The Canadian Guide To Whether You Should Incorporate

The Canadian Guide To Whether You Should Incorporate

It all started about a year ago. Actually, probably longer ago than that, most likely. I’m not good at using calendars. I still think it’s 1952.

In an effort to save taxes, I started looking into the benefits of incorporating my small business. I liked the ability to retain earnings in the corporation, as well as not having to pay any CPP contributions.

At that point, I abandoned the idea, since all of my business revenue was coming from one source and the government tends to frown upon such a thing. I decided I’d rather be safe than sorry. The last thing I want to do is piss the government off. Those jerks know where I live, but they’ll never get my phone number. That’s why I change phones every week, like a drug dealer.

These days, things are different. I’ve successfully diversified to the point where only most of my revenue comes from one client, picking up a few additional jobs along my travels. So I went ahead and folded my writing into a corporation.

The rationale for doing so was simple. I wanted to save taxes. But was I really doing so, or am I just fooling myself?

Let’s take a closer look, using a corporation in Alberta as an example.

Assumptions

We’re going to assume somebody makes $100,000 per year in revenue with $10,000 per year in expenses as both a sole proprietor and as an incorporated professional. We’ll assume zero in GST paid or anything like that because no matter how you structure your company the government still gets their share of that.

(Shakes fist aggressively) That’ll show them.

First, let’s look at the tax situation of a sole proprietor in Alberta.

Revenue: $100,000
Expenses: ($10,000)
CPP Contributions: ($5088.60)
Operating income: $84,911.40

Tax paid: ($19,841)

Net income: $65,070.40

And now the same person after they incorporate.

Revenue: $100,000
Expenses: ($10,000)
CPP Contributions: nil
Operating income: $90,000

Corporate tax (AB): ($2,700)
Corporate tax (Can): ($9,450)
Total tax paid: ($12,150)

Net income: $77,850

HUZZAH! PLAY ME A NICE SONG, GLORIUS TRUMPETS. I HAVE SAVED YOU ALMOST $13,000 PER YEAR.

Uh, Nelson?

Stop it. I’m celebrating.

What if they wanted to take that cash out of the corporation?

Really? Do you have to rain on my parade?

I’m just saying it’s an important detail.

AND I’M JUST SAYING YOU’RE A BIG FAT TURD.

Italicized me is right, of course. Here’s how the tax situation differs when you take that cash from the corporation and put it in your back pocket.

You have one of two ways of doing this. You can do it as a salary, which is subject to normal tax rates or you can do it via dividends.

There are pros and cons to doing it both ways. The big pro to taking the cash out as salary is you get RRSP contribution room to go along with it. Utilizing that room minimizes tax in the short-term. Meanwhile, the dividend method results in a metric assload of reduced taxes.

Here are the two tax situations.

Salary

Net corporate earnings: $77,850
Personal taxes: ($17,688)
CPP contributions: ($5088.60)*
Net personal earnings: $55,073.40

*Some of this would be a taxable expense to the corporation, but like hell I’m going to try to figure it out. My brain already hurts.

As you’ll see, it costs a lot to give yourself the ability to make RRSP contributions.

Dividends

Net corporate earnings: $77,850
Non-eligible dividend taxes: ($9,346)
Net personal earnings: $68,504

So, to sum it all up, if you incorporate your business and then take the earnings out as dividends, you’ll put an extra $3,500 in your pocket each year compared to just running as a sole proprietor, at least according to my very specific scenario.

Remember, though, running a corporation comes with extra expenses compared to running a sole proprietorship. You have annual expenses to maintain a corporation. And accountants tend to charge more to do corporate taxes compared to personal returns.

So, in short, you’ll put some extra money in your pocket if you incorporate, but it’s also easy to justify not bothering.

How to put even more in your pocket

The nice thing about a corporation is you don’t have to take the money out immediately. You can leave it in there. This move alone can really help to maximize your income over the long term.

Say we use our example above. Instead of taking all $77,850 out of the corporation, say our employee only takes $44,000 out in dividends. This would lower his total tax bill from $9,346 to just $2,632.

