Tuesday, August 29, 2017

Small Business

What do you think of when you hear “small business?” Maybe you think of a roofer who has enough work to employ three helpers. Or maybe you think of a hair-cutting place. Do you ever think of lawyers who make half a million dollars per year and incorporate themselves to defer and reduce their income taxes?

Opponents of the Trudeau government’s planned income tax changes for private corporations have been vocal lately. They have a lot to lose. The “tax planning” opportunities using private corporations are very effective at reducing taxes.

There are some good arguments on both sides of this debate, but one part of it irks me: referring to incorporated professionals as “small business.” It’s not that this is technically wrong; it’s that it’s deliberately misleading. The public has sympathy for the types of businesses they think of when they hear “small business.” This sympathy dries up quickly if we talk about highly-paid professionals reducing their income taxes.

Getting into the substance of the proposed tax changes, I think there are two parts that make a lot of sense. One is that private corporations shouldn’t be able to get income deductions for paying family members who had little or nothing to do with earning the income. The other is putting a stop to complex maneuvers designed to turn income into capital gains to cut the tax rate in half.

The merits of the changes designed to attack passive income inside a private corporation are less clear to me. Professionals hold assets in their corporations as a means of smoothing income over a lifetime. In a sense, it’s like using an RRSP to reduce income today and create an income after retirement.

Everyone should be allowed to save some money tax-free to create income in retirement (when it will be taxed). The debate is how much income we should be allowed to defer. Government employees with defined-benefit pensions get an advantage over those who use only RRSPs because the government undervalues future pensions. I certainly can’t replace 70% of my income from my RRSP savings. This means government employees get to defer more income than most of the rest of us even after taking into account their reduced RRSP room (called a pension adjustment).

Professionals using private corporations are deferring significant amounts of income as well, although working out how much they defer gets complicated when we take into account the partial tax payments they make at the corporate tax rate.

Another complication in this debate concerns doctors. Few people will cry over some lawyers and accountants leaving for greener pastures, but doctors are clearly in a different category. I don’t know what the long-terms effects of the new tax measures will have on our medical system, but I doubt the correct answer is “none.”

We need more reasoned debate on these issues. But, please don’t refer to private corporations of highly-paid professionals as “small business.”

Monday, August 21, 2017

Email Replies

Reader feedback is the best part of writing my blog. But some of the email I get is less welcome. Here is another installment of replies to emails I usually ignore.

Dear Brenton,

Thank you so much for the chance to register for your lucrative trader service. Your list of 15 triple-digit winners in just 8 months is indeed impressive. If you had started with $10,000 and let it ride through these great picks, you’d now have 736 million dollars! But, I’m puzzled. Now that you’re so wealthy, why do you need me to pay when I register?




Dear Melanie,

I’m so glad that my blog passed the test to join your publishing partners network. One of the tricks I use to keep quality up is that I never run advertorials. If I were to start publishing the “customized and relevant content” you provide, I’m afraid that my blog would then drop below your standards. It seems we’re caught in a catch-22.




Dear Robert, Reed, Michael, Joon, Brian, Craig, and many others,

Thank you for the many invitations to join your class action lawsuits. I have indeed suffered losses related to the companies you mentioned. However, my losses aren’t related to trading shares in these companies. I’ve lost time from my life dealing with the flood of class-action-related emails. Thank you for limiting my time losses by marking the emails with “IMPORTANT” and “ALERT”. This helped greatly in determining quickly that the emails were unimportant.



Friday, August 18, 2017

Short Takes: Begging the Fed, Asset Classes, and more

I managed only one post in the past two weeks:

Create the Retirement You Really Want

Here are some short takes and some weekend reading:

Tom Bradley at Steadyhand has a funny and accurate take on a letter from bondholders trying to avoid losses on poor investments by warning the U.S. Fed not to raise interest rates too fast.

Preet Banerjee comes back from an extended hiatus to explain asset classes in his latest video.

Big Cajun Man found that all of his credit card limits counted against the size of mortgage he could get.

Salman Ahmed at Steadyhand has some suggested questions for the guy who brags he earned a 30% return last year.

Potato says the advisor vs. adviser distinction is a meaningless distraction from finding good financial advice.

Tuesday, August 8, 2017

Create the Retirement You Really Want

Most retirement books focus strongly on finances and investing, but in Create the Retirement You Really Want, Clay Gillespie looks at a wide range of retirement issues from figuring out what you want to do during retirement to leaving a legacy. Readers are likely to find some topics relevant to improving their own retirements.

The book is a mix of standard non-fiction style writing and story-style using hypothetical retirees. Thankfully, the stories get to the points quickly rather than trying to be good fiction. I found this worked well. I would not have had the patience to read longer fictional parts.

I was surprised the book contained so little about investing. The hypothetical retirees deal with an advisor who offers three portfolio possibilities with targeted real returns of 2%, 3%, and 4% per year. Apart from varying the allocation to stocks, there was little mention of how these returns would be achieved. I thought it would at least have made sense to discuss the importance of keeping costs low. Canadians who pay 2.5% or more per year for their mutual funds can only dream of earning a compound average annual return of 4% above inflation for decades.

The topics covered included figuring out your dreams for what you’ll do during retirement, what it will cost, health, wills, events that derail your plans, cottages, and family bickering over inheritances. I particularly liked the discussions of cottages and inheritances. I’ve heard accountants and advisors warn about problems in these areas, but Gillespie illustrated the potential complexities and conflicts well.

One part of the discussion of inheritances surprised me: “giving back and leaving an inheritance is always important to retirees.” I know many people who’ve said they have no intention of leaving money behind. Either Gillespie is saying that people tend to change their minds as they age, or perhaps he only advises wealthy people who end up leaving inheritances.

