) paid almost 54% of all the income taxes in 2002.

So, if you ask me, the “rich” are bearing MORE of the burden not less. Just another example that the tax laws are out of whack.

John Chow August 8, 2007 at 2:18 pm

When I say the middle class pay the most tax I mean the gov collects more total tax revenue from the middle class.

Nabloid.com August 8, 2007 at 11:44 pm

The middle class citizens pay a much higher % of their pay cheques to the tax system than the rich…

Dave P August 8, 2007 at 1:48 pm

John, you should specify that you’re talking here about incorporating your company. While this can work pretty well if you’re in the right position, there are disadvantages.

This site has a good run down. (Found on Google)

http://www.taxpage.com/Articles/incorp.htm

Dave P August 8, 2007 at 1:50 pm

Sorry, to clear this up: Incorporation in Canada is different that being a Sole Proprietor or Partnership.

I was just thinking that John should explicitly state that.

Mat August 8, 2007 at 2:10 pm

Are you serious?

How about

“Canadian controlled private corporation”

Doesn’t sound like a sole proprietor or partnership to me.

Dave P August 8, 2007 at 2:53 pm

Fair point, but sometimes a CCPC is often confused with a LLC in the States, they aren’t exactly the same.

Eric August 8, 2007 at 1:51 pm

John,

Try to earn 400k in Belgium and see what’s left after taxes, you should be happy with 17% :razz:

shman August 9, 2007 at 8:22 am

Thats right. Maybe try in Poland and pay 40% tax. What do You think?

pj August 9, 2007 at 4:58 pm

Try selling your company for a billion dollar in Belgium and see what’s left after taxes… that’s right, no capital gain taxes in Belgium.

Belgium isn’t a place to put your income, but it is the place to locate your share sales to.

Blogging Experiment August 8, 2007 at 2:06 pm

Again with the taxes!?! And Canadian taxes at that! :roll:

John, I think it would be much more responsible of you to have some sort of disclaimer at the end of posts like this about taxes and such. People should consult a tax attorney or professional accountant before making any decisions like this.

I wouldn’t ask my dentist to perform open heart surgery on me, I wouldn’t ask my milk man to market my website, and I wouldn’t ask a blogger for tax advice (unless they’re a licensed accountant or tax attorney).

People, if you want help with your taxes, consult a professional, not JohnChow.com :!:

Mat August 8, 2007 at 2:14 pm

BE, you’re obviously not in business. All businessmen share their tips and tricks with each other for avoiding tax legally. Then they all go back to their accountants and ask them about it. It’s part of the natural camaraderie that entrepreneurs share.

Also, the blog is called ‘make money online.’ I’m pretty sure these posts fit smack bang into the middle of that topic.

If people aren’t smart enough to check with their own advisor, they’re probably not smart enough to make enough money for this sort of scheme to be worthwhile anyway.

John Chow August 8, 2007 at 2:22 pm

Once you start making serious money online, you’ll start to realize that making it isn’t enough. You have to keep it. And I am an accountant. At least I was. :twisted:

Blogging Experiment August 8, 2007 at 8:04 pm

John, that certainly gives your tax posts a lot more authority. Did you ever mention that before and I just missed it? If not, you should mention it in all your tax related posts so skeptics like me will give a bit more weight to your suggestions. :wink:

John Chow August 9, 2007 at 8:52 am

It’s been mention in past posts before. I’m also qualify to be a certified financial planner but didn’t brother to take the test.

Stay At Home Dad, Geek Style August 8, 2007 at 6:34 pm

I think anyone that wouldn’t consult someone who knows the specifics of their business before taking any action like those explained above deserves to screw it up and, in turn, get screwed.

DevDad

Thomas August 8, 2007 at 2:24 pm

So, how do you get the money out of the corporation? You pay yourself a small salary, so that you are taxed at less and/or equal to 17%, and then also pay yourself dividends of up to 30K? Is that how you are going to get the money out of the corporation without having to pay more taxes?
Does that also mean, that eventually, even if the company doesn’t provide any services anymore, you still pay yourself dividends until the cash fund is all used up?
Or, will the cash balance just be transferred to a new owner, in case you decide to sell, and you then pocket capital gains tax-free up to a certain amount?
Would love to hear more about how to get the money into your personal wealth from the corporation. Thanks.