Here’s how it would look:

Net corporate earnings: $77,800
Dividend taxes: ($2,632)
Subtotal: $32,500 (left in corporation)
Subtotal: $41,368 (after dividend taxes)
Total: $73,868 (total of the two)

There are a few problems with this scenario, of course. The first one is perhaps this person needs the full $77,800 to live. It doesn’t factor in any other tax considerations either. And why bother making $100,000 per year if you’re only going to take $44,000 out of the corporation?

Perhaps most importantly, you’re going to create a surplus of funds inside the corporation that could build up for years. This isn’t such a bad thing if you’re running a business that requires capital for growth. But what about a guy like me who’s limited to, basically, exchanging time for money?

I’m forced to invest that capital inside the corporation, which comes with much higher tax rates. Alberta charges a 12% corporate tax on investments while the federal government really wants to discourage investing inside of a corporation with a tax rate of 38.7%.

This is where things start to get too complicated for my layman’s knowledge of taxes. There are certain tax credits that apply to corporations getting investment income in each province. The fine folks at CIBC did attempt to tackle this question in this report I found while Googling.

Allow me to screenshot the results below after this little explanation. If a number is (in brackets) that means it’s a disadvantage to investing inside of a corporation. If the number is normal, it’s an advantage.

Screen Shot 2016-07-26 at 10.38.04 PM

So basically, as someone who’s from Alberta, it looks like any advantage I get from corporate versus personal taxes will probably get eaten away over time by these investment disadvantages.

What about Ontario?

Many of you live in Ontario. Allow me to see just how much of an advantage you’ll enjoy incorporation versus going the sole proprietor route.

Sole proprietor taxes:

Income: $90,000
CPP: ($5088.60)
Operating Income: $84,911.40
Taxes: ($19,016)
Total: $65,895

Corporate taxes:

Income: $90,000
CPP: (nil)
Operating Income: $90,000
Ontario corporate tax (4.5%): ($4,050)
Canada corporate tax: (10.5%) ($9,450)
Subtotal: $76,500
Dividend taxes: ($7,452)
Total: $69,038

Corporate taxes (if withdrawing $44,000 in dividends)

Subtotal: $76,500
Dividend taxes: ($1,221)
Total: $32,500 (left in corporation)
Total: $42,779 (dividend income after tax)
Total: $75,279 (total of the two)

Because Ontario has much lower tax rates on dividends than Alberta, taking out $44,000 per year in Ontario works better than it does in Alberta. And since Ontario’s corporate tax rules are more friendly towards investment income than Alberta’s, that advantage continues. This means it makes far more sense to keep as much cash as possible in your corporation if CIBC is to be believed and makes the decision to incorporate in Ontario a much easier one than Alberta.

This presents an interesting conundrum for me, personally. Do I take my corporate earnings and take them out of my company, or do I keep them in knowing I have a tax disadvantage in doing so? Sure, I can put about $5,000 per year in my pocket by only taking some of my earnings via dividends. But I’m also losing out on opportunity costs if I just let that money sit there.

Let’s wrap it up

So, to summarize:

  • It likely does make sense to incorporate, especially with CPP premiums going up. Remember, self-employed folks have to pay both halves of CPP contributions.
  • It makes sense to only take a portion of your earnings as dividends if possible.
  • It may make sense to invest in the corporation over investing personally, although this does not seem to be the case in Alberta. In this case, you’d take only the bare minimum out of the corporation.
  • If you live in Ontario, it sure looks like incorporating is the ticket. You can put $10,000 per year in your pocket by being smart with dividend withdrawals. And it looks like it’s better to invest inside of a corporation in Ontario too.

However, before you do any of this, talk to a tax expert. I think I have the gist of this down, but I’m only one man with fair to poor Googling skillz.

Thanks to the helpful tax calculators at taxtips.ca for making this a whole lot easier for me.

How Minimalism Can Be Dangerous To Your Financial Health

How Minimalism Can Be Dangerous To Your Financial Health

Let’s start things off with my fun minimalism joke from last year, easily in the top 10 of jokes you guys probably ignored.

After just moving to my new place, I’ve sort of gained a new appreciation of minimalism. On the one hand, I want to fill my new man cave with a nice chair and couch and maybe a TV. Anything less than 55” is for girly boys, or at least I’ve been told.

