Winnipeg Free Press Newspaper Archives Aug 1 2015, Page 40

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Winnipeg Free Press (Newspaper) - August 1, 2015, Winnipeg, Manitoba C M Y K PAGE B11 Source: 2013 NADbank Study Each Week Our Print & Digital Products Reach 72% of Winnipeg households likely to acquire a vehicle in the next year of Winnipeg adults who personally hold investments 72% 73% of Winnipeg households that did any major renovations or exterior work in the past 2 years 70% of Winnipeg households that shopped at a grocery store in the past month of Winnipeg adults who took an overnight vacation in the past year 71% 73% of Winnipeg households that purchased appliances in the past 3 years 70% of Winnipeg households that purchased furniture in the past 3 years up town Autos YOU WILL FIND IT HERE. MONEY MATTERS BUSINESS EDITOR: SHANE MINKIN 204- 697- 7308 I BUSINESS. DESK@ FREEPRESS. MB. CA I WINNIPEGFREEPRESS. COM SATURDAY, AUGUST 1, 2015 B 11 P AUL and Alicia have struggled through a couple of tough years as his fledgling business has tried to find its footing. “ In my third year, I am just now really turning a profit,” says Paul, a tradesman in his early 30s. At the moment, he’s drawing a salary of about $ 59,000 with a monthly net income of about $ 4,000 a month. The problem is household spending has exceeded that by a few hundred dollars on average for the last few months. “ I’d like to learn how to budget and run my business better because I’m just learning as I #$#$ up — if you will.” Now with business humming, Paul is seeking tax efficiencies to keep more money in the business and his pocket. Among his questions are whether Alicia should draw a salary, and should they earn dividends instead of paycheques from the company? And once profits are sufficient, is buying property a viable way to build wealth for their retirement? In the meantime, they’re contributing to RRSPs, a TFSA, and even an RESP in a group plan for their young child. While Paul says he believes their finances are looking up, he still wonders if he’s truly on the right track to prosperity. “ Everything is going well. We’re moving forward, and before it gets too carried away, we just want to know how to do it properly.” Certified financial planner Uri Kraut with Assiniboine Credit Union in Winnipeg says before they do anything else regarding their business or personal finances, this couple must address their monthly deficit. “ Paul and Alicia are currently experiencing a $ 270 monthly shortfall, which amounts to about $ 3,240 a year.” And that’s probably why the couple owes about $ 6,500 on the line of credit. To stem losses, they should try to find places to cut costs in the household budget, but if this isn’t possible, they can find other ways to increase Paul’s income by reducing the taxes he pays. They already have an accountant and should always lean on this professional when considering strategies to realize tax savings through Paul’s business. But one of them bearing further investigation is Alicia — who does the bookkeeping anyway — drawing a small salary. “ If Alicia was paid approximately $ 13,000 and the company gave Paul a corresponding $ 13,000 pay cut, his income drops to $ 45,000 with $ 13,000 of earnings slipping out of the 34.75 per cent tax bracket into an extremely low rate for Alicia.” As her income, the first $ 9,135 would be taxfree and the next $ 2,192 is taxed at about 11 per cent. And the remaining $ 1,672 would be taxed at about 26 per cent. All told the tax bill would be $ 668 versus Paul paying about $ 4,656.50 — before any deductions — on the same income. This strategy, however, is not without its consequences. For one, Paul could no longer claim Alicia as a dependent. The family tax cut, which allows spouses to split income would be less effective, and the universal child care benefit would be taxable because Alicia’s income would increase. “ It will still be a win for the family, but not as significantly as it may first appear,” he says, further adding they should consult with an accountant. “ But the tax savings on this one strategy would likely correct the monthly cash- flow deficiency.” If they do go down this path, they should stop contributing to RRSPs as the reduction in Paul’s income makes contributions less effective. “ For the most part, his tax rate would be about 28 per cent, and once retired, if they build up enough wealth, he may find himself withdrawing the money at a higher tax rate.” In the meantime, they could focus on contributing to their TFSAs. So far, they’ve been using it as a savings account for emergencies — certainly not a bad strategy, Kraut says. “ Some people believe six months of income should be set aside; that is about $ 24,500 for them, and they are about quarter of the way there,” he says. “ But many people do not set aside that much and seem to be fine, stopping once they have reached the amount in mind.” For Paul and Alicia, that might be three months of income, about $ 12,000. At their current savings rate, it will take them between one to two years to build up that much cash in their TFSA. Once they reach whatever goal they set out to achieve for an emergency fund, they should then try to increase their contributions and invest for the long- term — stocks and bonds — to build up a solid source of tax- free cash later in life. Kraut also wanted to make one other point about their investments before moving on regarding their RESP. The couple have been investing in a group plan that has very high fees. “ They have contributed $ 1,800 to a RESP so far and only have $ 769 in it after fees,” he says. A lower- cost alternative would be to open an RESP through their financial institution which would charge no fee in most cases. While they might pay management costs associated with the mutual funds they purchase inside the RESP, the fee cost on $ 1,800, for example, would be $ 45 as opposed to more than $ 1,000. Although a minor detail against the backdrop of their overall situation, Kraut says they want every dollar they invest in themselves and the company to go as far as possible. That also certainly entails examining the advantages of incorporation. In this respect the ability to draw dividends will be a very important tool in the future when the company is more profitable. Again Kraut says they should consult with an accountant on when and how to use dividends for greatest tax efficiency. But basically their income would have to be higher than $ 45,000 each to make it worthwhile, and they should only draw as much income as required. “ Remember dividend taxes are lower but not free.” Overall it’s better if profits are retained in the business where they can grow and eventually even be used to buy real estate. “ If Paul has a long- term goals of buying houses, or commercial real estate, these should be considered purchases within the corporation as it will help build up the equity of the corporation, which offers substantial benefits from reduced taxes on capital gains from various exemptions to deducting interest costs against generally higher taxable corporate income.” In addition, major purchases such as automobiles should also be made within the corporation to maximize its assets and deduct more expenses against corporate income. All of these measures will help build wealth inside the company. Until then Kraut suggests they refrain from rushing into real estate and heavily leveraging themselves. Instead retained earnings can be invested in mutual funds, stocks, bonds and other investments that can grow their wealth over time and generally taxed more favourably than in their own hands. “ Once the business is a little more profitable with built- up financial reserves, they can start looking at spreading out in to real estate,” he says. “ In the interim, they should consider relying on dividend paying equities through mutual funds or exchange traded funds.” joelschles@ gmail. com JOEL SCHLESINGER MONEY MAKEOVER Got a financial problem you want solved? Email business@ freepress. mb. ca for a free Money Makeover Small business, big dreams Tradesman has struggled for past few years, but with revenues now turning the corner, he seeks advice on how best to grow Paul and Alicia’s finances INCOME: Paul: $ 59,000 ($ 4,080 net a month) MONTHLY EXPENSES: $ 4,350 DEBTS: Line of credit: $ 6,530 at 3.5 per cent Mortgage: $ 169,300 at 3.29 per cent ASSETS: Savings: $ 2,800 Paul’s RRSP: $ 6,550 Alicia’s RRSP: $ 6,590 Paul’s TFSA: $ 6,380 Home value: $ 197,000 RESP: $ 770 Term life insurance: $ 750,000 each NET WORTH: $ 44,260 MIKE DEAL / WINNIPEG FREE PRESS B_ 11_ Aug- 01- 15_ FP_ 01. indd B11 7/ 31/ 15 4: 29: 46 PM

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