Doing Your Taxes VS Tax Planning

As most of my clients know, I talk about taxes a LOT. Why? It’s the easiest place to save money!
No, I am not an accountant. This is much different than accounting. Here is the simplest way to explain it.
Whether you like RRSP’s or not (and if you are a business owner, you shouldn’t), RRSP’s are an excellent tax saving strategy. They reduce your tax and defer tax as long as the money is invested.
RRSP’s are something that I do. I go through them with you and explain the tax savings and tax deferral. I help you pick from a variety of investments to put the money in depending on your investment goals, comfort levels, age, etc.
Your accountant takes the receipts you receive for your RRSP contributions to get you a reduction or a refund of your income tax bill when they do your taxes. They aren’t reviewing the actual investments because that isn’t their expertise.
If you aren’t using RRSP’s, your accountant most likely won’t recommend them. Not because they aren’t good to use, but like I said, that’s not their expertise.
I’m using this example because most people are familiar with an RRSP. There are so many different strategies that I put together for your accountant to use in a similar strategy.
Tax rules change every year. With those tax changes, financial products change in response to adapt to the new tax rules. While both your accountant and I are staying on top of the tax changes for you, I have the added benefit of staying on top of the changes with the financial products.
I try to review with clients every year a lot of the tax changes that will affect them now and, in the future, because they change every year. It’s a good conversation to have with me and it will help your accountant out too!

Going Broke Safely

The stock market is at an all time low for the number of investors. Before the Financial Meltdown in 2008, 62% of Americans were invested. Today, only 54% of Americans are invested in the stock market. That means that that 46% of people aren’t invested. Out of the 54% that are invested, the majority are just barely invested.
There are many reasons people don’t invest. For example, low income households are less likely to invest because they don’t have the free capital to do it. Other’s might not invest because they have a lot of debt and are more concerned about paying that down instead.
What about the rest of the people that aren’t investing?

They are going broke safely.
Fear is the biggest reason people don’t invest.
People are scared of another “crash” like 2008. While it’s hard to have your money in the stock market and watch it’s value go down, it is the best time to start buying! It’s just stocks going on sale. For most things in life – clothes, shoes, a new motorbike, a car – we try to find the best deal possible. For the stock market, we wait till it’s going up before we are comfortable investing. Even though there might be short periods in time when the stock market goes down, the stock market always goes up. There has never been a time in history that it hasn’t gone back up.
If you had of invested $10,000 in March 2009, today it would be worth $40,000.
In 2008, the majority of people were pulling their money out and trying to prevent losing any more. Those are the people that lost money. Their money wasn’t in the markets to recover. The few that started putting more money in, those are the people that made a lot!
The best thing that could happen in the next few years is another crash. It’s going to hurt watching your money that is in there. But with a good mindset and a steady strategy of investing more, that is when you will be able to catch up and get ahead.
The most recent example is at the end of 2018 and the markets went down. For my clients that kept their investment strategy going, they have earned 10%. For people that didn’t buy more, they are at a break even point now.
Not investing has far more negative consequences than investing:
– If you hold your money in bank investments, earning only 1 to 2% per year, you are losing money to inflation which is running about 2 to 3% per year. You are actually losing money, and this is what I call going broke safely.
– If you aren’t investing because you are concerned about paying off debt, you might still have debt in 10 years and still not have any money. I love putting together a good debt/investment strategy! Debt can be a “lifestyle” when taken care of and used properly. Sounds completely contradictory to everything most of you have been taught, but it’s true!
– If you don’t invest, you will still be no better off financially in 10, 20, 30 years from now. Don’t you want something to show for all your hard work?
Now that you know a few of the downsides and that not investing is the equivalent of going broke safely, there is no better time than right now to get started. Markets will always go up. As of this moment, you are actually buying them on sale. If debt is holding you back, there is a plan for that. If lack of additional funds is an issue, there could be a plan for that too. If fear is a problem, well there is some protection from the downside that I often set up but the only fear there should be is not investing. Let’s grab a coffee and discuss a plan for you!

Your Life as a Statistic

There are 2 paths that we can take in our lives. The first one is the one that we have created so far. Our families, our financial situations, our health, our hobbies. It is good, comfortable and predictable. In fact, it is so predictable that for 80% of people, scientists can project with amazing accuracy what the trajectory of what our lives will look like.

Then there is the 2nd path. The one that is scary, uncomfortable, unpredictable, and with more than a few problems along the way. It doesn’t sound very appealing does it?
Take a look at these sobering financial statistics:
“….. take any 100 people at the start of their working careers and follow them for the next 40 years until they reach retirement age, here’s what you will find:

Only 1 will be wealthy
4 will be financially secure
5 will continue working, not because they want to, but because they have to
36 will be dead
54 will be broke and dependent on friends, family, relatives, and the government to take care of them.” Hal Elrod; US Government
Having been a Financial Planner for more than a few years, I see these statistics manifest way too often. They are much more predictable than you think. Out of 100 clients, I don’t know which 36 will be dead, of course, but it is easy to spot the differences between the top 5 and the bottom 54.
What is different between the top 5 and the bottom 54? Lots! This is the first newsletter. Over time I will discuss different ideas, strategies and mindsets that really separate the two groups of people. I don’t claim to be a great motivator, great leader, or even very inspirational. The top 5 don’t actually need that. The top 5 are looking for opportunities along the second path, and that’s where I come in.

