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Weekend Reading: Salary vs. Dividends Edition

By Robb Engen | November 16, 2019 |
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Weekend Reading: Salary vs. Dividends Edition
One big decision I need to make as I transition from salaried employee to entrepreneur is whether to take a salary from my business or pay myself dividends. I set up a corporation for my online business back in 2012. My wife and I are 50/50 owners of the small business, and we’ve used the corporation to stream dividends to my wife for the past seven years. I earned a salary and my wife stayed home full time, so this structure allowed us to split our income somewhat and save on taxes.

We’ll need to change things up next year and decide whether to pay ourselves a salary, continue to pay dividends, or come up with some combination of the two.

Pros and cons of a salary

The main advantage of taking a salary from the business is that it will give us a personal income. That means we’ll pay into CPP, and also earn contribution room for our RRSPs. A salary paid out will also be a tax deduction for our small business. 

One potential disadvantage is the pain-in-the-ass factor of setting up a payroll account with the CRA and filing all of the related paperwork. We’ll also have to pay into CPP twice as both the employer and the employee. Finally, personal income is taxed at a higher rate than dividend income, potentially increasing our tax burden.

Pros and cons of dividends

We’ll definitely pay less personal tax since dividends are taxed at a lower rate. My quick estimate is an average tax rate of 13 percent with dividends, versus 27 percent with a salary. We’ll also save money (today) by not paying into CPP.

Dividends can be declared at any time, helping smooth out our cash flows throughout the year, and optimize our tax situation come tax time.

Paying dividends is fairly straightforward. We simply write a cheque to ourselves and then update our corporate minute book. 

The disadvantages of receiving dividends is that we won’t pay into CPP, which will lessen our entitlements in retirement. We also won’t have eligible income to create RRSP contribution room.

Salary vs. Dividends: Why not do both?

An accountant once told me to pay ourselves a salary up to the RRSP contribution maximum and then top-up with dividends as needed. He also suggested to leave as much money in the corporation as possible to keep taxes low.

Reality check. The RRSP contribution limit is 18 percent of income, up to a maximum of $26,500 (2019). To earn the maximum deduction limit you’d need income of $147,222. Each. That’s not going to happen.

A more realistic approach for us would be to pay ourselves enough salary to max out the Year’s Maximum Pensionable Earnings (YMPE) for CPP. The CPP maximum for 2019 is $57,400. 

We plan to pay ourselves between $66,000 and $70,000 each to meet our spending and saving goals. So we could pay ourselves a salary of $57,400 and then top-up with dividends for the remainder of our needs. 

This hybrid approach would allow us to max-out our CPP benefits, while also creating ~$10,000 each in RRSP contribution room per year.

This Week’s Recap:

November is Financial Literacy Month and this week I asked whether banks should have a hand in promoting financial literacy.

Over on the Young & Thrifty blog I took a long look at passive investing and why it’s about to finally take off in Canada.

I went on a bit of a shopping spree at Amazon recently, in anticipation of some extra free time on the horizon. I’d like to read more in 2020, and I’m getting a head start now.

I just finished Malcolm Gladwell’s latest – Talking to Strangers: What We Should Know about the People We Don’t Know. In the typical Gladwell fashion, he shares several interesting stories that are all connected around a central theme. It’ll have you questioning your own assumptions around complex topics like police shootings, terrorism, espionage, sexual assault, and deception.

Next on my list is Profit First: Transform Your Business from a Cash-Eating Monster to a Money-Making Machine.

Weekend Reading:

What’s the best Aeroplan credit card? The Credit Card Genius team compares the TD Aeroplan Infinite Visa vs. the American Express Gold Rewards Card.

Not sure how to get the most out of Aeroplan? Read how I maximized Aeroplan flight rewards for our epic trip to Scotland and Ireland.

Millennials are facing all the risk and none of the reward in today’s financial realities.

Millionaire Teacher Andrew Hallam explains how retirees can withdraw more than 4 percent per year from their investments.

Shane Parrish says better “mental models” are vital to improve society. How what’s in our heads changes what’s in the world:

“When we understand how someone sees the world, a lot of their actions and beliefs start to make sense. The medical profession offers a helpful model. Would you think highly of a doctor that offered a diagnosis without first understanding your symptoms?”

Collaborative Fund’s Morgan Housel explains what a spectrum of wealth would look like if you described it with words, not numbers.

Here’s a hodgepodge of smart investing commentary from Downtown Josh Brown and the Irrelevant Investor Michael Batnick:

Dale Roberts looks for an explanation as to why Canadians have given robo-advisors the cold shoulder? I’ve also wondered this.

Another reason to avoid time-shares. A Thornhill woman said she can’t get out of her timeshare agreement more than three years after she paid a company over $4,000 to break the contract.

My Own Advisor’s Mark Seed gives an update as he zeroes in on his financial independence goals.

Finally, this man tested Canada’s tax laws by moving in a canoe – and he won.

