# When to consider incorporating



## cloud72 (Aug 15, 2020)

Hi All,
I quit my job November last year and developed an investing strategy to make a living on the stock market.

-$370k CAD capital.
-US market only.
-Passive part: $250k CAD in ~30 hyper growth stocks.(e.g. ZOOM Video,DataDog, Cloudflare, GooseHead, Kinsale) I hold these for long term gain.
-Active part: $120k CAD: high yield cash secured put selling (Deep out of money with significant margin of safety).

The premium from put selling provide income to pay for my living expenses and add some saving.
I am able to get 50%/year return on the put selling. This is only possible in US market with the high liquidity and large diversified economy. In Canada market, not much opportunities. e.g. One of the best opportunity, a good put selling candidate: Lightspeed. It can only provide 30% per year return.It's below my target return of 50% per year. Canadian economy just lack diversified industries. I've been selling monthly cash secured put since end of march. Net worth is up 15% since Dec, 2019. So don't question my strategy. This is just a tax question.

This year, I'll make approximately $60k CAD from monthly put selling.I already made 38k CAD in put premium since end of march. I assume it'll be considered capital gain. So it'll be 50% taxed.
My living expense is quite low and I can compound half of the gain and put most of the another half into cash in bank saving accounts.
So 60k/year income compounds at 25% per year will become 180k per year income in 2025. I will also sell some growth stocks each year. So I might end up making $200k cad in capital gain in 2025.

Q1.So at what income level should I incorporate to minimize tax ?

Personal tax: it gets painful at 100k income. average tax rate : 27.7%. I believe it tops at 50% tax rate?
It's amazing I'll soon pay more tax without job than having a job. My last job pays me only 42k before tax.


Corporate tax rate:
50% on investment income regardless if it's small business or big business?
If it's also 50% tax rate, what's the point to incorporate?

Q2. Also, I am considered retired??? or self employed at this point? I don't work for a job for somebody but I make substantial capital gain from stock market each year. I don't want to say I am retired because I am working from home for myself.


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## james4beach (Nov 15, 2012)

cloud72 said:


> Net worth is up 15% since Dec, 2019. So don't question my strategy. This is just a tax question.
> . . .
> So 60k/year income compounds at 25% per year will become


I *am* going to question your strategy.

You are talking about making 60k income on 370k of capital, a yield of around 16%. That is clearly not sustainable. There's no way you can preserve capital over the long term while continuing to generate this income.

Instead what will likely happen is that you can generate this strong "income" as long as the market moves in your favour. Then once the market moves against you (falls), you would probably keep trying to extract 60k "income" which will severely erode your capital. If you get a stretch of bad years, you will likely see your capital rapidly decline.

I believe you are extrapolating way too much from short-term investing activities.



cloud72 said:


> I make substantial capital gain from stock market each year.


You say "each year". How many years have you done this?

Tax advice: It sounds like you've been doing this for just 9 months so far. I would not rush to overhaul your whole tax situation (and stop working) based on such short term results. Forming a corporation involves a lot of overhead work and you probably shouldn't rush to incorporate.

Doing all of this as personal capital gains and losses might be an advantage for now, especially if you get some bad capital losses, since then you can carry them forward forever.

But more importantly, I would take a serious look at your overall plan and ask if it's really a sustainable alternative to regular employment.


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## cloud72 (Aug 15, 2020)

My question was when to incorporate. Your reply certainly did not add value to this thread.

P.S. I don't believe this year is a good year for stock market.
You don't understand option can be very agile and target profitability is reached if stock price doesn't drop to my strike. 35% drop in SPY is nothing. Last month, I had a stock which dropped -60% after I sold the put and I still made money meeting the target 50%/year return on the sold puts. Predicted volatility is fluctuating. It can go extremely high thus high premium and then back to the mean thus average premium.


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## james4beach (Nov 15, 2012)

cloud72 said:


> My question was when to incorporate. Your reply certainly did not add value to this thread.


My view on this is: don't incorporate. These kinds of results are unlikely to keep happening, and the cost of incorporation is not worth to trouble.

I think I added lots of value to the thread. I pointed out that an investor can't reliably (persistently) generate 60k income on 370k capital over many years.