But on the other hand, I can see why the whole exercise is dumb. I’ll spend only a few hours in that room a night, tops. And that’s if I’m ignoring my wife, which I don’t like to do. At least most of the time. She cooks me dinner, and in exchange, I’m nice to her. It’s a real win-win relationship.

(Gets served with divorce papers) I really should have seen this coming.

Although our house is only 875(ish) square feet (with a full basement), it’s probably too big for two people. We have a spare bedroom that, as I’ve argued before, is pretty much a money pit. I should really AirBnb it, actually. We have two bathrooms, which is convenient about once a month. We could easily make due with one. And I need a man cave like I need Cheetos.

We could easily live in a place half the size.

Plus, after moving, it’s easy to see the appeal of only owning enough things to be able to fit into the backseat of a car. This undoubtedly makes live less complicated. It’s usually much cheaper too, since this enables one to live in very small places. There’s no sense buying a house or renting a whole apartment when your stuff fits into a bedroom or even a tent.

The extreme early retirement guy approves.

Minimalism has a huge financial benefit. Cash normally spent on items can be directed towards investing, saving, or paying down debt. Renting a room is undoubtedly cheaper than renting a whole apartment, although you do run the risk of having a crazy roommate. And there’s a certain lack of stress about a minimalist existence.

That’s the biggest benefit to being a minimalist, the freedom. If you can cut your fixed expenses to just a few hundred dollars per month, it’s easy to have flexibility in life. Want to spend your life washing dishes in all 50 states like Pete Jordan and then write a book about it? You can do that if you’re a minimalist.

(Aside: the story about [not Pete] spitting in Hillary Clinton’s sandwich is well worth the $12 price)

Inevitably, that becomes the big appeal of minimalism. In the world of personal finance, I’ve come across a lot of folks who would identify as minimalist. And just about always, a big part of embracing this lifestyle boils down to travel. They want to ride elephants in India or moon Hitler’s bunker in Berlin or partake the local “cuisine” in Amsterdam (weed or hookers, take your pick).

Long time readers may remember your’s truly falling for that, packing up and leaving for South Korea for a year. And although I enjoyed the experience (for the most part, anyway), I sure am glad I had a job throughout so I could continue growing my net worth.

 

Want to save money on hotels? Of course you do. Here’s how I saved over $250 in just a few minutes using Hotwire, which is pretty much the greatest thing since sliced bread. Not that sliced bread is worth getting excited over in 2016, but still. 

The problem with minimalism

Minimalism seems like a noble pursuit. So why exactly is ol’ Nelly here about to turn into the internet version of an old man yelling at teenagers?

It’s because like a lot of good movements, minimalism has devolved from something noble to something that, at least for some of the people preaching it, rotten to the core.

It goes something like this. Somebody embraces minimalism and decides it’s pretty outstanding. They realize there’s a market to selling their lifestyle to others, probably after the 27th “I’m so jealous!!!!” post on their latest vacation pictures on Facebook. So they start to push the sexy aspects of it.

Soon, the business takes off, which enables our hero to continue traveling indefinitely. Instagram pictures of her sitting on a beach get even more likes. Twitter status updates are filled with the kind of headaches regular people only experience every few years. Ugh! My flight is delayed again! Better @ mention the airline. That’ll get me on the plane faster!

Seriously, people mentioning the airline on Twitter is my favorite thing ever. You couldn’t pay me enough to run the social media for any airline. I’d slit my wrists within an hour.

The whole lifestyle becomes a bit of a competition. How many cities can I visit? How much money can I make while embarking in this sexy lifestyle? How many credit cards can I churn to get even more miles to go even more places? And so on.

What happens is the so-called minimalist creates a lifestyle that’s pretty much the opposite of free and easy. Traveling is stressful. Showing up in a city without a clue about using the subway is hard. You have to figure out where to eat and where the new hotel is. And depending on the place, locals are practically salivating over the either kidnapping or ripping you off.

I feel like I should be inserting a Rio 2016 joke here.

And the money spent! I don’t care if you stay at hostels or eat cheap or do all of the tips that end up in those “save money traveling” blog posts. Even if you do it cheaply, spending time on the road costs money. Vietnam and Thailand and wherever might be cheap, but so is renting a small bedroom at home.