Have a great weekend, everyone!

Should Banks Have A Hand In Promoting Financial Literacy?

By Robb Engen | November 11, 2019 |
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Should Banks Have A Hand In Promoting Financial Literacy?
The financial services industry takes a keen interest in promoting financial literacy as a do-good service for Canadians. November is Financial Literacy month, and the big banks and their PR machine are busy pushing out survey after survey explaining why Canadians are struggling to save.

The situation is dire, according to many economists and financial experts, who’ve sounded alarm bells over our increasing debt levels and declining savings rates.

Related: Canadians have an income problem, not a debt problem

The Government’s Role

Since 2001, Canada’s financial literacy programs have mainly run through its financial supervision and consumer protection body, the Financial Consumer Agency of Canada (FCAC). In April 2014, the federal government appointed its first and only Financial Literacy Leader, Jane Rooney, who led Canada’s financial literacy efforts under the FCAC until April 2019 (when the position was abolished).

Given just $2 million per year in government funding, Ms. Rooney was tasked with developing a national strategy on financial literacy for all Canadians, the results of which were to be measured by a nation-wide survey. Key performance indicators would include increased usage of TFSAs and RRSPs – outcomes that should make any bank executive salivate.

Banks Promoting Financial Literacy

Of course, that’s the real reason why banks want a say in promoting financial literacy – because they have the most to gain. It’s a sad reality, but the financial services industry has the money (and the incentive) to sponsor financial literacy programs in schools and in the community.

The default answer to fixing financial literacy is that we should teach it in school, either with a mandatory personal finance course in high school or by weaving in personal finance concepts throughout the curriculum each year.

Related: Why Canadian investors aren’t as savvy as they think

That presents several challenges for our education system – including the fact that few teachers are equipped with the necessary skills to teach personal finance concepts. Not-for-profit groups and government agencies don’t have the money or the manpower to offer resources and support to our schools.

So that’s where the banks want to step in. They’ll sponsor the curriculum, put together the textbook, and send their employees to teach classes and seminars. But can bank-sponsored financial literacy programs actually give Canadians the outcome they’re looking for?

No, says Rob Carrick, personal finance columnist at the Globe and Mail. Carrick’s definition of financial literacy is, “knowing how to be a savvy customer of bank products.”

In this column, Mr. Carrick explains how the banks profit from bafflegab at their clients’ expense. Mortgages, credit cards, mortgage life insurance, mutual fund trailer fees, hidden advice fees, and index-linked GICs – these are all ways that the financial industry use products to exploit our ignorance instead of promoting responsible lending and good saving habits.

Should banks have a hand in promoting financial literacy? Sure, if you don’t mind a few foxes standing guard over the henhouse.

With bank-sponsored materials and programs in our classrooms, who will be there to explain that you can shop around for a better-than-posted mortgage rate, or why your bank advisor might sell you a high priced Canadian equity mutual fund instead of its low cost index fund equivalent?

Final thoughts

The financial industry does have a role in promoting financial literacy. It can do this by offering simple, easy-to-understand products that aren’t designed to trick or trap consumers into paying outrageous fees. It can start by disclosing fees upfront, including any conflict of interest when it comes to advisor compensation.

Even better, it can separate advice from product sales to ensure that customers get service that is in their best interest.

Weekend Reading: Checking In On My Financial Goals Edition

By Robb Engen | November 9, 2019 |
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Weekend Reading: Checking In On My Financial Goals Edition
I publish my financial goals here every year to share my priorities with readers and to hold myself accountable to achieve them. The simple act of writing down your goals and reviewing them periodically can significantly increase your chance of success.

My 2019 financial goals were fairly straightforward. Here’s a recap, along with the progress or outcome to date:

  1. Contribute to RRSPs – I’ve caught up on all my unused RRSP contribution room and, due to my pension adjustment, my RRSP deduction limit for 2019 was just $3,600. I set up automatic monthly contributions of $300 and I’m on track to max out the limit for this tax year. For my wife’s RRSP, which we moved to Wealthsimple, she contributed $10,000 in February (for 2018’s tax year), and we’ll plan on another $8,500 contribution in early 2020 to use up her remaining room.
  2. Contribute to TFSAs – I’ve still got a long way to go before catching up on all my available TFSA contribution room. My goal was to put away $1,000 per month this year to help me close that gap. I’ve done exactly that, and should have my TFSA completely maxed out in a couple of years. 
  3. Continue to max out RESPs – This is a goal we’ve had on auto-pilot for the past few years. I have set-up automatic monthly withdrawals of $416.66 to max out the education savings grant for our two children (10 and 7).
  4. Don’t take on any new debt – All of the above goals were contingent on not taking on any new debt. We’ve paid off a car loan and line of credit in recent years, freeing up $1,500+ per month to put towards our savings goals. I’m pleased to say we haven’t had to borrow for anything this year and so we continue to pay down our last remaining debt (mortgage) while ramping up our other savings goals.
  5. Create my own raise – My salary had been frozen for the previous five years. I’ve had to get creative to manufacture my own raise by using cash back websites, taking advantage of credit card offers, and selling used items online. While I continued to do those things in 2019, I also surprisingly received a 4 percent increase at work earlier this year after taking on some new duties.
  6. Keep our trip under $12,000 – We went on an epic 32-day trip to Scotland and Ireland this summer. We kept our costs down by redeeming close to one million rewards points for travel. That included 5 free nights in Edinburgh and 5 free nights in Dublin through the Marriott Bonvoy rewards programs, and also free round-trip flights for four courtesy of Aeroplan miles (we paid less than $1,000 in fees and taxes). The bulk of our budget was spent on our Airbnb stays in Inverness and in Kilkenny, groceries and dining, and of course on entertainment and attractions. Altogether we spent around $10,500 out of pocket.

