My 2006 Income Tax Results
March 24, 2007 Posted by Tyler CruzIn my post I Owe $30,000 to the Government which I made a week ago, I stated how I had visited my tax accountant and that we estimated I would owe around $20,000 (plus an up-front fee of half of that to pay for 2007).
Yesterday she had finished preparing my taxes and I went to pick them up. The results were better than expected 🙂
It turns out that my final owing figure came to $15,802.32, which is $4,200 less than we had quickly estimated, so I’m happy about that. Since they are so busy right now because of tax season, I’ll be going back in mid-May to see a different accountant at the office. He’s the corporate accountant and owner of the company, and I’ll be seeing him again to revisit the option of incorporating, among a few other things. I’ll keep you updated on that in May.
My tax accountant also gave me back my forms for my GST rebate. I had asked her to look over them and let me know what exactly I need to do. Remember when I bought my condo? Well since it was brand new, I had to pay GST tax on it, which is 6% of the purchase price and came to around $13,000. The Canadian government has a thing where I get a big chunk of that back, the only caveat being that it’s a bit of a pain and hassle having to fill out and send a bunch of forms back. I’ll be doing this soon, and I should be getting around $4,000-$5,000 back. Yay.. money. I need it.
Anyhow, immediately after picking up my tax and GST rebate documents, I went straight to the bank and paid the full $15,802.32 to the Canadian government. It took a little while because the young teller at the bank was confused. “You owe this much? For taxes? Hmmm…” I had to reassure her that is was correct, and that I was glad to pay only $15k instead of $20k!
So, my taxes are done, yay. I don’t have to worry about them again for another year. Here’s hoping I can beat 2006 in terms of revenue, in 2007. To be honest, I think it will be fairly difficult to do, but we’ll see what I can conjure up.
All of this recent tax stuff, though, had made me think about something. If expenditures such as labour are 100% write-off’s, why don’t I just spend all of the money I would have owed to the CRA (IRS in USA), back into my business? For example, say it was December 27th, 2006, and I had estimated that I’d owe $15,000 in taxes. If labour writeoffs are 100% deductible, why don’t I just spend $15,000 on hiring designers and programmers to build me something or enhance my sites before the year ends, and instead of paying the government the money, I pay it to myself?
I asked my tax accountant this question and she shrugged and said I could, but I still don’t believe it. I asked John Chow his thoughts, and he disagreed and stated there were some rules such as it woudln’t bring my taxes down to $0, as not all of my income is tax-deductible. I’m still very confused though. Especially since getting different answers from different people.
Robert Kiyosaki I believe talked about doing something similar in his book Rich Dad, Poor Dad. But instead of spending it, I think he talked about putting money away in temporary investments such as bonds. He wasn’t very specific in his book, as anyone who has read it will know.
But I’ll talk to the corporate accountant about this. He’s the expert in my city for corporate taxes; he has a very good reputation, and he should be able to help me make the most of my money…
We’ll see. Again, I’ll keep you posted in mid-May when I go to see him.
Until then, that’s another tax season done, and it’s back to making more moola!
12 Responses to “My 2006 Income Tax Results”
[…] My 2006 Income Tax ResultsI asked John Chow his thoughts, and he disagreed and stated there were some rules such as it woudln t bring my taxes down to $0, as not all of my income is tax-deductible. I m still very confused though. … […]
You pay tax on your net income/profit (revenue less expenses).
So in your case 85k-35k=50k
Assume a 30% tax rate so 50k x 30% makes your tax 15k
What you propose is entirely possible and legal but to get your tax down to zero you’d have to spend ALL of your income on hiring designers/programmers to do stuff, ie. spend another 50k not 15k!
Hope that makes sense, just remember deductions come off your total revenue, not your tax bill which is calculated last after all deductions/write-offs have taken place.
[…] My 2006 Income Tax ResultsI asked John Chow his thoughts, and he disagreed and stated there were some rules such as it woudln t bring my taxes down to $0, as not all of my income is tax-deductible. I m still very confused though. … […]
Hey
MD is right
The only way to eliminate your tax obligation is to completely eliminate your income.
‘100% write off’ is not against your tax, it’s against your income, so your income would drop from 50 to 35k (for example) and you’d have still have to pay tax on that 35k
MD is correct.
