Tag: C3 Wealth Advisors

Small Business Tax Rate and Its Erosion with Passive Income

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Taxes C3 Wealth article

In recent years, the landscape of Canadian small business taxation has undergone significant changes, particularly concerning the small business deduction (SBD) and its interaction with passive income. Understanding these changes is crucial for small business owners who rely on the SBD to reduce their tax burden and promote growth.

What is the SBD?

The SBD is a tax benefit on the first $500,000 of active business income (ABI) in a Canadian-controlled private corporation (CCPC). This reduction is designed to help stimulate business growth and job opportunities.

The Tax Advantage of the SBD

The current combined federal and provincial corporate tax rate on income eligible for the SBD is 11% in Alberta. This represents a 12% tax savings compared with the general rate income pool (GRIP) tax of 23% on active income.

Changes in Corporate and Personal Taxation (2018)

In 2018, the Canadian tax system underwent significant adjustments aimed at achieving greater integration between business and personal taxation. This overhaul primarily affected business owners and their comparison to salaried individuals, creating a near-perfect tax alignment.

2018 Tax Changes Affecting the SBD

The 2018 federal budget introduced significant changes to the impact of passive income within corporations. If passive income exceeds $50,000 in a given year, a clawback* begins on the $500,000 of eligible ABI for the SBD.

Understanding Passive Income

Passive income includes interest, dividends, and capital gains. The taxable portion of these forms of income is termed adjusted aggregate investment income (AAII).

How is Corporate Passive Income Taxed?

Following the 2018 tax changes, corporate passive income as AAII is currently taxed at a rate of 46.7% in Alberta (combined federal and provincial rate).

The Tax Impact is Greater after June 25, 2024

In 2018, at the time of “near perfect integration” the capital gains inclusion rate was 50%. This means that 50% of the gain was deemed taxable as AAII. On June 25, 2024 the capital gains inclusion rate for corporations was increased to 66.7%, making it easier to surpass the $50,000 threshold, thereby affecting SBD eligibility.

How SBD Erosion Works

For every dollar of ABII that exceeds the $50,000 threshold, SBD eligibility is reduced by $5*. Once passive income surpasses $150,000 in any given year, the entire SBD on active income is eliminated.

Example of SBD Erosion in Alberta

Consider a scenario where a corporation has $500,000 in taxable active business income. Without any investment income, the corporate tax bill would amount to $55,000.

If this corporation also has $100,000 of ABII**, which exceeds the $50,000 threshold, the SBD rate of 11% will apply only to $250,000 of active income, with the remaining $250,000 taxed at the GRIP rate of 23%.

SBD Tax on $250,000: $250,000 × 11% = $27,500

General Rate Tax on $250,000: $250,000 × 23% = $57,500

Total Tax Bill on Active Income = $85,000 which is $30,000 MORE than if the corporation had passive income less than $50,000!

**this example does NOT include the tax bill on passive income. To see examples for other provinces and the tax on passive income visit our website to access a simple calculator.

A Complex Conversation

Navigating investment and divestment strategies within your corporation has become increasingly complex due to ongoing tax changes. A holistic financial plan that integrates both business and personal aspects of your wealth and taxation is essential to empower you in your financial journey.

It is never too early or too late to initiate your financial planning. Contact us at 780-261-3098 or email (Roxanne@C3wealthadvisors.ca) to set up your next conversation.

 

*Note: Ontario, Quebec and New Brunswick provincial tax calculations do not mirror the federal rules for the SBD clawback.

 

Roxanne Arnal is a CFP®, former Optometrist, Professional Corporation President, and practice owner. Today she is on a mission to Empower You & Your Wealth with Clarity, Confidence & Control.

These articles are for information purposes only and are not a replacement for personal financial and tax planning. Individual circumstances and needs vary. Errors and Omissions exempt.

