Wednesday, December 23, 2020

How to Decide

Following up on her bestselling book Thinking in Bets, Annie Duke’s new book How to Decide makes good on its promise of “Simple Tools for Making Better Choices.”  This is a workbook of sorts filled with reader exercises and space to write in your work.  Readers can get a lot out of this book by just reading through it, but they’ll get more if they try some of the exercises.

A necessary part of improving decision making is avoiding common types of mistakes.  But we tend to believe that while others make these mistakes, we don’t make them ourselves.  Duke does an excellent job of illustrating different types of mistakes and persuading readers that we make these mistakes too.  Perhaps a critical part of getting readers to understand their own failings is that Duke characterizes them as normal human tendencies rather than “mistakes” or “failings”.  Whatever we call them, it’s apparent that avoiding them requires mental effort and building new habits.

A common problem with the way we judge past decisions is that we are overly influenced by the way the decision worked out.  Some good decisions work out badly because of bad luck, and some bad decisions work out well because of good luck.  We see this in sports.  While the football was in the air during a last second field goal attempt to decide the game, the teams were well matched and played a great game.  But the second we know who won, the winning team played a brilliant game in all respects, and the losing team made numerous unforgivable mistakes throughout the game.

Another common problem with the way we think is 20/20 hindsight, or the tendency to see past events as inevitable.  Somehow we go from having no idea what will happen to having known all along what was going to happen.

One part of the book gently persuades the reader to try to assign numerical probabilities to possible future outcomes from a decision.  Not surprisingly, many people respond with some variant of “I have no idea.”  But Duke does an excellent job of explaining that we almost always do have some useful information.  She takes the reader through a series of steps to make even the innumerate more comfortable with assigning probabilities.

A tool most people know for making a decision is a pros and cons list.  Duke explains the many ways that such lists lead people astray.  She teaches ways to remove biases from decision making, but “if you wanted to create a decision tool to amplify bias, it would look like a pros and cons list.”

You might think that being smarter would help in making better decisions, but this isn’t always true.  “Being smart makes you better at motivated reasoning, the tendency to reason about information to confirm your prior beliefs and arrive at the conclusion you desire.”

One challenge with personal decisions is that we are stuck with our “inside view.”  The way we see ourselves in the world may not match reality.  To make better choices, we need to seek out an “outside view.”  But, “if you want to know what someone thinks, stop infecting them with what you think.”

The first three-quarters of the book is useful to individuals, and the later chapters shift to group decision making within organizations.  One problem not addressed is personal agendas.  I’d be interested to know how the group decision making techniques fare when one or more members of the group have something to gain from a particular choice and don’t care what’s best for the organization.

Overall, I recommend this book as a way to understand your own tendencies better.  I challenge readers who think they have no problem with the way they make decisions to maintain this attitude after reading How to Decide.

Friday, December 18, 2020

Short Takes: CPP Starting Age, Huge Bank Profits, and more

I recently made my annual withdrawal from my BMO Investorline RRSP.  Curiously, Investorline added an extra eight cents to the withdrawal.  I suppose it’s possible I mistyped the amount, but it seems unlikely.  I remember typing in the dollar amount and deciding to add the “.00” to the end.  The eight key isn’t beside the zero key on my keyboard.  Is it possible that RRSP withdrawals are reviewed and retyped by an actual human at Investorline, and the person misread the final zero as an eight?  If this is right, I’m surprised the process isn’t more automated.

Here are my posts for the past two weeks:

Transitioning Your Portfolio into Retirement

Quit Like a Millionaire

Choose Financial Independence

Here are some short takes and some weekend reading:

The typical Canadian who takes CPP at 60 instead of 70 “loses over $100,000 of secure lifetime income in today’s dollar” according to a report by the National Institute on Ageing (NIA) and the FP Canada Research Foundation.  I’ve written about this issue many times, but the emotional desire to take money now instead of later is difficult to overcome.  It doesn’t help that financial advisors have an incentive to advise people to take CPP at 60 so they sell less of their investments.  I like the way this report frames the choice as giving up more than $100,000 if you take CPP early.

Tom Bradley at Steadyhand has updated his bank profit indicator for 2020.  Among Canada’s top 6 banks, “the amount of [annual] profit per woman, man and child in Canada, comes in at $1,083.”  This is a staggering figure, and it’s just the profits.  We also pay banks enough to cover their taxes and other expenses.

Justin Bender explains where it makes most sense to use Vanguard Canada’s Retirement Income ETF (VRIF) in a recent video.