John Chow August 8, 2007 at 2:43 pm

The best way to do is to have the company pay for your life insurance policy. I’ll explain that in a future post. Other ways of getting the money out includes borrowing money from the company to having the company pay for stuff that can be used for both business and personal use, like a car. Most of my vacations are always combined with some kind of trade show so the company pays for it and not me.

Geedos August 8, 2007 at 9:13 pm

Looking forward to the post although my brain starts to hurt at the mention of tax!

It gets very complicated very quickly, which I guess is why experts in the field of taxation get paid a lot of money.

As far as I can tell the key here is to understand and be able to exploit all the legal loopholes.

Easier said than done! :shock:

Thomas De Maesschalck August 8, 2007 at 3:53 pm

Canada’s corporate tax is a lot better than the one in my country.

Here the corporate tax is still 33% :(, although the next government may drop it to 30% but that’s still a lot higher than Canada’s 17%.

Mansi August 8, 2007 at 4:26 pm

Hi, you have nice articles, esp to encourage newbies like me!! I loved the one which said:

Give and you shall receive!!

I’ll try following these gospels to increase my page rank; right now its N/A :cry:

-Mansi
http://funnfud.blogspot.com

Mansi August 8, 2007 at 4:28 pm

Nice post…I totally agree that middle-class pays the most taxes…man, I wish I were born a billionaire!!!

-mansi
http://funnfud.blogspot.com

Nick August 8, 2007 at 4:31 pm

Are there any sites out there that offer this kind of info for Americans? I run a single owner LLC from home and would like to find out more about taxes. The books I’ve read were little help, and the collage dropout from H and R Block knew less about deductions then I did.

John I don’t know if you take requests, but how about a post about finding a good accountant. Also you seem to know a lot about the US tax system if you could do a side by side comparison of Canada vs. the US that would be very enlightening.

I know these business/tax posts aren’t popular with some of your readers, but I’m getting a lot advice that’s going to put money in my pocket (or keep the money I earned in my pocket). Keep em’ coming! :twisted:

Nick August 8, 2007 at 10:03 pm

Hey! Quit commenting as me. Didn’t you know John had a post about that? :P

I guess you’re not really commenting as me if you have your name link to a different place.

Johnny August 8, 2007 at 5:16 pm

I wish the USA would give me money for selling a business.

Vahid Chaychi August 8, 2007 at 5:16 pm

Nice article. Thanks a lot and keep on your good work.

Ginene August 8, 2007 at 5:46 pm

The government will make sure they get their money. Tax ivasion is like the biggest crime to them. The only reason why prostitutes get arrested is because they don’t pay taxes. They don’t care that they are promiscuous(?) if that were the case then porn would be illegal but its not because it is taxed. In the past when cigarettes were illegal they arrested everyone, not because it was dangerous but because they avoided taxes. Now they legalized it and added taxes then everything became fine and dandy.

John Chow August 8, 2007 at 6:07 pm

Does it even remotely sound like I am talking about tax evasion here?

Blogging Experiment August 8, 2007 at 8:01 pm

Geez, I don’t like the tax posts but even I realize this isn’t tax evasion. :roll:

Ginene August 8, 2007 at 8:02 pm

NO. LOL. It just got me thinking about the government. Sorry. I wander sometimes. :grin: Basically that is good advice that you have bottom line. I was just thinking about everything that is taxed.

www.strongfams.com August 8, 2007 at 6:24 pm

man, John Chow. you are banking it, i get the hunch you make atleast six figures online. Do you bank more online then you would as an accountant that made partner. The average cat from the average firm could be banking in about 150000. but be doing 9-5.

John Chow August 8, 2007 at 7:27 pm

I don’t know how you can live on $150K a year.