This gets to the important message I want to get through with this blog post. I don’t care what you spend money on. You can spend it on things, travel, collectibles to hang on your wall, food, beer, or buying yourself a pet gorilla.

The point is cash spent is cash spent. It’s gone. It’s not contributing to your net worth if it’s spent onanything.

We seem to have this idea that money spent on experiences is better spent than money spent on stuff. Why have a closet full of clothes when you can have a brain full of unforgettable memories?

But remember the motivation of the person telling you such a thing. They’re likely directly (or indirectly) making money by perpetuating this lifestyle. Think of it as a technological version of a barber telling you it’s time for a haircut.

There’s a case to be made for spending money on experiences. Too often, however, that case is made by a person who has everything to gain from such an attitude. And remember that no matter what you spend your money on, once it’s gone, it’s gone.

At least when you spend it on stuff there’s often a little residual value. Try taking your Ibiza photos down to the pawn shop and see how far that gets you.

It’s Never Been Easier To Put Money Away in RESPs

It’s Never Been Easier To Put Money Away in RESPs

You guys might think us here at the Financial Uproar machine (138 HORSES OF PURE POWER, BABY!) are somewhat anti-child. After all, I penned a piece back in the day saying you’ll probably end up richer if you don’t have kids.

Saying that, there are plenty of reasons to have yourself a rugrat or two. They give you and your spouse something to talk about once you realize he’s never going to grow out of that stupid phase of liking baseball. Having little mouths to feed motivates even the laziest of slackers to finally get a job that doesn’t include wearing a visor. And I guess it’s rewarding watching your kids turn into productive members of society.

Oh, and I almost forgot the biggest reason. At least you’ll have somebody to visit you at the home during your golden years.

It’s harder than ever to be a parent today, at least according to the knower of all things, the internet. It costs something like $250,000 to raise a kid until they’re 18. Adult situations are constant on the TV and interwebz. You can’t tell your kid to go play in the street like it’s 1962 anymore. And perhaps worst of all, it turns out not everything is the teacher’s fault.

A cold chill just ran down my spine, guys.

A big fear for parents has to be post-secondary education. In today’s world, education is more important than ever.

Long-time readers might remember hearing about my path and how I didn’t go to school, choosing to work instead. This is a path I still think can work. But most people won’t bother, content instead to go off to university and get a degree. The usefulness of certain degrees will always be up for debate, but the fact remains that guys like me without college do tend to do worse than our more educated peers.

Besides, it’s every parent’s goal to have their child go off to university. Even if the kid doesn’t go, it’s not like all is lost. Junior will still have most of his RESP available for buying a house or whatever. (Remember, the government top-up gets forfeited if the beneficiary doesn’t go to school, but they’re still free to keep the rest of the RESP.)

Or to put it more simply, it’s better to arm your offspring with cash to go to school and have them not need it than the other way around.

Fortunately for parents looking to save for junior’s education, it’s about to become even easier.

Free money, baby

Justin Trudeau, Canada’s BOYISHLY HANDSOME new Prime Minister, has been making a few changes since getting elected in 2015. Before we talk about them, can we see a picture of our new benevolent overlord nice leader?

justin trudeau

Oh my (Fans self, prepares the fainting couch).

Many of the big changes came in this year’s budget. Notable programs for us financial nerds include lowering the TFSA limit from $10,000 to $5,500–a move that didn’t win Captain Handsome up there any friends among PF bloggers–increasing included various tax credits to students, and changes to EI that make it easier to qualify for benefits.

And for parents, perhaps one important change trumped them all. A new Canada Child Benefit was introduced, replacing the old program. Parents of children younger than six can receive tax-free payments of up to $6,400 per year per child, with parents of older kids getting up to $5,400 annually.

Canada Child Benefits are based on income, with families making under $30,000 automatically qualifying for full benefits. The amount paid decreases gradually as income increases, going away completely once family income hits $190,000.

Still, middle class families can expect some serious cash from the program. According to the Government of Canada’s official Canada Child Benefit Calculator a family with one kid under six and one over six with $90,000 in family income can still expect an extra $470 per month without doing much of anything.

It’s the closest you’ll ever get to getting free money. Naturally, I demand you do something smart with it. PUT THE GO-KART CATALOG AWAY, BUCKO.

