If you are in BC or Alberta, I will likely be able to help you out. I’ve done quite a bit of work in the last couple years on your exact situation with people your age. Myself, I’m only 30.

Tyson Russell

P.S. If you are on Facebook you can find my Estate and Business Planning page by just searching my name. :)

I have also been looking into a universal life policy as well and other investments (we have been purchasing stocks and have recently been told we pay 45% capital gains tax on these). Is it best to keep all investments such as a UL in the holding company? We are late 20’s, early thirtys looking for any advice that will help us deffer tax/contribute to retirement. Comments greatly appreciated!

I do not use a US based broker so I do not have any information for you on the tax withholding issue. With the new Dodd-Frank Act there are a variety of reasons not to have a US based forex account at this time. All financial institutions must withhold tax for non-US residents and there are specific parts that limit what can be done in forex. Sorry i could not help.

I am in the same situation as you are, but the only difference is that i am just starting up. I also trade forex and make about 15% to 20% gain on monthly basis.

Since i ma just starting up, instead of setting up a corporation which is owned by family trust and going through all those complexities, my accountant suggested me to do it as a sole proprietor.

I just opened forex trading account as a sole proprietorship account. However the brokerage is asking me to fill out W-8BEN for us tax withholding. Will they withhold any tax on my forex trading gain or that is only for the dividend and any interest income? Did you face this challenge?

Any option or suggestion to avoid US tax withholding on forex trading gain?

Thanks,
Universal.Trader

I noticed that you put quotes around “advisor”. :)

In general, TFSAs are better for many people than they initially seem, and better than RRSPs for many people. Check out the articles about them: http://www.milliondollarjourney.com/tax-free-savings-account-tfsa-%E2%80%93-how-should-we-use-it.htm .

I can’t help you with ETFs, though. I don’t buy them. They are designed as a cheap solution and for trading – both of which are not our main focus. We focus on quality, with “All-Star Fund Managers” that have beaten their index over long periods of time with solid investment strategies (so why settle for an index ETF?), and studies consistently show traders underperform (especially amateurs, but generally even pros).

Good luck, Ian.

Ed

Thank you for responding to my post. I it seems that I did not fully
understand all the ramifications of investing inside a corporation and I am
learning something new every day thanks to people like yourself . I will
definitely have toget back to my “advisor ” now and rehash some of his
ideas. It seems like I might not get any real gain by incorporpoating after
all. If I have to pay just as much tax in the long run it certainly seems
like a lot of work for little gain. My fault I guess for not investigating a
little deeper before jumping in :) My wife and I have ten thousand each we
can contribute into TFSA’s and this might be just as good as any investment
in the long run. I like the idea that the tax is already paid and you keep
all your money when you decide to withdraw it later. Thank you again for
your insight.
I am now thinking of dropping my return of premium and investing the monies I was using for this into a tfsa using etfs. Any ideas on this angle?

Ian

At 10% per month the long term is not really far away.

There may be more efficient methods but this was how my tax lawyer and accountant suggested that i go with it.

I am always open to suggestions, however.

While you are thinking about creating a corporation to put investments into, most business owners try to figure out how to get money OUT of a corporation! :)

The issue of investments in a corporation is usually for business owners that have a corporation and are trying to get money out. Setting up a corporation just for investments usually has more disadvantages than advantages.

The reasons for setting up a corporation for investment usually have to do with tax strategies like income splitting or with minimizing risk, because there are no savings on the tax on the investment income.

If you have investment income in your corporation, you will still pay the same tax in total as you would if you had it personally. The corporation will have to pay Part IV tax on any savings until it pays the investment income out to you.

In fact, Brian’s situation above is that he is fully taxed on his trading. He is not getting the 50% reduction for capital gains.

Investments in a corporation could be used to split income (dividend sprinkling), but there are other ways to split income on investments without having the costs of a corporation.

I don’t know why Brian setup his corporation, but he is trading Forex futures, so there is a possibility of losing more than 100% of his investment. It may that he is doing it to limit his potential loss to 100%.

Ed

You are not actually withdrawing money from your UL if you pledge it as security for a loan. All you would be doing is taking a personal loan – and using an asset in your corporation as security.

This kind of strategy may work occasionally, however in most cases, paying a bit of tax on the investment income is better than taking a loan and having to pay interest from then on.

If you want to take a loan against an investment, you should usually structure it so that the interest would be tax-deductible, which it would not be in this case.

If you want tax-free cash, just take a mortgage on your home instead – the interest rate would be lower.

The “return” on your critical illness policy is called “return of premium”. If you have no claim for 20 years, you get back the total of all premiums you paid.

The way they do this is to add an additional amount to the insurance (usually roughly doubling the premium) and investing the additional amount at a low rate until it accumulates the total premiums over the years.

It sounds good, but if you are any good at investing, you are better off just getting the insurance you need without the return of premium, and then investing the difference.

Your advisor will probably show you a calculation showing the rate of return is not bad, but remember if you do have a claim, then you don’t get your premiums back. But if you take the lower premiums and invest the difference, you will have that amount regardless of whether or not you have a claim.

If you cancel the policies, you will probably pay some fees. If you have not had them long, you will probably lose what you put paid so far.

Ed

I don’t do Forex, but I do a lot of short-term trading of equities; could I reduce or delay my taxes in a similar manner by opening up a corporation? Also, at what point (i.e. total income before taxes) would you recommend moving into a corporation structure? Should I just wait until the CRA stops letting me claim my profits as capital gains?

