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Bring the Compass on your Hike. Why should you plan twice?

By: Shawn Todd, CFP

Just before the New Year of 2023 – I was fortunate enough to go for a short adventure trip with my wife Michele, where we planned to do some extraordinary hiking in Arizona.  The first thing I did when I packed for my trip on the days we hiked – was making sure that I had packed a GPS, a compass, enough water, and had a plan.  It sounds simple, but you’d be surprised on how many people venture out with just their shoes.  I saw many with no gear, or the wrong gear.

Some short stats:

  • 57.8 million hikers every year in the US.
  • There are 4 deaths per 100,000 hikers
  • 70% of hikers who die are male

Looking at these stats – right away it becomes a very good message to me that not only should I be careful, but I should always be packing a compass.  I’m male, I hike, I Iove my wife and family, and I’m planning a hiking trip.

When it comes to our personal lives, and our business lives, it’s very easy to overlook what you need to be packing in your ‘day to day’ backpack.  It’s very easy to be comfortable with life ‘as it is right now’. The home & your after-hours routine, and your work & your normal ‘day at the office’ routine all flow one day to the next without any issues.  Sometimes we neglect how each of these affects the other. How impactful our personal lives are with our work, and how significant a role our work plays in providing comfort in our personal lives.

 

 

The merging of our personal and business lives give way to four key themes on this Venn diagram above. These dual areas are:

Time – how much time can we spend with our loved ones, what kind of quality time is it?  How much flexibility does our business provide us, how hard have we worked to have it be this way?

Security – Our business without questions provides the security for us to make decisions that affect our spouse, our children and ourselves.  Where are the children going to post-secondary school?  Do we need to have two incomes or just one in the home? What will happen if one of our family is sick and needs care? Does our life feel safe and secure?

Income – We all start off with a life wanting to not be only concerned about money.  You may be more interested in your community, in charity, in just time with loved ones.  The income that comes in now, and the income that may or may not come in – if you weren’t working – will impact most of the decisions we make with the other three areas – time, security, and our goals.

Goals – This is where it’s always interesting.  Every single person has different goals, different needs, and different wants.  Spending a great deal of time here, really helps with a good foundation to mapping out where we want to go in life [and mapping out what trails we want to explore on that hike]

Many times, when we meet new clients – and we ask – “would you like us to spend time doing financial planning for you personally, and also for you corporately?” they may feel initially positive about it, but also feel slightly tentative about planning twice.  Why would I need to do this?

Some more short stats:

  • 96 percent of small business [with 1-100 employees] survive for one full year
  • 70 percent of small businesses [1-100 employees] survive for five full years
  • There are over 1.3 million businesses in Canada with employees
  • Small businesses provide over 70% of the total private labour market
  • A healthy growth rate for a small business should be between 15%
  • A business will double in 5 years at a 15% growth rate
  • 350 people out of 100,000 [ages 45-49] will be diagnosed with Cancer [87 times the chance of dying hiking]
  • 1,000 people out of 100,000 [ages 60 and older] will be diagnosed with Cancer [250 times the chance of dying hiking]

Spending time planning can’t take away all the risks of business failure, of financial stressors, or of getting a critical illness that impacts your business. It certainly can help make you aware of your blind spots.  Having an opportunity to see the risks, whether they are in your investment portfolio, in providing enough retirement income, or possibly in your business structure – really help make you more aware of your current situation, and your future situation combined.  You wouldn’t go on a hike without the proper gear, and I wouldn’t suggest you tackle life and business without the proper gear.

Take the time to review your own strategy and plan. If you’re unsure on areas, or need guidance, consider having a finanical plan completed, or updated.  Keeping both your personal and corporate worlds safe is key.  If you need to pack a compass to stay on track, I’d certainly recommend doing so.

Just my thoughts for the day,

Shawn Todd, CFP

EMPLOYEE COMPENSATION – What is Fair?

By: Brian Adams CLU, C.H.F.C.

Every employer wants to fairly compensate their employees well. At the same time, they do not want to give away the farm as the expression goes.

When you pay an employee with salary, there are a lot of additional costs that comes along with that in the form of, such things as, EI, CPP, WSIB, and payroll tax. This means “that raise” ends up costing you more than what you originally intended.

There are also additional costs that are passed on to the employee as well, such as EI, CPP, and income tax. The tax factor becomes greater for the employee, meaning he/she does not get the intended benefit you wanted them to receive. So, imagine what they think of your raise now?

Also, keep in mind that CPP and EI costs are going up for 2023 for both parties. Here is an excerpt from the CTV news release published on Dec 30, 2022:

CTV News – Published Dec. 30, 2022
Higher Payroll Deductions
Canada Pension Plan (CPP) contributions and employment insurance (EI) premiums are increasing in 2023, meaning less take-home pay for Canadian workers.
The employee and employer CPP contribution rates will increase to 5.95 per cent in 2023 from 5.70 per cent in 2022, the Canada Revenue Agency announced in November.  Click HERE to read more on this.
That means the maximum employee contribution to the CPP plan for 2023 will be $3,754.45, up from $3,499.80 in 2022.
In a separate notice, the federal government said that changes to employment insurance rates will result in workers paying a maximum annual EI premium of $1,002.45 in 2023, compared to $952.74 in 2022. Click HERE to read more on this.

Well, there is a way to offer your employee more whereby it is a win/win situation for both parties:

Employee Benefits!!!

When you, as an employer, contribute that same amount of money to either a group or pension plan, the employee gets the full benefit you intended and there are no other costs to you (other than the 8% Ontario sales tax on the premium). And even better news… your whole contribution to the benefit package is a write off for the business!