 

ROXANNE ARNAL,

Optometrist and Certified Financial Planner

Roxanne Arnal graduated from UW School of Optometry in 1995 and is a past-president of the Alberta Association of Optometrists (AAO) and the Canadian Association of Optometry Students (CAOS).  She subsequently built a thriving optometric practice in rural Alberta.

Roxanne took the decision in  2012 to leave optometry and become a financial planning professional.  She now focuses on providing services to Optometrists with a plan to parlay her unique expertise to help optometric practices and their families across the country meet their goals through astute financial planning and decision making.

Roxanne splits EWO podcast hosting duties with Dr. Glen Chiasson.

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5 Principles of Cash Management

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Cash Management

In our cashless society, it’s common to lose the connection between what we are earning and what we are spending, often leading to empty bank accounts and increasing debt. How do you manage debt effectively while building long-term financial security and peace of mind?

  1. Review Your Cash Outflows

Sounds so simple, but do you know where your money is actually going?

Review a minimum of 3 months of bank and credit card statements. Summarize where your money has been going. Be honest. You might be surprised how much you are spending eating out, the number of “tap” charges you are paying, and the actual burden of interest charges.

  1. Create a Cash Flow Plan and Stick to It

Now that you know where the money is going, create a better solution.

This solution still needs to be realistic in order to be successful. Build in your mandatory payments like student loan repayment, car payments, rent and disability insurance premiums. Add in your after tax income. Then review how much you can allocate to everyday expenses like gas, groceries, gifts, clothing and social activities. Tracking this spending allows you to manage it and discipline gives you a clear plan for reaching your goals.

  1. Build and Maintain an Emergency Fund

An emergency fund is your personal safety net. Life is unpredictable and unexpected expenses, like a car repair or sick pet, can throw your financial stability into chaos. Your emergency fund should also be able to cover your basic needs while you wait out the elimination period before your disability insurance benefits are payable in the event that you are unable to work due to illness or injury.

The general recommendation is to have at least 3 to 6 months worth of living expenses set aside in an accessible, but separate, account from your daily spending.

Carve out a piece of your monthly income to build up this pool and use it for true emergencies only.

  1. Control Debt Wisely

Debt isn’t inherently bad, but it’s important to manage it carefully and use it strategically.

First focus on paying off high-interest debt, like credit card balances (and be committed to permanently keeping it off). These debts grow quickly and can easily overwhelm your finances if not addressed promptly. Look back at our previous article on Tackling Debt [https://www.eyecarebusiness.ca/resources/tackling-debt/ ] to learn about the Avalanche & Snowball methods.

  1. Save & Invest for Your Future

The final principle of personal cash management focuses on the future you. Sometimes hard to image when you are in the here and now, but the future you deserves your love.

Once you’ve build up your emergency fund and managed your debt, you can begin focusing on saving for future goals – buying a home, funding your child’s education and saving for retirement.

It’s essential to have a plan in place for your savings goals and the investments you pick should align with the time frame of each goal to help create a financial future of true freedom.

A Fool & His Money are Soon Parted

Understanding income, expenses, debt and savings are key to creating a stress free present and a future filled with opportunity. A holistic financial plan should integrate all aspects of your life in order to truly put you in the driver’s seat.

The best plans use a long-term strategy where your progress is measured and goals are adjusted as your life changes.

 

 

 

It is never too early or too late to set your financial plan in motion. Interested in an advisor that understands how to live for today and tomorrow, give us a call (780-261-3098) or email (Roxanne@C3wealthadvisors.ca) to set up your next conversation.

Roxanne Arnal is a CFP®, former Optometrist, Professional Corporation President, and practice owner. Today she is on a mission to Empower You & Your Wealth with Clarity, Confidence & Control.

These articles are for information purposes only and are not a replacement for personal financial planning. Everyone’s circumstances and needs are different. Errors and Omissions exempt.