I do not require much salary these days, and would reinvest most of my profits to generate more income. Being taxed up to 46% for personal tax would hurt my portfolio if I ever got to that level.

Bob

I’d like to give some ideas. I’d need age, smoker, non-smoker. How much Money would you keep in the corporation etc. If you want, we can use a similar example (age wise,etc.)

Feel free to drop me an e-mail.

cheers,

Brian

I am working with a Dr. who is 57, his problem is to make this work, he needs about 15 to 20 years. Also, if the money is invested in the market then you are taking on too much risk. If we have another pull back like 2008, the numbers you see may not happen and you may not have enough time to recover.

I my case the Dr. will have to fund this (insurance) for 10 years. Draw down his RRSPs age 67 when he wants to retire. The insurance must be not touched for at least 15 years. His problem is he really does not have enough money to retire in 10 years unless the markets give him at least 7-9% guaranteed. So working to age 70 makes more sense. (which he does not like).

As far as the return of premium on the CI I’d pass on it. The odds of you getting something after 20 years is almost guaranteed. Remember you pay extra for it.
Also, I am a big believer in going permanent vs term on this…avoid term to 75.

To your question “would happen if I asked to drop out of my UL and critical illness and start with something else?” You may be able to modify what you have. If you pull the plug you most likely lose what you put in. If you want you can contact the insurance company directly and ask them, or drop me a line.

Hope this helps.

Brian

My advisor also set me up with a critical illness policy ( seems expensive) but he tells me I will get a return on my premiums if I stick it out ( 20 years) I am 58 now. I am starting to get cold feet I think.
What would happen if I asked to drop out of my UL and critical illness and start with something else?
Ian

Assuming that you meant me as Brian….yes my active business income is the result of trading only. That active business income is subject to the small business tax rules.

In my case I trade Forex only. I may hold a position for 30 minutes all the way up to a few months. The gain or loss is treated as active business income just as if I sold widgets.

Brian

The issue is complex and there are all kinds of strategies, but usually the best strategy is to look for ways to bleed cash out of your corporation at lower tax rates.

Investment income is essentially taxed at the highest rate until you pay it out to yourself personally, so there are major disadvantages for tax reasons of holding investments in the corporation.

In addition, you need to watch out for “Incorporated Senior Tax Trap”. Essentially any cash left in your corporation when you turn 65 and stop actively operating your corporation will be taxed at the highest rates when you withdraw it.

Once you stop operating your corporation, you can’t deduct salary or other income you pay yourself in your corporation, so about the only way to withdraw income is by dividends.

However, once you are over 65, dividends are highly taxed for most seniors by the various government clawback programs. For example, the normal 15% OAS clawback is taxed at 15% on the grossed-up income, which is a 22% clawback – in addition to normal income tax.

In total, the tax for a senior with money in a corporation that is not active can be 16% small business tax in the corporation + 22% clawback (at most tax levels below $105K) + 10% to 22% personal tax on the dividend = 48% to 62% total tax.

There are ways to reduce this effect with careful planning, but this the “Incorporated Senior Tax Trap” is a major reason that most people should bleed income out of their corporation while they are under 65 and still have an active corporation.

You can take out about $77,000/year (plus the deductions you have such as RRSP or Smith Manoeuvre interest) at tax brackets of 31% or less while you are under 65, which is probably less than the total tax you will pay after 65 on any withdrawal from your corporation.

Ed

Permanent life insurance is often recommended in corporations to get around the punitive tax rates on investment income inside corporations, However, universal life insurance is not competitive, except for people that already have a permanent insurance need. That means they need to know now that they will need life insurance for their entire life.

For nearly everybody, life insurance is only necessary for income replacement, so you can make sure those financially dependent on you will be okay if something should happen to you.

Very few people actually have a permanent life insurance need, so why pay the full cost of it, just so you can get tax deferral on investment income? There are other ways to get a tax deferral, such as corporate class mutual funds.

Whole life is even more expensive and is essentially a GIC-type investment, so is easy to beat over time with any decent equity investment. You can also get a corporate class bond fund to get similar benefits for a fraction of the cost and without all the restrictions.

Ed

So you are paying full business tax on your investment income, instead of capital gains, since it is active business income – is that right? Or are you saying you are getting the small business tax rate on capital gains income?

Ed

Using Universal life insurance for your corporation is a great idea…but my advice is to keep it simple GIC’s (about 4% or so) or bonds. You want to keep the money safe right?

Another idea which is also very conservative is participating whole life insurance. Over a longer period of time say 20 years, this works out even better than UL. The dividends for 2008 was over 7% no negative returns for this product in over 100 years. Since few understand this product is is not offered as often as it should be.

I may have confused others by using something that is specific to me. In my case I do exceed the 20 hours per week on trading activities and my hold time is usually between 2 hours and 2 weeks with a significant numbers of trades per month.

My situation has been reviewed by a national firm and at this time CRA has had no issues with it. And as for the planning opportunity that you mentioned it is the one that was also suggested to me.

However, as i stated i may have confused the intent of the original topic by getting too specific.

I STRONGLY caution anyone taking this position that it is VERY easy for the CRA to take the position that the income is passive income (especially if they see the capital gains exemption for $750,000 flowing through your personal return). Also all or substantially all (90%) of the FMV of the assets of which at the time is attributable to assets that are used principally in an active business… by the corporation. The CRA could argue that as a trader you do not need the entire working capital you have invested to operate the business (and as little as 10% extra could ruin you). Now, I have NOT looked at any case law to support or deny this fact pattern. However, I do find it to be an interesting topic.