Big Cajun Man
ran into some trouble with automatic payments coming out of his PayPal account.

Wednesday, December 16, 2020

Choose Financial Independence

Many of us dream of financial independence.  Chris Mamula, Brad Barrett, and Jonathan Mendonsa offer many practical ideas for achieving financial independence (FI) and enjoying the journey along the way in their book Choose FI: Your Blueprint to Financial Independence.  They avoid many of the problems we see in the FIRE (Financial Independence Retire Early) book category.

The authors avoid the biggest problem with most FIRE books.  It’s annoying to tell the story of a high-income earner deciding to live like a student his whole life and retire in his 30s, and then say “you can too!”  Although I point out the bad parts of books, I can forgive a lot if my mind is opened to a good idea.  For this reason, I’ve enjoyed FIRE books even if they have some bad parts.  This book manages to avoid the worst parts of other FIRE books.

The authors don’t bother much with retirement.  FI gives us choices so we can “scrap the idea of retirement completely and focus on building lives we don’t want to retire from.”  The life you build can involve paid work, leisure, or any other pursuit you want.

Rather than focus on just one story, the authors draw from the experience of many people who have sought FI.  A common theme is the importance of enjoying the journey.  If you see your pursuit of FI as suffering for several years until you hit your magic number, you’re not doing it the right way.

You benefit from pursuing FI even before you reach your target.  “If you have a mortgage, a couple car payments, a family to feed, and nothing in the bank, what choice do you have when your boss asks you to do something stupid?”  I was able to push back somewhat with my boss in the late part of my career, and this got me more money and autonomy.

If reaching FI seems like an unattainable goal, it may help to break it down into milestones.  The authors suggest “getting to zero” for those in debt, “fully funded emergency fund,” “hitting six figures” in your portfolio, “half FI,” “getting close,” “FI,” and “FI with cushion.”  This last stage is defined as having a portfolio equal to 33 times your annual spending needs.  This is a sensible target for a young person with a long remaining life who doesn’t really know how spending needs will change with age.

The bulk of the book is organized around the main themes of achieving FI: spend less, earn more, and invest better.  In the spend less theme, the idea is to align your spending with your values.  Once you figure out what’s important to you, it becomes easier to cut out spending inconsistent with your values.  Once you settle on how to spend, “What you spend, not what you earn, determines how much you need to achieve FI.”

Here’s a vivid explanation of the spending problem: “We found ourselves working non-stop to pay for a house we couldn’t enjoy, cars that were losing value while being used primarily for getting us to and from work, and unhealthy restaurant meals we ate because we didn’t have time to shop and cook for ourselves.”

The book gives examples of different people who have pursued “lean FIRE” and “fat FIRE.”  We’re familiar with lean FIRE examples where people cut their expenses to easily-ridiculed levels.  But fat FIRE, where you retain some of the finer things in life is possible as well.  It takes longer, but you may enjoy the ride a lot more.

One area where it’s possible to save a lot of money is housing.  Sharing housing is a good way to cut expenses drastically, “but there is a stigma associated with living with roommates as adults.  Why is there no stigma to living paycheck to paycheck in houses or apartments that destroy wealth?”

One of the expenses that goes down as you become wealthier is insurance.  For example, you generally don’t need life insurance if you’re FI.  However, as you become wealthier, umbrella insurance may be a good idea.  “If you were successfully sued, it could have a significant impact on your finances.”

The section on spending less ends with the suggestion to see the world and how others live to get ideas on how you might be happier living differently.  A good quote from Mark Twain: “Travel is fatal to prejudice, bigotry, and narrow mindedness, and many of our people need it sorely on these accounts.”

In the section on earning more money, the book is critical of the advice to “follow your passion.”  They say it’s better to “find a career that interests you and allows you to earn a solid income.  Then learn to love it, or at least like it, while saving a high percentage of your income, allowing you to achieve FI quickly.”

The section on index investing is excellent.  It took me a long time to learn the wisdom in these few pages.  The hardest part for me to finally accept is that “thinking you can improve investment results by developing your investment skill is likely to do more harm than good.”

The 4% rule for retirement spending isn’t too bad for a 60-year old (although I always suggest being prepared to adapt your spending level if your portfolio doesn’t generate the returns you planned).  However, the 4% rule is not well-suited to young retirees because of the length of their retirements and uncertainty in how their spending will change with age.  The authors suggest some sensible changes to the 4% rule.  The first is to drop it to a 3.5% rule, and the second is to build a buffer into yearly expenses.