 

ROXANNE ARNAL,

Optometrist and Certified Financial Planner

Roxanne Arnal graduated from UW School of Optometry in 1995 and is a past-president of the Alberta Association of Optometrists (AAO) and the Canadian Association of Optometry Students (CAOS).  She subsequently built a thriving optometric practice in rural Alberta.

Roxanne took the decision in  2012 to leave optometry and become a financial planning professional.  She now focuses on providing services to Optometrists with a plan to parlay her unique expertise to help optometric practices and their families across the country meet their goals through astute financial planning and decision making.

Roxanne splits EWO podcast hosting duties with Dr. Glen Chiasson.

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7 Key Features to Look for in a Financial Advisor

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Financial advisor

The world of financial advice can be very confusing – it is proverbial alphabet soup out there. Let’s take a look at some of the features you should be looking for in a true advisor.

  1. What training have they undergone?

The worldwide standard for financial planning is the CFP®. A Certified Financial Planner® has undergone rigorous training and examination, adheres to a strict ethical standard and is committed to ongoing professional development. There really is no substitute for this designation.

  1. Are they truly a fiduciary?

A requirement of CFP® certification is that designates must commit to serve in the best interests of their clients. Unfortunately, the certification doesn’t guarantee true fiduciary advice. A fiduciary must make recommendations that are truly in the best interest of the client. Not their pocket book or employer.

  1. Are they licensed to sell products and other services?

CFP® professionals can be licensed to sell products alongside providing advice. It is imperative that you understand their licensing credentials and how recommendations are made within any licensing restrictions. Understanding your options is critical to making smart financial decisions.

  1. Do they utilize an Investment Policy Statement (IPS) to provide you with suitable recommendations?

An IPS is a document that outlines your risk tolerance, risk capacity, and overall opinions regarding investing. Your investments should align with your personal situation.

  1. Are they a specialist in the circumstances that apply to you?

Financial planning has many facets and finding an advisor that understands your situation is critical to long term success. Planners that understand the business of optometry will have far more to offer you than just reviewing your investment strategy.

  1. Do they integrate the various tax “persons” that apply to your situation?

The CRA defines “persons” as different tax entities. To have a truly efficient tax and planning strategy, your professional advisor should integrate all “persons” for your personal situation, such as spouses, operating companies, holding companies and trusts for example.

  1. Do they provide you with actionable items to bring you closer to your goals?

A planner should have a deep understanding of your goals and where you are today. The plan should help bridge that gap. Because life is ever changing, your goals will change too. How often are your goals reviewed? Is there follow-up on actionable items? How is your progress measured?

A Holistic Approach to Financial Planning

A holistic financial plan should integrate all aspects of your life: personal and business. It should include an IPS, a Letter of Engagement, goal creation and action items. The best approach is a long term strategy where your progress is measured and goals are adjusted as your life changes.

If you aren’t sure your advisor is a CFP® professional who is acting in your best interests first, don’t be afraid to ask the questions.

It is never too early or too late to set your financial plan in motion. Interested in an advisor that not only understands optometry deeply but is truly your fiduciary, give us a call (780-261-3098) or email (Roxanne@C3wealthadvisors.ca) to set up your next conversation.

Roxanne Arnal is a CFP®, former Optometrist, Professional Corporation President, and practice owner. Today she is on a mission to Empower You & Your Wealth with Clarity, Confidence & Control.

These articles are for information purposes only and are not a replacement for personal financial planning. Everyone’s circumstances and needs are different. Errors and Omissions exempt.

 

ROXANNE ARNAL,

Optometrist and Certified Financial Planner

Roxanne Arnal graduated from UW School of Optometry in 1995 and is a past-president of the Alberta Association of Optometrists (AAO) and the Canadian Association of Optometry Students (CAOS).  She subsequently built a thriving optometric practice in rural Alberta.

Roxanne took the decision in  2012 to leave optometry and become a financial planning professional.  She now focuses on providing services to Optometrists with a plan to parlay her unique expertise to help optometric practices and their families across the country meet their goals through astute financial planning and decision making.

