October 5, 2009, 5:00 am

Spending Money with Before Tax Income

by: The Financial Blogger    Category: Business,Make Money Online
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autumn-roadUsing little more than your imagination, picture this: you wake up in the morning, pack your bags and you and your spouse leave with house. You drive for about an hour far enough from your house to forget about your troubles. When you exit the highway, you enter a smooth and comforting landscape covered by red, yellow and orange maple leaves. A few mountains capture your vision and you proceed through the mist of a beautiful autumn morning. When the car stops, you climb a few stairs to enter a marvellous property; high ceilings (some 20+ feet high), a huge window accessing the clouds and furnished with modern, zen pieces. At the front desk, the young, pleasant staff take your luggage and welcome you with a fresh bottle of spring water. You pass the second door to get changed and you finally arrive in today’s version of nirvana: a high class spa!

The day is spent going from sauna to a hot tub then cold water dip and repeat, enjoying a nice, light duck and cheese salad before receiving your massage. The day would be considered perfect when you finish it in a 5 star hotel with a 7 course meal (complimented with a few choice bottles of wine of course). This sounds like the perfect holiday, doesn’t it? The perfect weekend escape from real world irritants like traffic, measured results and constant pressure. It is almost perfect… it is actually 832 dollars and 59 cents away from being perfect. And this is why we, mere mortals, can’t really afford this kind of weekend unless it is a very special occasion (like when you win the PowerBall lottery!!). This is also why you need a connection with an immortal to pay for such luxuries.

Am I talking about a spiritual force? Did I inherit from a long lost uncle? Nope. I am talking about having a company spend cash with before tax income! Since companies can survive their owners, they are technically immortal ;-).

If you wanted to spend $800 on a spa weekend, it would come directly from your net pay cheque. Therefore, you need to earn $1,333 using a marginal tax rate of 40% to have $800 to pay for your weekend. If you are lucky, your insurance benefits may reimburse a part of your massage costs but you still have to earn more than $1,000 to be “so romantic” ;-).

Let’s look at the same situation considering a company tax structure. The best thing about a company is that it pays its expenses with their gross income. Since a company has the right to have 1 congress per year (also called annual meeting), you are allowed to setup this kind of weekend once a year without much trouble from the Canadian Revenue Agency. So instead of paying taxes, you provide yourself with a nice weekend AND deduct your expenses from your gross income. Therefore, if your $800 will result in a tax savings of $160 at a 20% marginal tax rate (known as the business small rate).

But the dream doesn’t stop there! You are also allowed to recover taxes as well (GST and PST if you live in Quebec). Therefore, your company will also receive a cheque of $100 in tax returned (about 14% in Quebec, it can be different depending where you live). Can life get better? If your insurance covered the massages, you just saved another $70 per person 😉

So, an $800 expense in a company structure can result in:

– saving tax for the amount of $160

– receiving a tax return (GST and PST) of $100

– receiving an insurance cheque of $140 (the $800 cost was for 2 people).

Real cost of the adventure: $400 real and net dollars compared to $1,193 (considering your still receive the insurance cheque)… no wonder companies can grow and make money more than mortals!

The secret of the wealthy resides in an absolute force of the nature: tax laws! If you find a way to spend your money with before tax income, you can almost double your income each time!

image source: Ronzzo

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Great article FB, very well written.

Thx MDJ!

So where I you going this year now that you have a corporation ? 😉

are there any limitations on this? Our prof. Corp. has a year end of Aug 31st…. going to vegas end of october… should we be having an AGM there?

I would discuss this matter with your accountant first. He told my I was entitled to a few hundred up to $1000 and it would make sense with the size of my business. Since we have been audited in the past and everything was in order, I trust him 😉

However, what you can do depends on how much your company declares in revenue (i.e. you can’t go on a world around trip of 25K if you company earned 30K the very same year).

From what I understand, an annual shareholder meeting is expected, even an annual Christmas party. I personally wouldn’t push it too far, but a nice dinner at an expensive restaurant would not be out of the norm.

by: The Financial Blogger | October 5th, 2009 (12:42 pm)

Just remember to put it as a annual shareholder meeting and not resaurant… laws regarding restaurant have changed this year.

Great article. I think everyone should check with their accountants first, but what you said at the end was what I think was the best line of all:

“If you find a (legal) way to spend your money before tax income, you can almost double your income each time!”

As a corporation myself, this was extremely useful information. 🙂

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