Taxes and domain business? (1.Viewing)

Is it best to run as a sole proprietorship or start a company when selling domains? what works best for tax purposes in Canada? or do you make a change once you reach a certain revenue amount?

How you register your business is a personal decision, I like sole proprietorship because it is easy for beginners but remember to charge sales tax. Revenue Canada will eventually come calling if you sell domains in Canada and do not charge sales tax.

I think it is around 20-25k per year until in sales until you have to charge sales tax. If you do not then you have to pay all that tax back to revenue canada and it will eat into your profits big time.

I like collecting sales tax because it allows me to claim back the sales tax I paid on renewals.

MapleDots said:

How you register your business is a personal decision, I like sole proprietorship because it is easy for beginners but remember to charge sales tax. Revenue Canada will eventually come calling if you sell domains in Canada and do not charge sales tax.

I think it is around 20-25k per year until in sales until you have to charge sales tax. If you do not then you have to pay all that tax back to revenue canada and it will eat into your profits big time.

I like collecting sales tax because it allows me to claim back the sales tax I paid on renewals.

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The threshold is 30,000. More details here.

Incorporating can potentially also protect you more in case of any potential liabilities, but I mostly did this due to the consulting I offer rather than the domain trading.

I imagine if you're just doing domain sales only and maybe a little affiliate selling, to keep it sole proprietorship, and if you reach the annual sales threshold start collecting the GST/HST.

But there must be a certain point where it becomes worth incorporating or going to the next level.

For example, if you're young, or maybe the stay at home person or lower income person in a relationship, you can do domain sales and be in a lower tax bracket.

If you have a full time job at high xx,xxx or low xxx,xxx and are doing domains on top of that, you are looking at paying what, like 30 to 45% of every domain sales in taxes.

I imagine a fully incorporated business could protect from those taxes, but then you have more filing and accounting to do, and if your domain sales years are up and down that might not be worth it at times either.

Just looking for some ideas of what people think is best, or the best options.

well I've always been incorporated too, so here's what I've experienced:

Incorporation Cons:

- business bank accounts in USD & CAD, so monthly bank fees.

- corporate tax filing, accountant fees can be $1000+ depending.

- CRA may tell you to pay monthly tax installments based on previous year's income, so you may not even be making income this year and yet they're telling you to make installments. Sales are streaky after all... I have just always ignored those though and pay up at the end of each year.

- Collecting GST/HST could be considered a con because it forces the buyer to pay more for your domain. In theory they too get the money back as a GST credit paid, and big companies don't balk at this. But its sometimes a mental barrier for smaller buyers that they're paying more, which you in turn might be inclined to lower your price to make a deal. That's why I only negotiate on selling price, and in the initial discussion, I always say the price is $$$$$ plus GST or HST if applicable.


Incorporation Pros:

- You will pay corporate taxes on profits, but can leave profits in the company to invest or hold. As a sole proprietor, I believe you have to declare it all as income every year. So if you have a primary job and you score a 6-figure sale on top of it, you will get bent over by the tax-man as he screws you and simultaneously steals all the cash from your wallet.

- If you want to take profits out, you can take it as a dividend rather than wage/salary/etc, avoiding some extra taxes.

- Get a GST # and you get credit for all the GST you pay on domain renewals and purchases, against any GST you collect on sales. If you're acquiring more than you're selling (or your big sales are US based and therefore didn't collect as much GST as you paid out), then CRA will send _you_ a check for the difference.

- Of course you can write off expenses, such as home office space, utilities, internet, cell phone, etc... but I presume you can do that as a sole proprietor too.

- If you've been doing this a while, you already have assets. So when you incorporate, any money or domains given to the company to get started would technically be personal assets that you transfer in, which is basically a loan. You'll want to value those assets with a reasonable value that you can document, like, maybe do the GoDaddy valuation, take a PDF of it and store it. That might be too generous, but you can say its wholesale value is say 25% or whatever you feel you can justify. Anyways, discuss that with a tax guy and _document_the_heck_ out of all your assets you're putting into the company. Then, you get to take all that value back out of the corporation, tax free, at your convenience, because it was all just a personal loan. Technically I guess the company would be buying the domains from you, and putting it on the books as debt owed to you. For an established domainer who isn't incorporated yet, this could actually be a big tax win, as you'll be forced to valuate your portfolio at a wholesale price which hopefully will be much greater than your actual price (since you may have been sitting on some of these for a decade or more). This is all just thinking off the top of my head here, I've never done this, but now that I think about it, I don't know why this wouldn't be legit. Dang, not a bad idea for anyone not incorporated yet but that has a big portfolio. If anyone discusses this idea with a tax guy, let me know because now I'm curious what they say.

As a sole proprietorship, the domain revenue counts as income for the year. So if you already have a good full time job, at some point if you're getting well into xx,xxx sales revenue in a year, you could be paying 35 to 45% of every dollar in domain revenue in income tax. So great you sell a domain for $10000, but $3500 to $4500 is going to the government. Sell that great premium name you've held onto for so long for $100,000? $40,000 of it goes to taxes.