Roxanne splits EWO podcast hosting duties with Dr. Glen Chiasson.

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There’s No Such Thing as Risk Free Investing

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Risky versus Safe Investments

I often hear that Guaranteed Investment Certificates (GICs) are risk free because they protect your capital, much like a savings account would be considered risk free. Although this makes sense on the surface, these “safe” investments are anything but.

What is Risk?

Risk refers to the degree of uncertainty of achieving an expected rate of return. Thus, if all factors are equal, the degree of risk (uncertainty) and the expected rate of return should correlate accordingly. Ideally, more uncertainty, more expected return.

Impact of Inflation

One risk with all investments, including GICs is a long-term inability to keep pace with inflation. Essentially, the cost of living continues to increase and if your money isn’t keeping pace, your purchasing power decreases. A million dollars in 1988 (when the Bare-Naked Ladies would purchase a house, a K-Car, and really expensive ketchup) bought you a lot more than a million dollars will buy you today. A loaf of bread at the time was under $1 while the current average for boring bagged bread is around $3.

But Doesn’t a GIC Pay More Than Inflation?

Let’s look at an example based on known history. If you retired in 1989 with $500,000 in non-registered capital invested in a GIC and withdrew a net of $26,707 from this savings for annual spending, adjusted for inflation and taxation on the investment earnings, you would have run out of money in 20 years.(1) And keep in mind that GICs paid much better in the ‘90s at upwards to 7.1% for a 5 year GIC when inflation was 1.7% (2).

What are my Options?

Because no investment is risk free, and because hindsight is 20/20, we can use the same 20 year period invested in the TSX and S&P 500 indexes, with their fluctuating market valuation, and after 20 years you still had $360,627 left.(1)

I’m not saying you should invest in these markets specifically, especially during a withdrawal phase, but you should be aware that there are other options that can do a better job long term to keep up with inflation.

Other Components of Risk

Inflation and taxation both play integral roles in understanding your true rate of return and purchasing power for all investments, but you shouldn’t negate other factors of risk to define what is ultimately suitable for you, your goals and long-term needs.

Throughout history, variability in markets is really a short-term risk, just pull up an image of an Andex® chart to see the historical long-term growth of various investments.

Other factors to consider include currency risks, geographic and political risks, liquidity (ability to get usable cash when you want it) risks and timing of withdrawals (having to cash out an investment when markets are down create a permanent loss that can’t be recovered from).

The Bottom Line

The truth is what is often considered “risk free” is really just “comfortable”. It provides uneducated investors with a false sense of security based on knowing that their capital isn’t subject to stock market sentiment of day. Understanding that no investment is truly risk free will allow you to make more suitable investment decisions based on your comfort level as a well-educated investor.

  1. calculations provided by PlanPlus Planit
  2. 1995 values as reported https://www.ratehub.ca/blog/the-history-of-gic-rates/

Advisory

Have more questions? As your Chief Financial Officer, I am here to help you make smart financial decisions that align with your business growth, personal wealth creation strategy and long-term interests. Helping you understand your money and assisting you in making informed decisions about your investment options are just some of the ways that I work as your fiduciary.

Educating you is just one piece of being your personal CFO that we excel at. Call (780-261-3098) or email (Roxanne@C3wealthadvisors.ca) today to set up your next conversation with us.

Roxanne Arnal is a former Optometrist, Professional Corporation President, and practice owner. Today she is on a mission to Empower You & Your Wealth with Clarity, Confidence & Control.

These articles are for information purposes only and are not a replacement for personal financial planning. Everyone’s circumstances and needs are different. Errors and Omissions exempt.

ROXANNE ARNAL,

Optometrist and Certified Financial Planner

Roxanne Arnal graduated from UW School of Optometry in 1995 and is a past-president of the Alberta Association of Optometrists (AAO) and the Canadian Association of Optometry Students (CAOS).  She subsequently built a thriving optometric practice in rural Alberta.