These financial goals were meant to get us closer to our financial freedom date, but also give us some ability to spend on things we enjoy such as travel. It obviously worked! We had an amazing trip and now all of us have caught the travel bug. We’ll be travelling more in 2020 than we ever have before.

Oh, and I quit my job a few weeks ago. My last day is December 6th. 

I’m already thinking carefully about next year’s financial goals and what we want to achieve. Obviously, growing my online business will be top of mind. And I’ve already mentioned travel. I’ll want to continue to max out our RRSPs, TFSAs, and RESPs. I’m also thinking about how I’ll spend my time, and how much will be allocated to work versus free time to spend with family. 

I’ll post my goals in the coming weeks, along with updates as I transition from salaried employee to full-time entrepreneur. 

This Week’s Recap:

I treaded into controversial territory in my latest post when I argued that Canadians have an income problem, not a debt problem. 

Thanks to PWL Capital’s Cameron Passmore and Ben Felix for giving me time to promote my fee-only financial planning service in their latest episode of the Rational Reminder podcast.

Erica Alini (Global News) took Preet Banerjee’s MoneyGaps financial planning software for a spin and explained how Canadians who cannot afford a comprehensive financial plan can get a money check-up.

I’ve been using the MoneyGaps platform to offer light advice and a check-up to Boomer & Echo readers for the low price of $199. If you’re interested in a financial check-up, or retirement readiness report, send me an email and ask me about MoneyGaps.

Promo of the Week:

We’re heading into Christmas shopping season and one thing we’ve enjoyed the past few years is getting the majority of our shopping done early and online. I mentioned we go through cash back websites such as Great Canadian Rebates and Ebates (now Rakuten) before we make an online purchase. It’s a great way to get anywhere from 2 – 10 percent cash back on spending you were going to do anyway. 

Become a member of Great Canadian Rebates and take advantage of online coupons and earn cash back rewards. GCR features over 400 merchants to satisfy all your shopping needs.

Ebates.ca (now Rakuten) pays you cash back every time you shop online, and it’s FREE to join. Sign up now and when you spend $25 you’ll earn a $5 cash back bonus.

Weekend Reading:

The Credit Card Genius site is back with their HUGE $1,000 cash Christmas giveaway. Head on over and enter for your chance to win.

Here’s a must-read from the Million Dollar Journey blog: The ultimate guide to safe withdrawal rates for Canadians

From the Toronto Star, five myths about the Canada Pension Plan debunked.

Former long-time Toronto Star columnist Ellen Roseman is back on the LowestRates.ca blog and she’s writing about insurance – personal finance’s blindspot.

An interesting piece on how the stress test is making it tougher to borrow later in life:

“because Joe had recently retired from his job as an inspector at a casino and Erin was a self-employed small business owner, they no longer qualified for financing under the mortgage stress test for federally regulated financial institutions.”

Your car loan payment may be way too high. Erica Alini from Global News explains what’s happening.

We’re all busy. This is how much time you should carve out of your schedule to look after your personal finances.

November is Financial Literacy Month and here’s a strongly worded piece by investor advocate Neil Gross on why Canada’s diluted ‘best interest’ rules might doom us to unaffordable old age

Dale Roberts from Cut The Crap Investing explains how to spot investment sharks who are looking to part you from your money.

A Globe & Mail reader asked where to save next after maxing out her RRSP and TFSA while working and living in Canada’s Arctic.

As fundamental as market efficiency is to good financial decision-making, it is poorly understood by most investors. Ben Felix explains efficient capital markets in his latest Common Sense Investing video:

Here’s some straight-talk from Rob Carrick, who says owning a house doesn’t automatically give you an A+ grade in personal finance:

“Surveys about stress consistently show that money is one of the biggest worries people have right now. Somehow, people can’t make the connection between this stress and home ownership.”

Finally, here’s a post from T.E. Wealth’s Aaron Hector explaining how to increase your tax benefit for charitable donations.

Have a great weekend, everyone!