The authors discuss two other ways to invest, building a business and real estate, although they make it clear that index investing is an easier path.  A good quote on building a business from Lori Greiner: “Entrepreneurs are the only people who will work 80 hours a week to avoid working 40 hours a week.”  The authors also warn readers that stories of business success “have a massive selection bias, focusing on the ‘unicorns’ who made it while ignoring the many others who, despite taking risks, fail anyway.”

It’s important to emphasize the benefits you get from pursuing FI before you actually reach the destination.  “Having the financial freedom to live life on your own terms is the ultimate reason to Choose FI.  Take a minute to reflect on the idea that you don’t have to wait until you hit a magic number or a certain age to retire and experience that freedom.  You begin to gain more freedom the day you Choose FI.”

One warning I have is for the many of us who get enthusiastic about an activity, say skiing, and buy expensive gear and clothing before discovering we’re not really skiers.  It’s possible to sink a lot of time on FIRE blogs and attend FIRE events without ever doing anything to pursue FI.  It’s better to make a few positive changes in your life than it is to just dream and contribute revenue to FIRE blogs.

In conclusion, this book has a lot of great suggestions for improving your life, and it avoids many of the problems pointed out by FIRE critics.  If you think you may not be on the right financial path in your life, this book may be for you.

Friday, December 11, 2020

Quit Like a Millionaire

Many of us dream of what life would be like as a millionaire.  In their book Quit Like a Millionaire, Kristy Shen and Bryce Leung tell the story of starting dirt poor and eventually retiring millionaires in their 30s.  The book is a cross between a how-to guide and their personal stories that works quite well to keep the reader engaged.  The main criticism is that the authors don’t seem to have realistic ideas about how the stock market is likely to perform, but this doesn’t take away from the practical ideas and motivation to help readers achieve financial independence.

The book covers the usual subjects like education, debt, housing, banks, investing, taxes, travel, and retirement, all woven into Shen’s personal story.  She grew up dirt poor in rural China, and after coming to Canada made a series of steps ultimately leading to wealth.  If she can do it, you likely can too, and the authors set out to show you how.

It’s common to hear that you should follow your passion in choosing how to make a living, but the authors say “don’t follow your passion (yet).”  They believe young people should focus on making money first, and then follow their passions once they’re well on the way to financial independence.

While low interest debt isn’t so bad, “Consumer debt should be treated as what it is: a financial emergency that you have to take care of now.”  “Cut expenses to the bone, even if it hurts.”

The book’s take on whether we should spend on experiences or stuff focuses on brain chemistry.  “Possessions give you an initial burst of dopamine that fades as your nucleus accumbens acclimatizes, causing you to continuously chase that high.  People who spend on experiences get way more bang for their buck.”

Banks and their expensive mutual funds are a barrier to wealth.  “The bank wants your savings—specifically, a percentage of it, every year, forever.  The real bank robbers work for the bank.”

“If you ever want to see a banker sweat, try this: walk into your bank, ask to see a salesperson, and ask to put your savings into index funds.  It’s the funniest thing ever.”  “I did exactly that.”  The “salesperson spun story after story about why I was making a huge mistake.”  “Eventually he resorted to outright lying.”

The authors tell a vivid story about what it felt like to make their first stock trades and to live through a market crash.  I was reminded what it felt like the first time I bought shares through an online broker.  No matter how carefully you’ve thought through your investment plans, self-doubt can hit you big time.

An interesting part of the book is about the authors’ extensive experience keeping costs down traveling.  They manage to spend less overall while traveling than they spend when living in Canada.

On the subject of managing a portfolio in retirement, the authors draw an analogy about bullets, missiles, and feedback loops.  Once fired, a bullet just travels on a path determined by physics.  However, a missile “sees” its target and course-corrects.  Similarly, we should adjust our spending in retirement if our portfolios don’t perform as expected.

“Because I’ll stay invested in equities throughout retirement, my portfolio is naturally hedged against inflation.”  This point about inflation makes sense, but another comment didn’t: “Inflation doesn’t affect you when you travel because inflation is a per-country effect.  By switching countries you sidestep inflation.”  Inflation still happens in a country prior to your arrival.

On life insurance: “The worst thing to do if you’re trying to clarify your needs is to ask an insurance salesman.”  “The only [type of  life insurance] you need is term life insurance.”  “If you retire early, you don’t need life insurance.