Roxanne took the decision in  2012 to leave optometry and become a financial planning professional.  She now focuses on providing services to Optometrists with a plan to parlay her unique expertise to help optometric practices and their families across the country meet their goals through astute financial planning and decision making.

Roxanne splits EWO podcast hosting duties with Dr. Glen Chiasson.

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5 Reasons You Need a Will

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Creating a Will for Optometrists

Many young doctors, grappling with the demands of their profession and burdened by student debt, often postpone addressing critical aspects of wealth management and legacy planning. Even amidst the hustle of daily life and financial obligations, there are compelling reasons why executing a will should be a priority sooner rather than later.

  1. Distribution of Assets:

    While starting with a negative net worth is common for many young professionals, it won’t be long until your assets exceed your debts. Dying intestate, or without a will, results in your assets being distributed according to provincial laws.

  1. Increase Costs:

    Legal proceedings, particularly involving courts and lawyers, entail significant expense. In addition, settling your estate will require the court to appoint an estate administrator, who also has a right to charge a reasonable fee for their services. Without a will, these costs can quickly eat into the estate, potentially diminishing its value to the point where the distribution of valuables become negligible.

  1. Probate Fees:

    Probate is the legal process validating a will and is a standard procedure for most estates. Having a named beneficiary on life insurance policies and registered investment assets can bypass probate. Probate fees are set provincially and vary substantially across the country.

  1. Family Disputes:

    Intestacy laws dictate how assets are divided among family members, leaving no room for your personal preference. Siblings, parents, a common-law partner – everyone will be hurting and likely feel differently about what is fair, especially compared to a court definition. Many familial relationships have been permanently damaged because you didn’t plan ahead.

  1. Care of Minor Children:

    In the absence of a will, the court determines guardianship arrangements for minor children, a critical decision particularly if you have been their only parent. In addition, if there is any residual of your estate when they turn 18, they will receive the full amount in one lump sum!

Often we believe that everything will pass directly to our spouse. Common-law relationships don’t have the same rights as legally married spouses, and can differ across provincial borders. In addition, if you have children, only a fraction of your estate will be distributed directly to your spouse.

Proper planning will also ensure that your corporation or business interests are handled efficiently to maintain their highest value, and that tax strategies have been included to limit significant liabilities.

Failure to address these issues can lead to many unintended consequences.

Crafting a will empowers individuals to assert control over the distribution of their assets, safeguarding their interest and those of their loved ones. By addressing these considerations proactively, individuals can navigate the complexities of estate planning, ensuring a smoother transition of wealth and preserving their legacy.

Advisory

Have more questions? As your Chief Financial Officer, I am here to help you make smart financial decisions that align with your business growth, personal wealth creation strategy and long term interests. Helping you understand your money and assisting you in making informed decisions about your estate planning are just some of the ways that I work as your fiduciary.

Educating you is just one piece of being your personal CFO that we excel at. Call (780-261-3098) or email (Roxanne@C3wealthadvisors.ca) today to set up your next conversation with us.

Roxanne Arnal is a former Optometrist, Professional Corporation President, and practice owner. Today she is on a mission to Empower You & Your Wealth with Clarity, Confidence & Control.

These articles are for information purposes only and are not a replacement for personal financial planning. Everyone’s circumstances and needs are different. Errors and Omissions exempt.

ROXANNE ARNAL,

Optometrist and Certified Financial Planner

Roxanne Arnal graduated from UW School of Optometry in 1995 and is a past-president of the Alberta Association of Optometrists (AAO) and the Canadian Association of Optometry Students (CAOS).  She subsequently built a thriving optometric practice in rural Alberta.

Roxanne took the decision in  2012 to leave optometry and become a financial planning professional.  She now focuses on providing services to Optometrists with a plan to parlay her unique expertise to help optometric practices and their families across the country meet their goals through astute financial planning and decision making.