Parents are already thinking about this. According to a poll commissioned by Knowledge First Financial, 70% of parents agree this extra cash will help around the house, and plan to contribute 22% of this extra cash towards further education.

This free cash is the perfect opportunity to contribute to junior’s RESP. Using the example of the family above, each kid would get an extra $2,760 in their RESP without their parents breaking a sweat. These are pretty much the easiest savings you’ll ever get.

It gets even better. Remember, the government will top up the first $2,500 of annual RESP contributions with the Canada Education Savings Grant, which gives $1 for every $5 contributed. That’s an extra $500 for doing nothing on top of the money just received for doing nothing.

It’s not very often opportunities like this come along. I almost want to have kids just to take advantage of it.

I’m glad people plan to use this extra money wisely rather than wasting it on stickers or whatever it is you kids buy for fun. Glitter, maybe. Or temporary tattoos.

This is a great start, but I really think Financial Uproar readers can do better. I want y’all to contribute every nickel of that cash towards giving your kids the best future you possibly can. Every time those cheques show up, picture me above your shoulder like that goofy green guy in The Flintstones, telling you not to squander it.

It’s hard to raise kids. I get that. It’s just gotten a little easier. You owe it to those sad little eyes to do the right thing.

Best Ways To Make Money Off The Stock Market Without Having To Invest

When it comes to investing many may not know that the stock market actually isn’t the only option for making worthwhile investments, since the recession there have been a huge increase in alternative investments. The majority of people see the stock market as incredibly risky and very complex, so they choose other methods that appear far more secure as well as profitable. Investments basically come down to a trade-off between the risks and the pay-offs. Even if you make a very well-thought out investment there will always be an element of risk. If you want to invest without playing the stock market game then you still have a few other options.

Spread Betting

Spread betting allows you to trade on the price of movements of thousands of financial markets including indices, shares, currencies, commodities and more. With spread betting you don’t invest in the financial markets just the price, you speculate on prices movements whether the markets will rise or fall. Your profit or loss in spread betting is the difference between the price at which you enter and the price at which you close the trade. Many have chosen to take a gamble on the stock market with financial spread betting, and the more the market moves in your direction you have predicted the greater the profit you will receive and vice versa if you lose.

Real Estate

For those who wish to invest in something a bit more worthwhile, your best bet may just be real estate. If you happen to be knowledgeable about realities of the housing market, investing in real estate is a good option. Many chose to purchase income property which can then be used for regular rental income. Another way is buying shares, as you will be able to benefit from property ownership without becoming a landlord although many may say this option isn’t a far from the stock market.

Commodities & Collectibles

If you want to invest in something that is far more substantial there are various different options other than real estate. Many choose to invest in gold ETFs, so they don’t actually have to worry about collecting gold in your jewellery boxes. Although gold and other commodities can be risky there are other collectibles including art, comic books as well as antiques that could be a profitable if you are obviously knowledgeable on the matter. If you put large sums of money into collectibles it could be unwise, especially if the markets are unsteady but you could start it off as a hobby and see how you go from there.

Peer-to-peer

Peer-to-peer lending is a relatively new investment opportunity, so approach with caution. However many investors see decent returns with website such as Lending Club and Prosper. Basically investors lend what could be very small sums of money to peers, which they then pay back with interest. The risk is with this type of lending means that your loans could go into default which will leave you at a loss.

Why Are You Morons Still Living in Vancouver or Toronto?

Why Are You Morons Still Living in Vancouver or Toronto?

Let me tell you a story about the teachers in my small town in Alberta. I promise, there’s a point to it that isn’t just me shaking my fist about how they all get two months of vacation.

Oh, sorry. I mean “deserved time off”, obvs.

Related: that time I made fun of teaching about how it’s not nearly as hard as they think

On the surface, teaching at this particular school looks like a pretty sweet gig. The school is just a few years old with all the latest electronic gadgets you need as a glorified babysitter teacher in 2016. Class sizes are small and the faculty seem like a pretty close knit group of people. You’re done work by 2:00pm on Friday because of a union negotiated contract perk. And some of the students are even attractive. Well, solid 7s at least. We’re talking small town hot here, not Carrie Underwood.