Geedos August 8, 2007 at 9:06 pm

Ha! I’d love to live on $150k a year! :lol:

Clearly I need to be more evil! :twisted:

InfoEmpresa August 8, 2007 at 9:57 pm

I used to live on around $10K a year… until I discovered how to make money online, now I make around $36K a year… Although I have high expectations, and I plan to reach the $60K per year mark in about 3 years (fingers crossed), I don’t think I’ll ever be able to enter the $150K…

shman August 9, 2007 at 8:24 am

$150k / year sounds really good :).

Tim August 8, 2007 at 7:10 pm

A small yet important detail that is forgotten for questioning the fairness of the system is that a lot of the tax free money flows back to employees. Sure… though it still doesn’t justify the unfairness of it towards other companies… (I’m betting a lot of parlement members have such companies?)

Geedos August 8, 2007 at 9:10 pm

How does utilising a Canadian company compare to using a company that is registered off-shore in a tax haven?

John Chow August 9, 2007 at 8:55 am

The off-shore company will pay no tax. The problem is getting the money back into the home company. CRA and IRS is not dumb. If you are living a lifestyle that is out of wrack with your reported income, it triggers red flags.

The #2 way the CRA find people to audit is by looking for people who live in expensive areas with low reported income.

Nick August 8, 2007 at 9:59 pm

You’ve had some good articles lately on taxes and income tax and such, but I have an idea for you. I’m suggesting this because it is something that I (and probably many others) could use some help on. I know that your in Canada and things are different there, but any insight may be helpful.

What are the income tax implications of having a blog? I am talking about a one person operation (like most of us have) with a few forms of monetization? TLA, Adsense, Review Me, Kontera. Is the blog considered a company? Would it be a good idea to make it one? Advantages and disadvantages to each?

John Chow August 9, 2007 at 8:58 am

I wrote a basic post about that back in March. You can read it here: http://www.johnchow.com/blog-income-and-taxes/

CASH for COMMENTS August 8, 2007 at 10:12 pm

Hey Evil Genius. You should see my new layout for a Evil vs. Sneaky

Making The Money August 9, 2007 at 1:21 am

Just a few words, 0% corporate tax! Why offshore is sometimes best. :grin:

shman August 9, 2007 at 8:26 am

yey

John Chow August 9, 2007 at 9:06 am

And I agree with you. However, you have to remember that you need to show an income that justifies your lifestyle. If you’re living in a $10 million house in West Vancouver and your reported income is $30,000, someone at CRA is going to come knocking on your door.

Making The Money August 12, 2007 at 7:41 am

Haven’t you ever thought of moving offshore though? You always got the problem of shipping money back onshore but if you buy yourself a holiday home and live there for x amount of months you can avoid a lot of those pitfalls.

It’s what a lot of the very wealthy/famous do.

MillionDollarJourney.com August 9, 2007 at 4:44 am

John, have you calculated your effective tax rate after you pay yourself a salary? Your company is being taxed, then you are being taxed on the salary. Perhaps it would be best to pay yourself dividends like you mentioned esp. in BC.

John Chow August 9, 2007 at 9:07 am

If you pay yourself a salary, the company can deduct that as a business expense. So it’s not a double tax. It’s a shifting of the tax from business to personal.

sandossu August 9, 2007 at 7:47 am

Unfortunately, i’m neither from Canada or the US :(

Tarik August 9, 2007 at 9:28 am

Wow, great stuff John. And perfect timing as well.

I have a meeting with my tax attorney this afternoon to work out the final details of my corporation.

Like you said, “making money is half the battle; the rich work within the laws and obey them; the middle class and poor get upset over the laws instead of learning about them.”

These tax posts are some of your most valuable entries in my opinion. Way more influential over the long run than some Google linking scheme.

Thanks.

OneYearGoal.com - $100,000 in one year August 9, 2007 at 9:44 am

How do you pull cash out without getting double taxed?

Sunnye August 19, 2007 at 4:28 pm

Send it through a foundation that you control.