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## Jimmy (May 19, 2017)

Some ideas

Q1 To become a business you have to be seen to be trading 'for profit' . The CRA may view your non option investments as investments for a capital gain - ie not business income as you are holding them and not actively trading them. 

Also as the article mentions, if you are a self employed business you may have to make CPP payments of 9% as a negative

You may claim the put trading as 'business income' on your personal return but not sure it is of any adv as you pay 100% tax on income.


Q2 Retired or not you still have to file a personal return for the capital gains or a business return for the income.

Here are some articles.






How should I report my online trading income?


<p>If you’re into online trading and watching the market everyday, you’re part of a growing number of Canadians who are managing their own investments. Online trading is a great way to build up your investment portfolio and generate some extra income, but



www.hrblock.ca













Calculating Taxes when Day Trading in Canada - FBC


Reporting online day trading income? A growing number of Canadians manage their own retirement portfolio and trade online every day. When you sell a security and make a profit, you realize a capital…




www.fbc.ca


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## off.by.10 (Mar 16, 2014)

The Dunning-Kruger is strong with this one. To educate, too late we are.


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## Just a Guy (Mar 27, 2012)

The government changed the rule on holding companie, its generally not worth if forms financial sense anymore. There can be reason, from an income splitting sense, by issuing stocks to various family members, etc. But filing taxes will cost you significantly more and you don’t save more than if you claim personally.


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## Eclectic12 (Oct 20, 2010)

cloud72 said:


> ... I assume it'll be considered capital gain. So it'll be 50% taxed.


Seems doubtful as it sounds more like income than capital gains. You'll have to check the factors used by CRA to determine which it is.








TaxTips.ca - Tax treatment of investments - capital or income?


TaxTips.ca - When are gains on losses on sales of investment considered capital gains or losses, and when are they considered income (100% taxable or deductible)?




 www.taxtips.ca





The upside of capital gains is that it's taxed at 50% with a downside of losses only available for use against capital gains.
The upside of income is that losses can be used against all income instead of being limited with a downside of 100% being taxes.




cloud72 said:


> ... Q1.So at what income level should I incorporate to minimize tax ?


Here's an article that goes through some of the pros/cons.


https://www.avalonaccounting.ca/blog/should-i-incorporate-my-business



'Course the other question is how the changes in the last few years that tax income within a corp from investments more heavily than regular business income affect or don't affect your situation. I haven't delved into it but my understanding it that more investment income means one starts to lose the lower tax rate.




cloud72 said:


> ...Q2. Also, I am considered retired??? or self employed at this point? I don't work for a job for somebody but I make substantial capital gain from stock market each year. I don't want to say I am retired because I am working from home for myself.


I'd expect self-employed, similar to a trader.


As I say - whether it really is a capital gain or income is likely to change things.


Cheers


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## Eclectic12 (Oct 20, 2010)

Jimmy said:


> Some ideas
> 
> Q1 To become a business you have to be seen to be trading 'for profit' . The CRA may view your non option investments as investments for a capital gain - ie not business income as you are holding them and not actively trading them ....


Maybe someone who has delved into it can update us on the details?

OOH, I have seen articles talk about a day trading being able to have some capital and some income transactions.
OTOH, the wording talks about having separate accounts for each type.


Cheers


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## james4beach (Nov 15, 2012)

Eclectic12 said:


> OOH, I have seen articles talk about a day trading being able to have some capital and some income transactions.
> OTOH, the wording talks about having separate accounts for each type.


From memory (something I looked into a long time ago), I think that there's some general criteria for calling yourself a trading business (self employment income). It might relate to active trading, how numerous the trades are, expertise of the trader, and the amount of time spent doing all this. But I think it's a grey area.

I realized significant losses on stock investments and I'd like to check if I can submit my losses as a day-trader (Business Income then with T2125). If yes, how?

You can then file T2125 and report either positive or negative self-employment income, which goes onto your main T1 tax return. There is no corporation involved with any of this. It's all on your personal taxes.