If you are doing high revenues every year ofcourse it probably makes sense to incorporate, but wondering if incorporation is worth it anyway even if you have low xx,xxx sales years? And say your renewal fees are about $10k per year.

As a sole proprietor with a business number, all my domain revenue counts as income so I just have an accountant do it which is about $700/yr. On top of that no other real costs to sole propietorship, collecting gst/hst and filing is just a time thing you can do on your own.

To fully incorporate and maintain that each year, what does that cost around?

How do the taxes work with an incorporated business, as you said you can leave profits in the business? For personal income tax, you could be paying up to 50% of domain revenues as taxes if you're in the higher brackets, and it's probably going to get worse.

if you are paying high taxes on domain revenues as a sole proprietor, one tool you have is to make an rrsp contribution to lessen the blow.

Old topic, but how do you guys do the Tax calculations as a Sole Propreiter? This would be very different for Incorporated biz.
Tax on "Total Revenue - Expenses (including new acquisitions/renewals, marketing cost if any, other misc. expenses)" = Profit?

There’s no clear cut way to do this. On a sole proprietorship it can be done by revenue - expenses I guess. On a corporation there’s multiple ways of doing it. Still don’t know what’s right or wrong but consistency is the key. I also let my accountant handle it.

Bennett G. said:

Old topic, but how do you guys do the Tax calculations as a Sole Propreiter? This would be very different for Incorporated biz.
Tax on "Total Revenue - Expenses (including new acquisitions/renewals, marketing cost if any, other misc. expenses)" = Profit?

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For me....

All my sales minus all my expenses is what I claim as income from domaining.

Because I have a number of businesses I just add the total income from domaining onto my income from my online store.

My accountant treats my domain registration costs and domain buys as 'inventory' I carry from year to year, much like a clothing store keeps an inventory. Even though those total costs change year to year, but not much because I don't drop a lot of names year to year, or buy a lot of names year to year. before having an accountant I used to do the same thing, domain sales minus domain costs equals my profit or loss. maybe it ends up in the same way. if you use part of your house for your domaining, and monthly internet cost, computer cost, etc, all those can be part of your deductions. Worth looking into, however really with just an internet connection and phone you can do domaining if you're mostly parking, buying and selling your names. So I don't find there's too much I can deduct.

Also if domaining is a side thing for you, and you have a good paying day job that is upper 5 or six figures, you soon see that if you make $10,000 profit on a domain sale, then you are paying tax on that at your highest bracket, so goodbye to $3000, $4000, $5000, or whatever your highest bracket is. Takes away a bit of the excitement on a good domain sale, and almost makes a $500 or $1000 sale not so attractive. Though there are things like RSP contributions you can do to lessen the blow. All this is assuming sole proprietorship. If you actually register as a business and do it that way you can probably lessen the tax burden (I'm told), but that brings additional headaches. I think if I was making high 5 or 6 figure profits on my domains year after year, it would be worth going the business registration route. Then you probably pay lesser tax, can keep the money in the business, pay yourself a salary or dividend in a tax efficient way, etc but as I said, additional tax and administration headaches if it's only for domains. If you already own and run a business, you can probably fold the domains into that with little friction.

Personally for me [notify]domains[/notify] it was a smart move to go corporate because the big advantage is carrying losses forward and gains that don’t really have to be pulled from the business to pay tax.

The real costs of a corporation is the bookkeeping and accountant fees. Once you get past that it’s always a win in my opinion to have a corporation. Also it allows you to protect your personal assets as they are no longer owned by you but the business.

What value of annual domain sales do you think it makes sense to go corporate?

I’m not sure there’s an exact magic number but I would say mid 5 figures would be enough for it to be worthwhile.

Also, if you wish to do it in the future you can always open up a corporation once you sell a domain for a hefty amount. You can treat them separately if you wish. I know my accountant suggested that also. I just prefer to have one company carrying all the domains to be able to show the history etc in case I ever get a full blown audit.

What would be the costs to incorporate in the first year? I imagine after the first year it would be less once it's set up.

Incorporation is relatively cheap. A few hundred dollars. It’s the yearly accounting fees. Depending on the cost of your accountant it could range from $1,000-$3,000 yearly for their bookkeeping and year end taxes. The more complex the more you pay. That’s generally how it works.

That doesn't sound too bad.

theinvestor said:

Incorporation is relatively cheap. A few hundred dollars. It’s the yearly accounting fees. Depending on the cost of your accountant it could range from $1,000-$3,000 yearly for their bookkeeping and year end taxes. The more complex the more you pay. That’s generally how it works.

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Great thread so far guys

As for an accountant, is "domaining" an easy business for them to understand or do you have to educate them? Are there Canadian accountants that specialize in this?