When people hit their magic number and decide to retire, they often hit a “Wall of Fear.”  “Instead of feeling excited, they worry about all the things that could go wrong.  I experienced this wall of fear.  It led me to keep working a couple of years longer than I needed to.  The roaring stock market since I retired has given me an even larger margin of safety.

The most serious criticisms of the book relate to expectations for the stock market.  One example begins “At a conservative return of 6 percent per year on average (inflation-adjusted), … .”  This isn’t a conservative assumption for a long-term average portfolio return starting today.  The book discusses 60/40 portfolios and having a maximum of 80% stocks, but this 6% real return expectation isn’t realistic even for 100% stocks.  One wonders whether the strong bull market over the last decade has given younger investors unrealistic expectations.

The authors recognize that the 4% rule is meant for 30-year retirements and not the 60-year retirement they may have.  To combat this, they created what they call the “yield shield,” which amounts to shifting to higher-yield assets, such as preferred shares, REITs, corporate bonds, and dividend stocks for their first 5 years of retirement.  They assume that this yield will be safe in a market downturn and they won’t have to sell stocks while they’re low.  This is far from guaranteed.  There are many types of market crashes.  The yield shield will work in minor market declines, but dividends can get cut and stay low for a long time.  The only way to shore up the 4% rule reliably for longer retirements is to save more money.  I’d suggest increasing from 25 times annual spending to 30 times for very long retirements.  The authors were simply lucky that they retired into a continuing bull market.

The authors believe that the difficult market in 2015 shortly after they retired was a good test of their yield shield.  My own portfolio went up 7.63% in 2015.  This is hardly a meaningful test when their stated goal is to have their portfolio last their whole lives with 95% certainty.  Fortunately, the continued bull market has made the sequence of returns problem moot for this couple.

The authors describe their bucket system that involves making active decisions about avoiding selling stocks when they’re down.  This can work well for market corrections, but not extended market declines.  When you spend from cash and bonds to avoid selling stocks, you’re increasing your stock exposure.  This makes further declines hurt even more.  Once you’re out of cash and bonds and you have to sell stocks, this will hurt even more.

The book describes a number of backup plans in case your portfolio shrinks too much.  The last resort is to earn an income again.  This may seem reasonable in your 30s, but what if you’re 70?  When deciding on how much you need to save to retire, imagine yourself old enough that your most useful skills are gone.  I’d rather work an extra year while I’m young than have to flip burgers for 5 years when I’m old.  It’s certainly possible to be too cautious about how much money you need to retire, but misapplying the 4% rule isn’t cautious enough.

Despite these criticisms, this book is a useful guide to financial independence written in an engaging style with some good stories.  Many people think building wealth is just impossible, and the authors do a good job showing how it is possible.  It may take longer on lower incomes, but it’s still possible.  Most of my criticisms can be addressed by simply saving a little more than the 4% rule suggests.

Tuesday, December 8, 2020

Transitioning Your Portfolio into Retirement

It's common for investors to want less risky investments as they transition into retirement.  This means that somewhere in the years leading up to retirement, investors plan to sell some of their stocks to buy more fixed-income investments.  What is the best way to make this transition?

Like most things in life, there is no single answer that applies to everyone.  A range of approaches are possible, from a gradual shift over several years to a sudden sale of stocks on retirement day.  To decide which approach makes sense, I’m guided by my rule that I only invest in stocks with money I won’t need for at least 5 years.

Last-minute stock sale upon retirement

Can it ever make sense to wait until just before retirement to sell a pile of stocks to get to the asset allocation you want in retirement?  The answer is yes, if a number of conditions are met.

Suppose you’ve been working for several years at a secure job with the plan to retire when your savings hit a target level.  You’d be happy to retire immediately, or wait 5+ more years if that’s what it takes.  One day you hit your target, sell some stocks to get to your desired retirement asset allocation, and give notice at work.  

Did you violate the rule not to have any money in stocks if you’ll need it within 5 years?  No.  If stocks had crashed any time in the previous 5 years, you would have kept working longer until you hit your retirement “magic number.”  You wouldn’t have been forced to sell any stocks while they were down.

Cases where a last-minute stock sale isn’t a good idea

1. Your employer may force you to retire before you want to.

If you look around the office and don’t see many people over 60, that’s a sign that you may be pushed out before you’re 60.  Try to be realistic about whether your employer will keep paying your salary for another 5 years or more.  If the stock market happens to be down when you’re forced to retire, your chance to sell stocks while they were up would be gone.

2. Poor health may end your career early.

You can’t know for sure what health issues you’ll have, but if you think you may not be able to keep doing your job for 5 more years, it’s time to think about shifting your asset allocation closer to a retirement mix.