Matjnewton is partially correct. In Canada, for the 2007 tax year, your basic personal amount you can earn before paying federal taxes is $8,929.00. For BC (provincial taxes) for 2007, the basic personal amount you can earn before paying provincial taxes is $9,027.00.
TD1: http://www.cra-arc.gc.ca/E/pbg/tf/td1/td1-07e.pdf
TD1BC: http://www.cra-arc.gc.ca/E/pbg/tf/td1bc/td1bc-07e.pdf
To make this way easier, they have figured out the exact percentage average taxes you must pay on the first $37,178 to be 15.5%. See below link:
http://www.cra-arc.gc.ca/tax/individuals/faq/taxrates-e.html
So yes, if you were able to live off of $8,929, you could lower your taxes to zero by spending the money on business expenses that are fully expensed (not items that must be amortized).
“So in your case 85k-35k=50k
Assume a 30% tax rate so 50k x 30% makes your tax 15k”
SO you would need to spend an additional 50,000 – 8,929 = $41,071. So yah, if you wanted to spend an additional $41 grand, you could have paid no taxes.
No one can live off of $8,929 if they are paying a mortgage and living alone. The more realistic thin to do is to pay attention to the tax brackets, and perhaps use this knowledge to not be in the highest tax bracket next year.
But in order to save $15,000 taxes, spending $40,000 might not work the best unless you are heavily investing into your business to expand it further. In the end, the main point is to make plenty of profit… but profit is taxed. If you do make a ton of profit, then it is very wise to incorporate… Not only is the income taxes on Canadian business much lower for the first $350,000, but you can also pay yourself dividends (flat taxed!) and even pay yourself a small amount of money to lower your taxes to the optimal level!
Hope this somewhat helped.
Thanks guys, that helps a lot. Part of the problem is that, honest-to-God, my head is just having a difficult time wrapping itself around this. I totally understand this is like basic grade 7 math.. I don’t know.. brain just doesn’t want to co-operate.
I understand it a lot better now though, thanks. Mainly I try to think of:
“You pay tax on your net income/profit (revenue less expenses)….just remember deductions come off your total revenue, not your tax bill which is calculated last after all deductions/write-offs have taken place.”
However, what about this? Let’s assume the tax bracket doesn’t change and it’s at 30%. Could we not assume that anything you buy that is a 100% business expenditure, such as labour, can’t you really just consider that you’re saving 70% whenever you pay for such a thing? Or am I missing something again?
Thanks.
Tyler, how much do you pay your accountant?
Well for taxes I pay $250. For incorporating consultation, etc. I pay $25 an hour, but I wouldn’t be surprised if it’d be more once I do become incorporated.
$25 an hour seems like a deal, and $250 for it seems good too. I don’t know how many 1099’s you have or how that all works up there but down here we have to pay by forms, hourly, etc and I know I pay around $500 for my “tax guy” however he’s worth it!! It really PAYS to have someone who knows what you can do with your tax stuff.
Just discovered your blog, and am enjoying it so far.
Let’s see if I can explain this better in layman’s terms. Saying 100% deductible is confusing because you focus on the percentage portion, and your mind makes that the amount of tax you pay since we always talk about our tax bracket in percentage. Entirely deductible might be a better term, and it means you don’t pay taxes on the entire amount of the deduction. So if you have a $10,000 deduction that is entirely deductible, you get to reduce your taxable income by $10,000.
So to answer your question about savings, if you have a $10,000 deduction that does not change your tax bracket, and you are in a 30% bracket; then you would have paid $3,000 in taxes on that amount and that is therefore what is your tax savings. Or to re-express it in percentages, Percentage Deduction x Percentage Tax Bracket = Tax Savings; or in this case 100% deduction x 30% bracket = 30% savings. Therefore, if you are in the 30% tax bracket, you get a 30% savings (not 70%).
[…] 2006 Income Tax Results – Thats’ right. You need to do it, and I will start on it as soon as I have my paperwork straightened out. […]
Seriously dude
“I asked my tax accountant this question and she shrugged and said I could, but I still don’t believe it.”
Get a new accountant, the first thing you learn at university about tax is the way the taxable income and tax payable is derived, it is key to everything! These guys seem like ameteurs.
Goog luck beating your revenue figure for 07!