Top Ways To Avoid Income Tax – Part 2

This is part 2 of my series on the top ways to avoid income tax. In case you missed part 1, you can read it here.

The Principal Residence Flipper

I have a friend who likes to buy the cheapest house in the best neighborhood. While living in it, he would fix it up and renovate it. After the renovations are complete, he would sell the house and walk off with a gain of $35,000 to as much as $100,000. Then he would move on to the next one. In Canada, there is no capital gains tax on a principal residence (the house you live in).

My friend went around flipping principal residence after principal residence until the government finally had enough and tried to put a stop to it by requiring you to live in your house for at least a year before it can be call a principal residence. This didn’t stop principal residence flippers, but it did slow them down.

The US has a better deal than Canada. Mortgage interest is tax deductible and if you sell your principal residence and buy another one of equal or greater value within 180 days, there is no capital gains tax. It’s a fantastic way for build wealth tax free. When the time comes to finally take the money out, you can do the real estate equity play mention in part 1.

Earn Dividends Instead of a Salary

If you own your company, then you may consider paying yourself with dividends instead of a salary. Depending on the province you live in, you could earn up to $30,000 of dividends per year tax free. This is possible because of the basic personal and dividend tax credit, and the way that the tax rates are calculated.

Another advantage of paying yourself dividends instead of a salary is you don’t need to pay CPP (Canada Pension Plan) or EI (employment insurance) on the earnings. Chances are, the Canada Pension Plan won’t be around by the time your retire so why pay into it if you don’t have to?

The Perpetual Traveler

Canada taxes its citizens based on residence and not on citizenship. If you no longer live in Canada, you are considered a non-resident and therefore not subjected to Canadian income tax. You are a non-resident when you live outside the country for six months plus a day (you can live in Canada for up to 182 days and still maintain non-resident status). You are allowed to keep your Canadian citizenship if you become a non-resident. There are other rules to follow – simply leaving the country isn’t enough. Internet publishers are ideally set up to take advantage of this because we can run our sites from anywhere in the world.

By dividing your time between three or more countries, it’s possible to be avoid all income tax. For example, you can spend five months in Canada and then divide the rest of the time in countries that welcome Canadians without a visa – there are tons of them. The amount of time you are allowed to stay in each country varies. For example, Taiwan lets Canadians stay 30 days visa exempt while the US will let them stay six months. The US actually doesn’t care how long Canadians stay. Every time I go into the US, they don’t brother to stamp my passport.

The US taxes its citizen based on citizenship and not residency. It doesn’t matter where a US citizen is in the world, your income is taxable. However, Uncle Sam understands that if you’re not living in the good old USA, you should get a break. The first $75,000 of income is tax free if you become a US non-resident. This is one of the reasons why Mr. 4-Hour Workweek, Tim Ferriss, is now partying it up in Costa Rica.

Read part 3 here.