Filing as self-employment income is more work and the CRA is more likely to ask to see supporting documentation. I'm really not sure it's worth the extra trouble in this situation. Personal capital gains / losses are pretty sweet, with the lower tax rate on cap gains, and the ability to carry forward capital losses *forever.*

Personally I doubt that the CRA would look at an amateur trader as a situation which requires filing as a 'trading business'. Many people decide to become daytraders, do this for a while, probably file T2125s, then eventually have some bad losses (or lose their enthusiasm) and stop. Half the guys I knew in the early 2000s thought they were day traders.

This is a guess on my part, but I bet the CRA is used to seeing this since 2000 when it became fashionable. They probably see it more of a hobby than a bona fide business.


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## OptsyEagle (Nov 29, 2009)

It doesn't really matter whether he is called a trader or an investor, I can not see an advantage to incorporating the type of activity he is doing. He would not be eligible for the small business tax deduction and I can't see any other tax advantage and I doubt he would have much liability protection either. He might even find that the brokers have an issue here or there since his trading activity would require the use of a margin account. I don't know if brokers have any special rules with corporations and margin accounts but he would want to find that out for sure.

Anyway, from what I see a corporation would just create hassle and an extra tax return which if he does not do that himself is costly as well.


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## Eclectic12 (Oct 20, 2010)

james4beach said:


> From memory (something I looked into a long time ago), I think that there's some general criteria for calling yourself a trading business (self employment income). It might relate to active trading, how numerous the trades are, expertise of the trader, and the amount of time spent doing all this. But I think it's a grey area ...


The point is not what you call yourself but what CRA applies the criteria to determine you are. Where CRA's application of the criteria results in a different classification than one reported - it can get expensive.

As for the criteria ... I guess you didn't look at the tax tips link provided as the criteria which includes things like short periods of ownership or security transactions form a part of one's ordinary business are listed there. It also says in the same article that the ‘Election to Treat Transitions as Capital Transactions' Form T123 is for Canadian securities only, where as I understand it, the OP says they are mainly in the US market.




james4beach said:


> ...Personally I doubt that the CRA would look at an amateur trader as a situation which requires filing as a 'trading business' ...


I suspect if CRA investigates - it will be because they think they are being cheated. I doubt they care about "amateur" or "pro" but will apply the criteria to justify what they suspect.

A quick look at the list suggests to me that four or five of the eight criteria are met with another two that arguably might be met as well. With those numbers, I'd want some expert help.


Cheers


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## cloud72 (Aug 15, 2020)

When I used the online after tax calculator to check the after tax income, I mistakenly used a calculator which only accept employment income. And I entered the capital gain as employment income. So the result scared me.
I found another one which allowed me to enter capital gain on a separate line and the average tax on half million capital gain is just 20% which is very reasonable. (Half of 40% tax).

I wonder if CRA will try my put options income as business income. I sell around 50 puts per month on various stocks. I kept changing the stocks depending on their change on volatility.

Anyway, I agreed I am thinking too ahead of the game. If at one point, CRA starts to treat short put income as business income. Then I will start to worry. Until then, tax rate on capital gain is not too bad.

I found this on Taxtips.ca: "Gains or losses realized by a writer (seller) of  naked (uncovered) options *are normally treated as income*. However, according to  IT-479R Transactions in Securities (Archived), paragraph 25(c), *CRA will allow these to be treated as capital gains, provided this practice is followed consistently from year to year. "*


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## Afp (Mar 19, 2013)

You are awesome! I think you already know about this topic more than anyone who has given their 2cents above. LOL ... 

People like you are extremely rare on this board. I had this exact same question many years ago but couldn't find satisfaction answers from anyone around me (in real life of course). Fast forward today, I am the owner of my own corporation though for completely different reasons and purposes.

You got it right. In your case, there is absolutely zero benefit to incorporate. Unless you employ over 4 full-time staffs, you won't have access to business deductions which are bread butter and your income will be considered as passive investment income, thus, heavily taxed. It's funny how they call this income as passive investment income though you clearly have to actively earn it. 

The road you take is a tough one. Somewhere I learned "if you don't want to be like the 99%, you have to be able to do what the 99% can't do".

I sincerely wish you good luck. We can revisit this topic in 5 years or you let me know when you hit the 7 digits milestone.


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