From a monetary perspective, things are pretty sweet too. Each school board negotiates directly with the province, but wages tend to be within 2-4% of each other no matter where you are. So dollars go pretty far in my town where houses can be had for under $200,000. Compare that to Calgary or Edmonton, where the same amount of money is going to get you a small condo in worst part of the suburbs. You’re looking at a minimum of $400,000 to get a decent house in either of those cities.

And yet, every year, the school in my town has vacancies. Between 10 and 20 percent of staff members hit the road, usually to the bright lights and longer commute times of either of Alberta’s largest cities.

The reasons for this are usually pretty obvious. They’re young, and want to live somewhere a little more exciting than a small town. They feel they have better career prospects in a larger center. And most come from large cities (usually Ontario, which has a surplus of teachers). The lack of dating prospects here doesn’t help either. Remember, I’m no longer single.

And yet, career prospects in these larger centers are often crummy. Many can’t get full-time jobs for years after moving into these cities because that’s where everyone wants to be. So they end up on the substitute list, but sometimes that doesn’t even work since more experienced teachers are always applying from out of town and out of province. Some have spent years trying to find that lucrative permanent contract, a piece of paper that says they’re really only going to get fired for exposing themselves to some kid.

I wish I was kidding, but permanent contracts are really that iron-clad. Must be nice.

Anyhoo, let’s get to the real point of this post. Which is if you have a regular job, why in the hell do you live in a big city?

Vancouver and Toronto are the real terrible examples. In Vancouver, unless you want to live in a box in the sky or some suburb an hour away from the actual city itself, you’re shelling out at least seven figures for a house. Toronto is slightly cheaper than the place many contend is corrupted by dirty Chinese money, but its housing market still seems equally ridiculous to this guy who just ended up getting a decent place for under $200,000.

“But those places are where the jobs are” say all the people who live in these cities. I’ll admit, they have a point, but there’s also way more competition in these places. The aforementioned school I was just talking about? They get like five serious applications to fill three vacancies. I like those odds much better than in a large center where you’ll likely have dozens of applicants per open position. And you can’t seduce your way to a job anymore. Cause believe me, I’ve tried.

There are certain jobs you can do anywhere. You can be a teacher or a nurse or a social worker or a mortgage guy in a million different places. Sure, you probably can’t be an oil company middle manager or an advertising guy or whatever else without moving to a city. I get that. But most people aren’t those things. They have very regular jobs.

Small towns aren’t nearly as exciting as big cities, that I get. But let me tell you YOLO LOVING WHOO GIRLS a secret. There becomes a point in everyone’s life when they stop going out every weekend, exchanging a life of adventure for a life of video games in a basement or movies on Netflix. For most people, this usually happens when they have kids, but some of lucky folks become lamer at an even younger age.

When this happens, you won’t get close to using everything a big city has to offer.

And the cost difference! It’s not just in housing prices, which are far cheaper in smaller centers. You’ll also save money on your commute (the wife and I share a car and a tank of gas will last a month), entertainment, eating out, booze, and whatever else you kids literally piss away on “experiences”.

There’s a lot of displeasure about trying to get ahead in Toronto, Vancouver, Calgary, Montreal, and even places like Winnipeg LOL JUST KIDDING NOBODY LIVES IN WINNIPEG. Millennials don’t feel like they will ever be able to afford a place. And even though housing bears are screaming BUBBLE at the top of their lungs, I’m still not sure we’re poised for a crash. The supply/demand equation is still heavily skewed towards demand, especially in the two major centers.

But there’s a really easy way for astute millennials to easily get ahead. By doing the opposite of their peers–moving from a large center to a smaller one–they can take advantage of easier to get jobs, lower costs of living, and still have the opportunity to move up at work. This is especially true if you work for the government and get paid the same no matter where in the province you work.

It’s an easy solution to a very real problem. And yet many people don’t even consider it, choosing instead to complain how they can’t afford a place in two of the world’s most expensive real estate markets.

We live in a world where many of us have the option to make a living from home. Bloggers, vloggers, and other freelancers actually make serious cash doing this stuff, a fact my grandmother refuses to believe. If you’re one of these people, I beg you to settle in a place with a low cost of living that isn’t in Thailand. It’s just a good idea.