The top 5 people have a different attitude about opportunities and money in general. They treat money differently. They have a strategy and focus on long-term instead of getting stuck in the moment. They use debt efficiently and have it work for them instead of against them. They use tax strategies to keep more money in their pockets. They respect money on a higher level and take care of it differently; that’s why they have more of it. It’s not economies, stock markets, or bad luck that cause a lack of money. They use those problems to their advantage, know those problems are short term, and turn them into opportunities that the bottom 54 miss out on.
The traits, mindsets, and qualities of the top 5 can be learned by anyone. The top 5 did not become the top 5 because they naturally possessed these skills. Regardless of what end of the money spectrum you are on, there is a chance that you learned your current money skills and attitudes from your parent’s, friend’s, community or co-workers, even if unknowingly. If any of them are multi-millionaires, then great, you have likely picked up on some of the right mindsets just by association. If they aren’t, then you might have picked up on some negative money beliefs that you aren’t even aware of.
The best thing about all of this is, it doesn’t matter what situation you are in financially, how old you are, or what your current views of money are; you can start where you are and you can change it. The sooner you start, the further ahead you will get. The key is, as Tony Robbins says, “taking massive action”. The expression “window of opportunity” carries the truth that opportunities only stay open for a few, brief moments. Hesitate, procrastinate, and the window closes shut. Unfortunately, the bottom 54 don’t recognize the path they are on until later in the game.
There will be lots of tips and strategies and mindsets coming in newsletters as time goes on, but if you are wanting the opportunity to start earlier, let’s get a coffee. There really is no time like the present!

Business Owners: A few tax planning strategies to use BEFORE the end of 2018

Hard to believe that we are so close to the end of 2018! There have been some big tax changes that came into place this year for business owners and there is another one coming in 2019.

Business owners are very busy, especially this time of year, and you have to remember that not only do you have a business year end, which might not fall on December 31st, but you have a personal year end that does end that day. Proper planning and strategies need to be implemented now to make the most of 2018, but to plan for the years going forward.

Without going into big long technical details as to what is changing, how it is changing, etc, (that’s more of a one on one conversation) there are a couple of small strategies that are simple to implement and that make tax deferral sense.  The sooner you start, the more tax dollars saved, and it’s a great way to start off 2019.

Near the end of the year is when business owners will typically pay out dividends to themselves and a spouse. With the new income splitting rules we need to do an evaluation on whether or not you will qualify. I’ve had some business owners say they are still going to do it regardless. As long as you are aware of the HIGH penalty for getting caught, then by all means, go ahead. Alternatively, there are cash flow strategies that you can use in order to reduce the need for the previous higher dividend disbursement. For example, if you have young children and are contributing to an RESP, there might be a better long term solution than funding that out of paid dividends, which will result in keeping more tax dollars in your pocket. Don’t worry, with the proper plan there will still be money for your child’s education!

The next thing to plan for is the new passive income rules for small business owners and how they are going to impact you going forward. We want to preserve your small business deduction as long as possible. The sooner we start planning this, the easier it is. You don’t want your investments to all of a sudden do really well next year resulting in the sudden loss of your deduction. Investments have to do REALLY well for the increase in your investments to compensate for your higher tax rate. It is also important to remember that if your company has invested in and owns rental properties, rental income is considered passive income.

A few strategies we take a look at:

  1. Tax-free withdrawals – is there money that can be withdrawn from the corporation on a tax-free basis that would otherwise be invested in the corporation. (Shareholder loans being repaid.)
  2. Life Insurance – there are numerous reasons to hold life insurance policies inside of your corporation rather than personally. Depending on the structure and size of your corporation, even something as simple as eliminating the mortgage life insurance off your mortgage at the bank and owning one inside of your corporation can have compound tax saving benefits over the years. (Do not cancel your mortgage life insurance without your new policy in place, if this is a plan you decide to go with.) This is a cash flow strategy that is very effective. Also, qualifying permanent life insurance policies can also be an alternative investment solution when there is concern that investment growth inside of the corporation will limit or eliminate the SBD.
  3. Investment Strategies – every company is different and we need to take a look at if the best solution is to continue investments inside of the corporation, use RRSP’s/TFSA’s, or create an IPP.

There is not a one size fits all. There are other strategies that can be used as well. You will have to work with both your Accountant and your Financial Planner on the right solution for you and your company. Don’t just take a friend’s advice on this kind of stuff because “that’s what they did/heard”. It could be very costly! And your Accountant would love to hear from you this time of year. As one of my colleagues says, as of December 31st accountants become historians. Do your part and give them more to work with.

Do make sure you take the time to plan! Fail to plan, plan to fail. We are always so busy working to make money,  take a bit of time to make sure that you keep it.