Roxanne splits EWO podcast hosting duties with Dr. Glen Chiasson.

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6 Reasons to Consider Business-Owned Life Insurance as an Investment

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Business Owned insurance

Business-owned life insurance presents a unique opportunity for business owners to leverage insurance as a strategic investment tool. Here’s why it’s worth considering:

  1. Protection Against Business Risks:

    First & foremost, insurance should be used to cover off a risk. Business-owned life insurance can serve as a safeguard against business risks such as pre-mature death. Having an investment portion to your policy adds flexibility funding for other risks such as disability, loss of key personnel, or the buyout needed on retirement of a partner.

  2.  Tax Advantages:One of the most compelling reasons to opt for business-owned life insurance is its tax benefits. The growth from corporate investments is considered passive income and is taxed at the full corporate tax rate, currently 50.2% in Ontario. By utilizing life insurance with investment potential, business owners can effectively shield financial growth from excessive taxation, maximizing the potential of their investment.
  3. Preserving the Small Business Deduction:Investing in a business-owned life insurance policy can help preserve the small business deduction tax rate on active income. Typical investment earnings in a corporation exceeding $50,000 will grind down this tax rate benefit. Growth in the life insurance policy can mitigate this grind down.
  4. Wealth Accumulation and Protection:Beyond tax benefits, business-owned life insurance serves as a powerful tool for wealth accumulation and protection. It provides a vehicle for building assets within the business while simultaneously offering protection against unforeseen events such as the death of a key employee or business partner.

  5. Legacy Planning and Succession:

    Business-owned life insurance can play a crucial role in legacy planning and business succession strategies. It can help ensure that the business has sufficient liquidity to cover expenses, settle debts, and facilitate a smooth transition in the event of the owner’s death or retirement. Additionally, the death benefit can provide financial security for heirs and facilitate the transfer of ownership in a tax-efficient manner when utilizing the capital dividend account.

  1. Flexible Access to Funds:

    The life insurance policy’s cash value can be accessed through various means, including collateralized loans, policy loans, or partial surrenders. This flexibility allows business owners to access capital when needed without disrupting the business’s operations or incurring significant tax liabilities. Additionally, this flexibility can be utilized as an alternative source of retirement income.

In conclusion, business-owned permanent life insurance offers a range of benefits, including tax advantages, wealth accumulation, legacy planning, and protection against business risks. By leveraging insurance as an investment tool, business owners can optimize their financial strategies and secure the long-term success of their company.

Advisory

As your Chief Financial Officer, I am here to help you make smart financial decisions that align with your business growth, personal wealth creation strategy and long term interests. Helping you understand your money and assisting you in making smart decisions about your debt repayment, insurance protection, tax management and wealth creation, are just some of the ways that I work as your fiduciary.

Have more questions than answers? Educating you is just one piece of being your personal CFO that we excel at. Call (780-261-3098) or email (Roxanne@C3wealthadvisors.ca) today to set up your next conversation with us.

Roxanne Arnal is a former Optometrist, Professional Corporation President, and practice owner. Today she is on a mission to Empower You & Your Wealth with Clarity, Confidence & Control.

These articles are for information purposes only and are not a replacement for personal financial planning. Everyone’s circumstances and needs are different. Errors and Omissions exempt.

ROXANNE ARNAL,

Optometrist and Certified Financial Planner

Roxanne Arnal graduated from UW School of Optometry in 1995 and is a past-president of the Alberta Association of Optometrists (AAO) and the Canadian Association of Optometry Students (CAOS).  She subsequently built a thriving optometric practice in rural Alberta.

Roxanne took the decision in  2012 to leave optometry and become a financial planning professional.  She now focuses on providing services to Optometrists with a plan to parlay her unique expertise to help optometric practices and their families across the country meet their goals through astute financial planning and decision making.

Roxanne splits EWO podcast hosting duties with Dr. Glen Chiasson.

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