3. You’re not sure how much longer you can stand your job.

Maybe you’re not sure exactly when you want to retire, but you’re sure you won’t still be working in 5 years.  Then it’s time to start shifting your asset allocation.

4. You have a fixed retirement date.

This is the most extreme case: your retirement date is set well in advance, and you don’t intend to find other work.  In this case, it makes sense to gradually shift towards your desired retirement asset allocation during your last 5 years of work.

Conclusion


As you get closer to retirement age, it makes sense to look forward 5 years and think about whether you’ll likely still be working.  If there’s a good chance you won’t still be working even if you haven’t reached your savings target, it might be time to start shifting away from stocks a little just in case the stock market crashes.

Friday, December 4, 2020

Short Takes: U.S. Estate Taxes, a Primer on Ditching Expensive Mutual Funds, and more

I thought I was going to have to replace the locks on my house doors.  At first I just had to jiggle the key a little to get it in the lock.  But then it was getting bad enough that as I fought with it, I wasn’t sure the key could go in all the way any more.  Fortunately, before I called a locksmith, I did an online search.  The locks just needed a little grease.  I can’t believe how well it worked.  The locks had seemed like they were broken, not just a little stuck. There might be better lubricants for the job [a reader suggested graphite spray as a better solution], but I just used WD-40 in the keyholes.  A few seconds later, the locks were like new.  Don’t forget to hold a tissue or rag under the lock to catch the excess; it can make a mess dripping down your door.

Here are my posts for the past two weeks:


CPP Timing: A Case Study

The Capitalist Code

Management Expense Ratio per Quarter Century (MERQ)

The Ultimate Retirement Guide for 50+

The Grumpy Accountant


Inconsistent Pension Envy

Here are some short takes and some weekend reading:

Elena Hanson says Biden is likely to reduce the net worth threshold where Canadians have to pay U.S. estate taxes on U.S. property.

Larry Bates gives a good primer on how to make the switch from expensive mutual funds to low-cost ETFs.

The Rational Reminder Podcast
welcomes Josh Brown and Brian Portnoy to discuss how financial professionals invest.  It turns out that while the pros may invest most of their money in rational ways, they often make some personal choices that deviate from “best practices,” such as holding a lot of cash or picking their own stocks.  The guests strike a defiant tone saying that people have a right to express themselves through their investments.  This is undeniably true.  They even admit that these deviations aren’t likely to beat the market.  However, I’ve often encountered people who cross the line from declaring they can invest any way they want (clearly true) to claiming that they are likely to outperform (very likely false).

Canadian Couch Potato
explains what’s inside iShares’ new ESG (Environmental, Social, and Governance) asset allocation ETFs.

John Robertson looks into the dilemma facing condo landlords: sell now, rent now and possibly lock in a low rent for years, or wait to rent hoping for higher rents soon.  Mostly, this article reminded me how happy I am that I don’t invest in real estate.  Stocks have performed excellently for me, and I haven’t had to do much work or make tough decisions since I became an index investor.

Big Cajun Man explains the new rules allowing RDSPs to be kept open even if you lose the Disability Tax Credit (DTC).

The Blunt Bean Counter gives a step-by-step guide to tax-loss selling for those who invest in taxable accounts.  He explains a rule I was never certain about: “you have to calculate your adjusted cost base on all the identical shares you own in, say, Bell Canada and average the total cost of all your Bell Canada shares over the shares in all your accounts. If the cost of your shares in Bell is higher in one of your accounts, you cannot pick and choose to realize a loss on that account; you must report the gain or loss based on the average adjusted cost base of all your Bell shares, not the higher cost base shares.”  I assume this only applies to all taxable accounts, and not any Bell shares you might hold in registered accounts.  I also assume this wouldn’t apply to Bell shares you might own indirectly through an ETF or mutual fund.  If this isn’t correct, then the accounting would be a nightmare.

Thursday, December 3, 2020

Inconsistent Pension Envy

People without pensions like to call civil servants’ pensions “gold-plated.”  However, when they get a chance to get their own pension, they often turn down half of it.

The inflation-indexed pensions common among government workers are extremely valuable.  Government accounting fictions set the value of these pensions lower than they really are, and taxpayers stand ready to make up the difference.

Fair or not, it frustrates many private sector workers who have no pension to have to contribute taxes for others’ pensions.  But when these frustrated taxpayers get the chance to collect their own CPP pensions, they often opt for payments less than half of what they could be.

