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Wong and all the other Canucks here:
Let's get this thread rolling with some issues and opportunities to discuss
with your Canadian tax advisors. Although not directly applicable to our US
cousins, this may highlight some parallel opportunities for them.
BACKGROUND
1. In general, 3/4 of capital gains are taxed in Canada at the regular
progressive tax rates, and only very few costs incurred to earn those
capital gains are deductible (either by addition to the Adjusted Cost Base
or by deduction as a carrying cost).
2. It may be beneficial in some circumstances to have one's gains classified
as ordinary business income. Revenue Canada's Interpretation Bulletin
IT-479R (http://www.rc.gc.ca/E/pub/tp/it479ret/it479re.txt.html) outlines
the factors considered in determining whether a trader is carrying on a
business.
ISSUES
Some of the situations where a trader might want to be classified as
carrying on a business are:
3. Although 100% of gains (vs. 75% for capital gains) would be included in
income, a wider range of expenses may be deductible as costs incurred to
earn that business income. Some of these may include: software and hardware
costs, data costs, courses, books, rent, office-in-home expenses, reasonable
salaries to spouses to assist in investment management, etc. This is a
simple cost-benefit analysis your tax advisor can do for you.
4. Incorporation may provide opportunities to split income with family
members to take advantage of their lower personal tax rates. Although
incorporation may present opportunities even where gains are taxed as
capital gains, tax complexities arise which would have to be carefully
addressed by your tax advisor.
5. If part of a trader's plan is to accumulate profits to increase his/her
trading stake, incorporation may offer a lower tax rate, and therefore
faster accumulation. Here's an example. A trader plans to set aside
"excess" profits of $50,000 per year for 5 years to increase his stake. If
this is active business income accumulated in a corporation, the
small-business tax rate of approximately 20% may apply. The after-tax
accumulation inside the corporation is ($50,000 - $50,000x20% tax) $40,000
per year, or $200,000 over the 5-year plan. Taxed at the top personal rate
of 50%, the after-tax accumulation is ($50,000 - $50,000x50% tax) $25,000
per year, or $125,000. A difference of $75,000 excluding the gains to be
had from compounding.
6. Opportunities are presented for offshore incorporation. Active business
income earned offshore is treated differently than capital gains (Foreign
Accrual Property Income or FAPI) and with the right structure, it can be
accumulated free of tax. This is a highly specialized area of taxation, so
the advice of a qualified advisor is critical.
The above discussion is a summary of issues to be discussed with your tax
advisor, and does not represent legal or accounting advice. This is a very
serious and complicated area with long-reaching (and possibly negative) tax
implications, and the above issues should not be considered lightly.
Qualified advice specific to your own situation is necessary.
Glen
-----Original Message-----
From: wong <whs@xxxxxxxxxxxx>
To: code-list@xxxxxxxxxxxxx <code-list@xxxxxxxxxxxxx>; omega-list@xxxxxxxxxx
<omega-list@xxxxxxxxxx>
Date: April 4, 1999 13:18
Subject: tax stuff - in Canada
>Hi All who live in Canada:
>
>I read with interest the various posts on tax questions, incorporation,
etc.
>
>Unfortunately, these are for U.S.
>
>Even Ted's book is for US residents.
>
>Anyone interested in picking up the thread with a Canadian view?
>
>For example, we don't distinguish between short-term and long-term capital
>gains.
>
>And if I remember correctly, about 25+ years ago, we were allowed to
>designate whether the gains/losses were to be regarded as capital gains or
>income. Since I'm out of the tax field entirely, I'm worse than the
>average Canadian tax payer as far as income tax knowlege goes.
>
>As for incorporation, I haven't got a clue...
>
>Regards,
>
>Wong
>
>ps: I would rather spend more time optimizing than studying tax law
>revision every year.
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