The author shows a better understanding of inflation than some advisors. “When most people think about returns, they think only in nominal terms. They forget inflation. But inflation is very real, and retirees feel the impact more than any other group because they often live on fixed incomes. Real return is the number that people should really focus on.”

Gillespie believes that “an initial withdrawal rate of 5.5 percent is sustainable if you have the proper retirement income strategy in place.” I’m skeptical that an income strategy will make much difference. This sounds a lot like a claim to be able to beat the market. The right withdrawal rate depends on age, asset allocation, portfolio costs, and willingness to reduce spending if market returns disappoint.

The book contains some plugs for financial advisors. One is included with some statistics: “Only 29% [of Canadians] use the services of a financial advisor (even though investors who use an advisor are more confident and optimistic about their financial futures).” Of course, the implied causality here is questionable. Having lot of money makes people “confident and optimistic about their financial futures.” Also, financial advisors seek out people with a lot of money, and those with a lot of money are more likely to find a good advisor. The root cause of the correlation between financial optimism and using an advisor is having a lot of money.

While many financial advisors push their clients to leverage their portfolios, Gillespie believes it’s a mistake to avoid paying off debt in favour of saving for retirement. He gets full marks for this in my opinion. The best plan involves getting total debt down to a manageable level while you’re relatively young and then keep it dropping while simultaneously building savings. Gillespie says “good debt and bad debt is just splitting hairs,” a point I’ve made before.

“It’s always a good idea to exhaust your non-registered funds before dipping into your registered savings.” I don’t think this is always true. Between retirement and age 71, it can make sense to make an RRSP withdrawal in a low-income year where the withdrawal would be untaxed or taxed at a very low rate. Figuring out when this makes sense can be tricky, though.

In one section a hypothetical couple derail their carefully constructed retirement plan to follow the advice of a do-it-yourself (DIY) investing brother-in-law. This section paints DIY investing as chasing risky biotech stocks. There certainly are people like this who try to draw others into their risky strategies, but DIY investing can also mean low-cost diversified investing.

Advice we hear frequently is not to put money in the stock market if we’ll need it within 5 years. Gillespie has an interesting way of saying something similar: “Always invest based upon when you want your money back.”

Overall I found this book useful for its treatment of a wide range of retirement issues. However, its main purpose seems to be to drive home the point that you need a financial advisor to steer you. Of course, the challenge for most of us is trying to find a quality advisor, particularly for those with modest portfolios.

Friday, August 4, 2017

Short Takes: Mortgage Delinquencies, Stupid Investments, and more

Here are my posts for the past two weeks:

The Behavior Gap

You Can’t Have Your Sears Cake and Eat it Too

Here are some short takes and some weekend reading:

Estate administrator Scott Terrio explains why today’s low mortgage delinquency rate means almost nothing in predicting future mortgage delinquencies.

Freakonomics Radio has a very interesting investment podcast called “The Stupidest Thing You can Do With Your Money.”

The Blunt Bean Counter explains the Liberal government’s new tax proposals for private corporations. He says “the impact of these proposals is potentially massive,” and “I don't think most small business owners have any idea what is about to hit them.”

Financial Services Commission of Ontario explains how to protect yourself when renting a car. Many of us have had that moment of doubt about whether to pay for the rental company’s insurance coverage that often increases the rental cost by 50% or more. This article explains how to get coverage with your credit card or your current auto insurance policy.

Canadian Couch Potato uses his latest podcast to examine MoneySense’s role in advancing index investing in Canada and to disagree with Warren Buffett and John Bogle on international investing.

Boomer and Echo explain why you shouldn’t get mortgage life insurance. Don’t miss a comment by Travis spelling out post-claim underwriting and how it can cost you.

Thursday, August 3, 2017

You Can’t Have Your Sears Cake and Eat it Too

It’s well known that Sears Canada has been having financial trouble for some time. As often happens in these situations, the Sears defined benefit pension plan is underfunded. According to Steven G. Kelman, “Ill-advised government policies” have resulted in former employees getting only “81% of the commuted value of their defined benefit pensions.” What we have here is a tension between trying to keep companies afloat and keeping pension plans fully funded.

It’s easy to decide today that Sears should never have been allowed to delay properly funding their pension plan. But, if Sears had been forced to fully fund the plan sooner, they would have gone bankrupt sooner. If we go back to a time when there was still hope to save Sears, few people would have agreed to force Sears into bankruptcy over their pension funding. But allowing sick companies to let their pension obligations slide inevitably leads to some bankrupt companies with underfunded pensions.

We can agree that it’s unfortunate that some Sears employees won’t get their pensions. But back when Sears was still limping along, who would have decided to force them into bankruptcy and sacrifice jobs to make sure that pensions are topped up? I’m not suggesting that current jobs are necessarily more important than future pensions. But, those who focus solely on pensions need to understand that they are advocating killing off sick companies sooner.

One suggested solution is Kelman’s assertion that “governments, in my opinion, should kick in the shortfalls to make the Sears former employees and others in similar predicaments whole.” This sounds perfect until we realize that governments pay for nothing; taxpayers foot the bill. There’s no free lunch. Why should taxpayers make good on the promises of failed companies?

Another idea to protect pensioners is to put them ahead of other creditors when a company gets into financial trouble. But, then who would want to be a creditor? Any company that has an underfunded pension would have serious trouble getting credit, which would drive them into bankruptcy sooner. I’m not saying this is the wrong approach, but advocates of this idea must acknowledge that it will drive more companies into bankruptcy.

If we’re going to demand that no pension plan ever be underfunded, we have to be prepared to accept that this will bring some companies to financial ruin sooner, and will break some companies that might have survived if they had a little more time to turn around. We have to choose between pensioners and current workers. We can’t have our cake and eat it too.