The catch here is that to get the largest CPP payments possible, you have to wait until you’re 70 to start collecting CPP.  These payments are more than twice as large as payments are when you take CPP starting at 60.

We can’t blame people for taking CPP early if they don’t have any retirement savings to spend during their 60s, or if their health is so poor that they’re certain to die in their 70s or earlier.  Or maybe they’re so rich it doesn’t matter.

However, huge numbers of Canadians who don’t fall into these exceptions fail to maximize their CPP payments by waiting until they’re 70.  In effect, they’re turning down most of their own gold-plated pension.  This is a strange way of showing their pension envy.

Tuesday, December 1, 2020

The Grumpy Accountant

Canada’s tax system is very complicated.  It takes an army of accountants to help Canadians navigate the tax system and another army of tax collectors at Canada Revenue Agency (CRA) to police all the rules.  Author and CPA Neal Winokur thinks we need to simplify the tax system even if it puts him out of work.  He offers ideas to fix the tax system in his book The Grumpy Accountant.  The book also serves as an easy-to-understand introduction to the Canadian tax system.

The book is written in the style of a story, not unlike The Wealthy Barber, which works surprisingly well.  The “story” parts are very brief, so we get to each tax issue quickly, but the story helps to give context as we follow a couple throughout their tax lives.  This presentation, along with the fact that Winokur doesn’t get mired in unnecessary details, helps the reader get a good high-level understanding of the major aspects of Canada’s tax system.

Winokur advocates huge simplifications to the tax system.  He would get rid of all deductions, eliminate taxes on the first $50,000 of income, and cut the federal tax rate to 10% on income from $50,000 to $97,000.  He says these measures would offset so that the government would still collect the same total tax revenue.  He would eliminate all registered accounts, such as RRSPs, RRIFs, and RESPs, except possibly the TFSA.  He also suggests replacing GST payments, child benefits, OAS, and GIS with a simple guaranteed minimum income.

One question I have concerns how all this would affect individual Canadians.  Simplification is a good thing, but such substantial changes would help some Canadians and hurt others, even if the government gets the same total tax revenue.  It’s not clear which Canadians would end up paying more tax and which less.  We’d have to do an analysis of how different Canadians would be affected before agreeing to such sweeping changes.

As proof that simplification is possible, the author points to Spain, Estonia, Finland, Norway, Denmark, and England where aspects of taxation are simpler than what we have in Canada.  I’d be interested to know a little more about the ways the tax systems in these countries are simpler than what we have.

A common theme throughout the book is complaining about CRA.  A complaint I would add to Winokur’s list is the fact that an estate tax return after a person dies is lumped in with all other types of complex trusts that wealthy people set up.  If you’re handling your mother’s will, and her assets earn some income after she dies, you’re supposed to file a T3 Trust Income Tax and Information Return.  This form handles complex trusts along with your mother’s simple situation.  Here’s one of twelve questions you’ll have to answer: “Does the trust qualify as a public trust or public investment trust that has to post information about the trust on the CDS Innovations Inc. web site under section 204.1 of the Income Tax Regulations?”

One complaint about the tax system I didn’t agree with is the complaint that self-employed individuals have to make double-sized CPP contributions, but they don’t get double the benefits.  Employees pay half their own CPP contributions, and their employers pay the other half.  Presumably, employers offer lower salaries as a result.  CPP benefits are based on the total CPP contributions made on an individual’s behalf.  In this regard, employees and the self-employed are treated the same for CPP.

Another common theme in the book is how much reverence the characters have for their accountant.  One of the more amusing examples is where the main characters realized that their accountant “was a magical wizard with unlimited powers.”

There are some who think that we don’t need to simplify the tax system because software handles it now instead of having to fill out tax forms by hand.  This wasn’t covered in the book, but I think it’s worth pointing out that tax complexity isn’t just about filing a return.  It’s about deciding how to arrange your financial affairs, such as which types of accounts to invest in and which to spend first in retirement, along with many other decisions that only exist because of complex tax rules.  Much of the accounting information we have to collect only exists because of tax rules.

Among the many tax tips in the book is the advice to name beneficiaries on your various accounts.  I’m familiar with doing this for registered accounts to avoid probate, but Winokur says to do it for bank accounts as well.  I’ve been told by others that this isn’t possible for regular taxable accounts.

I recommend this book as a painless way to get a good high-level understanding of how the Canadian tax system works.  The suggestions for simplifying the tax system have strong intuitive appeal, but we’d need to drill deeper to see what unintended consequences they would cause.