Tips for Minimizing Taxes

[mcliu]

As self-employed person, there are many more options available to minimize taxes than a W-2 person.

Agree. For instance you can contribute bigger amount to tax deferred plans thus reduce your taxable income.

Yes, in Canada too.  Other benefits...very low tax rates for first $500K of business income each year or $150K in passive (investment) income...15% rate.  Money can be sheltered in there at low rates for decades.  Plus all allowable business exemptions can be written off against income.  There are more esoteric borrowing strategies with corporations as well, but I avoid anything that starts to get too complicated.  You just do the available simple things and you can reduce your tax burden considerably while paying your fair share.  Cheers!

Isn't passive income in CCPCs taxed at the highest marginal tax rates..?

[Cigarbutt]

As self-employed person, there are many more options available to minimize taxes than a W-2 person.

Agree. For instance you can contribute bigger amount to tax deferred plans thus reduce your taxable income.

Yes, in Canada too.  Other benefits...very low tax rates for first $500K of business income each year or $150K in passive (investment) income...15% rate.  Money can be sheltered in there at low rates for decades.  Plus all allowable business exemptions can be written off against income.  There are more esoteric borrowing strategies with corporations as well, but I avoid anything that starts to get too complicated.  You just do the available simple things and you can reduce your tax burden considerably while paying your fair share.  Cheers!

Isn't passive income in CCPCs taxed at the highest marginal tax rates..?

Your statement is correct on a first-level of thinking.
Tax authorities allow different formulas based on the integration principle, ie whatever formula chosen, in theory, the result for owed taxes should be the same at the individual level. The key here is the deferral advantage. The small business deduction can be used on top of lower corporate tax rates for "active" business income and the amount of taxes to be paid eventually can be deferred and another second generation layer of money can be made from passive income. There have been modifications and the idea now is that a business loses its small business deduction advantage progressively when passive income reaches 50K and disappears above 150K. Conceptually, like reference three of the first link shows: "Why is the CCPC deferral advantage significant? The answer lies in a well-known principle dealing with the deferral of the taxation of income (the “deferral principle”). The deferral principle holds that the deferral of the taxation of income is the equivalent of not allowing a deferral, but instead exempting from tax the income earned by investing the income.[3] In other words, allowing a tax deferral is the same as allowing an exemption from tax for investment income."

https://wolterskluwer.ca/blog/ccpc-passive-investment-income-saga-comes-end/#referenceS2PCIe110
https://www.advisor.ca/sun-life-retirement/practice-advice/dont-be-passive-about-canadas-new-passive-income-rules/

[mcliu]

As self-employed person, there are many more options available to minimize taxes than a W-2 person.

Agree. For instance you can contribute bigger amount to tax deferred plans thus reduce your taxable income.

Yes, in Canada too.  Other benefits...very low tax rates for first $500K of business income each year or $150K in passive (investment) income...15% rate.  Money can be sheltered in there at low rates for decades.  Plus all allowable business exemptions can be written off against income.  There are more esoteric borrowing strategies with corporations as well, but I avoid anything that starts to get too complicated.  You just do the available simple things and you can reduce your tax burden considerably while paying your fair share.  Cheers!

Isn't passive income in CCPCs taxed at the highest marginal tax rates..?

Your statement is correct on a first-level of thinking.
Tax authorities allow different formulas based on the integration principle, ie whatever formula chosen, in theory, the result for owed taxes should be the same at the individual level. The key here is the deferral advantage. The small business deduction can be used on top of lower corporate tax rates for "active" business income and the amount of taxes to be paid eventually can be deferred and another second generation layer of money can be made from passive income. There have been modifications and the idea now is that a business loses its small business deduction advantage progressively when passive income reaches 50K and disappears above 150K. Conceptually, like reference three of the first link shows: "Why is the CCPC deferral advantage significant? The answer lies in a well-known principle dealing with the deferral of the taxation of income (the “deferral principle”). The deferral principle holds that the deferral of the taxation of income is the equivalent of not allowing a deferral, but instead exempting from tax the income earned by investing the income.[3] In other words, allowing a tax deferral is the same as allowing an exemption from tax for investment income."

https://wolterskluwer.ca/blog/ccpc-passive-investment-income-saga-comes-end/#referenceS2PCIe110
https://www.advisor.ca/sun-life-retirement/practice-advice/dont-be-passive-about-canadas-new-passive-income-rules/

Ok thanks, that makes sense.

[lnofeisone]

Anyone happens to live in DC (the actual DC) and owns muni bond funds/etfs? Just curious what my tax forms will look like given that (based on my research last Feb) interest from individual securities (completely onboard with ST/LT gains) are exempt from Federal tax and DC doesn't charge tax either on any muni in the US.