Book an appointment with us to discuss setting up an employee benefits plan for your business!

Getting Money from your Corporation

Executive Summary

There are numerous ways to take money from corporate earnings while keeping your tax bill to a minimum. Often, business owners opt to receive a portion of corporate earnings through a salary. While others opt to extract profits using a mix between salary and dividends.

Finding the optimal combination to maximize your tax savings depends on many factors including (but not limited to) your cash flow needs, income level, payroll taxes on salary, or the corporation’s income level.

Understanding the tax treatment of payments is important as you want to ensure that the maximum amount of funds is left to be invested back into the corporation.

Earning Options

Paid-Up Capital: If you funded your corporation with a large sum of capital, you may be able to extract funds tax-free by reducing the corporation’s paid-up capital; essentially this is the amount of capital contributed in exchange for shares. Typically, you are allowed to pay shareholders any amount less than the corporation’s paid-up capital without tax consequences.

Repay Shareholder Loans: Another option to receive corporate funds is to repay shareholder loans. If you loaned funds to your own corporation, you are entitled to receive any amount of repayment of the loan tax-free. You may also arrange to have the corporation pay you interest on the loan. Taxation of the interest income is about equivalent to the taxes deducted if the corporation paid you a salary.

Passive income: Investment income earned inside your corporation is classified as ‘passive income’ as it is not generated by direct business operations. The combined tax rates are over 50%, depending on your province of residence, on the taxable portion of earnings. In the case of interest, that is the entire earned amount. For capital gains, half of the gain is subject to the combined tax rate and for dividends the rate is 33.33%. All three of these rates are higher than the highest marginal rate for individuals. Subjecting passive income to higher tax rates within a corporation can lend some benefits like:

  • Building your nest-egg inside the business to fund future expansions
  • Cover short-comings during difficult periods
  • Facilitate borrowing

However, the largest risk with this option lies in losing the capital gains exemption on the sale of shares of a ‘qualified small business corporation.’ As the invested assets build over time, and operating assets decline in value thanks to depreciation, the asset mix could be lopsided. To have the capital gains be exempt, the ‘passive’ invested assets cannot exceed 10% of the fair market value of the corporations’ assets.

Lifetime Capital Gains Exemption (LCGE): For 2021, the LCGE limit per person is $892,218 and is indexed to inflation. This means a married couple who both own shares and can both utilize the exemption could shelter $1.784 million from taxes. Farms and fishing operations that qualify have the individual limit of $1 million per person, allowing a couple to shelter a maximum amount of $2 million. Depending on your goals, a short-term increase in tax and the professional fees associated to establishing the appropriate corporate structure could save you significant amounts of tax in the long run.

Maximizing Capital Dividend Payments: When you have a capital gain, the untaxed portion (one half of the gain) is added to its capital dividend account. The corporation can pay any amount from this account to your client without attracting personal tax. Although this is likely your best option, you must ensure that you make the appropriate tax deductions and remember to file the directors’ resolutions with the CRA.

Bottom Line

Every corporation is going to present varying degrees of needs. When it comes to determining how to pay yourself, be sure to be well informed before making any final decisions. Of course, consulting with a financial expert, like myself, can prove helpful. I encourage you to get in touch with any questions or concerns or to simply learn more.

Book an appointment to discuss how you can get money from your Corporation – Book Here

What Business Owners Need to Know About Health Spending Accounts

Employers are always looking for an edge when it comes to attracting new talent and offering comprehensive employee benefits is one of the best ways to do so. Health Spending Accounts, also referred to as Private Health Services Plans, offer both business owners and their employees a flexible health benefits solution that can work as a replacement or compliment to traditional health plans.

What You Need to Know

  1.  How It Works – A Health Spending Account (HSA) is an account with a predetermined dollar amount that employees can use to cover health expenses that are not covered by their traditional health plan.  The amount in the account is predetermined at the beginning of the year by the plan sponsor (employer).  The employees may apply to be reimbursed for eligible medical expenses for both themselves and their dependents.
  2. What It Covers – Eligible expenses are determined by the CRA. The general rule is you can claim anything that can be claimed as a medical expense by the Income Tax Act. An HSA is available to cover unpaid balances that are not covered by your health plan, governments plans, or your spouse’s plan. For example, the HSA covers services such as vision care, dental care, and drug expenses that are not otherwise covered (such as fertility drugs).
  3. Tax Implications – Businesses may deduct HSA payments made on behalf of employees and their dependents.  Benefits are received tax free by the employees. There are different rules for HSAs for incorporated and unincorporated businesses:

Incorporated

  •  The Income Tax Act does not place a limit on the amount of deductions allowed for HSA premiums in a corporation.
  • Can be set up with only shareholders as employees
  • Payments for medical expenses may only be received by the shareholder as an employee
  • Shareholder must be actively engaged in business activities.
  • Benefits must be reasonable and be consistent with what would be offered to an arm’s length employee.

Self Employed or Partnership

  •  Expenses may be deductible if:
  • Individual is actively engaged in business
  • In current or preceding tax year, more than 50% of income is from the business or individual’s income is less than $10,000 from other sources.
  • Health Spending Account may not be accepted by CRA if the self-employed individual does not have at least one arm’s length employee.

The Bottom Line

Health Spending Accounts are a useful and beneficial tool that can be used by business owners to supplement their employee’s health coverage. Health Spending Accounts can help business owners budget their yearly expense more effectively as the cost of the plan is determined by the business owner, rather than traditional health benefits which have increasing yearly premiums based on claims.  It is important for business owners to pay close attention to the CRA rules surrounding HSAs to ensure that they are eligible for the deductions that are offered to plan sponsors.