Legal structure for Canadian day trader with 1 million income a year?

[tonyzhou]

I think what you can do is, set up a corporation in a tax haven such as cayman, estonia, ireland or hungary, hire some locals, rent an actual physical office so that it's all legit. A P.O. box only won't cut it these days as the CRA will pierce the corporate structure and tax you as if you were still in Canada. Obviously, consult actual expert advice before doing this, but that's what I came up with after researching this a bit.

I consulted a local accountant firm. They told me that a corporation will work. For short term trading, it is income instead of capital gains. For SBD, the tax rate is 13%. So I can leave the money in the corporation after paying the 13% corporation tax, instead of paying the highest bracket personal tax rate.

I think incorporate in cayman may even better with zero corporate tax. So I only need to pay the personal income tax when I get dividend from the cayman corporation.

 

[cruisecontrol]

I consulted a local accountant firm. They told me that a corporation will work. For short term trading, it is income instead of capital gains. For SBD, the tax rate is 13%. So I can leave the money in the corporation after paying the 13% corporation tax, instead of paying the highest bracket personal tax rate.

That is true, however SBD is only good up to $500K. After that you pay full corporate rates.

I think incorporate in cayman may even better with zero corporate tax. So I only need to pay the personal income tax when I get dividend from the cayman corporation.

Be very careful with cayman or any other tax haven. You will need to be able to prove upto a certain standard that the activity actually happens over there and not in Canada. Like I said if you just have a P.O. box in georgetown, no actual office/employees there and you are resident in Canada, CRA will tax you as if the cayman corp is Canadian, and you will not be eligible for SBD either.

 

[toc]

I think what you can do is, set up a corporation in a tax haven such as cayman, estonia, ireland or hungary, hire some locals, rent an actual physical office so that it's all legit. A P.O. box only won't cut it these days as the CRA will pierce the corporate structure and tax you as if you were still in Canada. Obviously, consult actual expert advice before doing this, but that's what I came up with after researching this a bit.

Is there a time limit on this set up to avoid taxes or it can go on as long as corporation is active. Can the income be brought back into US or Canada and still be tax free. So basically rent an office and employ a computer literate guy and send the signals over a chat program to them to execute and it is all clear deal !!

 

[cruisecontrol]

Is there a time limit on this set up to avoid taxes or it can go on as long as corporation is active. Can the income be brought back into US or Canada and still be tax free. So basically rent an office and employ a computer literate guy and send the signals over a chat program to them to execute and it is all clear deal !!

You can pay yourself dividends from the company which get taxed in accordance with the laws of both countries, which generally means the higher of the two. So you can just pay yourself what you need to live (taxed at regular rates) while the company keeps compounding your big account with extremely low tax. Then once the account reaches your target, say $5M, you can liquidate the company and pay capital gains once over the entire amount.

As for sending signals, you could do it that way, even easier is if you are running an automated program on the company's server. If you have to rely on another human for sending signals you might have issues, plus you might not want to reveal how your system works.

 

[toc]

Thx very much for the inputs. So you pay capital gains tax to Cayman Islands or US. Is capital gains tax rate in Cayman or other tax havens is nearly zero?

https://tradingeconomics.com/cayman-islands/personal-income-tax-rate

 

[cruisecontrol]

Typically cap gains are paid where you are resident, but US citizens are taxed on their worldwide income, so if you are american, IRS is going to take a piece of that. US capital gains are pretty low though so it's not that bad really.

 

[toc]

Typically cap gains are paid where you are resident, but US citizens are taxed on their worldwide income, so if you are american, IRS is going to take a piece of that. US capital gains are pretty low though so it's not that bad really.

One more vague question: How much ball park would it cost to set up a corporation in cayman for example. Can a person just fly down and do the paperwork or would need 10-15K for a lawyer etc. Can the paperwork be done on the internet itself? also, being not too advanced in computer, how does the server mechanism work in order to avoid needing an employee to run the signals. Thx again !!

 

[cruisecontrol]

One more vague question: How much ball park would it cost to set up a corporation in cayman for example. Can a person just fly down and do the paperwork or would need 10-15K for a lawyer etc. Can the paperwork be done on the internet itself? also, being not too advanced in computer, how does the server mechanism work in order to avoid needing an employee to run the signals. Thx again !!

IIRC registering a corporation can be done online for a few hundred bucks, that is not the expensive or hard part. Office space, employees and accountants will be your main costs, you are probably looking at ~30K/year minimum to do a fully legit setup (20K for small office space, 10K for part time secretary to keep the company books and reports, 1-2K for yearly accountants fees).

As for the server mechanism, just have the corporation rent a dedicated server somewhere (doesn't have to be in cayman, I think) and run your trading system on there. The hosting company will take care of all the maintenance of the server for you and you just access it online.

PS. I just want to emphasize I am not an actual expert on this and this is just based on my understanding of what I've read online. If you are at all serious about doing something like this, absolutely consult with pro advisors, preferably one of the big four firms: https://en.wikipedia.org/wiki/Big_Four_accounting_firms . If you actually have enough money and are profitable enough to make such a scheme worth it in the first place, you can certainly afford professional advice.

 

[toc]

Thx for the inputs.

$30/yr. is a little hurdle for small joe but good part with cayman, bermuda and panama is a corporation can be set for as little as $1 capital. Others like Bahamas require $500K minimum.

 

[tonyzhou]

That is true, however SBD is only good up to $500K. After that you pay full corporate rates.

I am thinking to setup another one if income exceeds $500K. I think it should be easy for individual trader business.

One thing to mention is the TOSI rule. If spouse needs to get dividends but does not work for 20 hours per week on the business, tax would be much higher, my accountant said.