Tag Archives: leverage

Real Life Investment Strategies #4: Business Owners should Leverage their Corporation for Retirement Savings

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Lowrie Financial/Canva Custom Creation

By Steve Lowrie, CFA

Special to Financial Independence Hub

When you’re immersed in running a business, thoughts of saving for retirement often take a back seat; Employees in the corporate world may rely on employer pensions, but as a business owner, the responsibility for your retirement falls squarely on your shoulders.

Starting your retirement planning early and consistently contributing allows you to benefit from compounding returns to steadily build your nest egg over time. Investing in your retirement can ensure you have the financial means to enjoy life post-retirement, whether it’s traveling, pursuing new passions, passing along a little financial freedom to family members, and more.

This blog explores how business owners can utilize their corporation (Canadian-controlled private corporations or CCPCs) to retain business income that exceeds operational and personal lifestyle needs.

Changes to Income Tax Rules (Capital Gains Inclusion Rate) can throw Business Owners’ Retirement Savings Plans into Chaos

The 2024 Federal Budget is a perfect example of how income tax rules can change, sometimes less smoothly and with less notice than what is reasonable.

Specifically, the 2024 budget included an increase in capital gains inclusion rate that affects:

  • Individuals with over $250,000 of capital gains in a tax year (only on the amount in excess of $250,000)
  • Corporations
  • Trusts

To make matters worse, the timeframe for any pro-active tax planning was very short and with few specific details before the tax changes became effective on June 25, 2024.

Many have also speculated that capital gain tax increase was a last-minute addition to a budget that was politically motivated and not based on sound economic policy.  Among the critics was none other than, Bill Morneau, the former Trudeau-Liberal finance minister.

There is also a high probability that there will be a change in Federal Government in 2025, which may bring a complete taxation review and reform.  Among the taxation reforms might be to roll back this tax increase.

Given this context and uncertainty, what should an individual with corporate investment assets do?

The best advice I can give you is to step back and view these tax changes versus your long-term financial goals, and to avoid making hasty decisions.  If there is major tax reform in the next few years, many individuals might find their hasty planning decisions to be very costly.

Even with higher capital gains inclusion rates, investing in your corporation still has many advantages.

Using Your Corporation for Retirement Savings still Provides you with Numerous Advantages

Retirees increasingly rely on their savings to sustain their lifestyle after leaving the workforce, presenting unique challenges (and opportunities) for business owners pre- and post-retirement. Over time, these corporations can accumulate investment assets and simply selling the business for retirement funds isn’t always the best option. The corporation can reliably serve as a source of dividends for the owner-manager in retirement. When a corporation is involved, it opens up another retirement savings and withdrawal option which, although advantageous, can be complex. We’ll walk though how saving within your corporation can be a great choice for business owners, but it is quite important to work with a competent independent financial advisor, accountant, and other professionals to determine the best retirement saving planning for each specific situation.

4 Reasons you should be Using your Corporation to Save for Retirement

  1. Tax Deferral

By retaining excess funds within the company, the initial tax benefit is that the income is taxed at a lower corporate rate vs. your personal tax rate – the extent of the advantage can vary depending on whether your corporation qualifies for the small business tax rate, which would be even more advantageous. Hand-in-hand, the tax benefit is also gained by the postponement of personal taxation. When funds are distributed to the business owner later as dividends, even with consideration of tax integration, the investment returns of the funds held within the company can generally more than compensate.

  1. Tax Deferral means more Money to Invest Today

By taking advantage of the tax deferral due to the reduced corporate tax rate, you have access to more investable capital today. This increased liquidity opens up the possibility of generating higher returns on your investments within the corporation, amplifying the potential growth of your wealth over time.

  1. Build Up Long-Term Value of the Corporation

If you plan to sell your corporation down the road, you can also take advantage of the Lifetime Capital Gains Exemption (LCGE), which Budget 2024 is proposing to increase to $1,250,000 (for dispositions after June 25, 2024) when you sell shares in the business.  Let’s say you sell a business for $2 million; the exemption amount means you wouldn’t pay tax on 62.5% of that profit. This translates to hundreds of thousands of dollars in tax savings.

In addition, the LCGE is a lifetime limit – so you can also choose to apply the exemption multiple times until you reach the limit. So, you have the option to sell shares over time and use the LCGE for multiple years until you’ve capped out. Figuring out how best to apply the LCGE can be challenging but worth the effort.

Lastly, with proactive planning, leveraging the lifetime exemptions of multiple family members can potentially mitigate or even eliminate the capital gains tax liability on higher-value businesses. A reliable professional financial planner and accountant can help you determine the best way to allocate and dispose of corporation shares to realize the optimal financial result.

  1. More Options for Savings & Withdrawal Streams = Flexibility

The most important advantage of saving for retirement within your corporation is that it gives you more options for both your retirement savings and investment options and your retirement withdrawal pools. Essentially, it gives you another tool in your toolbox. Most people are limited to three investment streams: RRSP, Tax-Free Savings Account, and Non-Registered Investments.

The corporation gives you a 4th pool of funds to work with – for both saving and withdrawal.  This allows for the flexibility to optimally select the best pool of funds for savings and withdrawal over time. For example, in any given year, your lifestyle needs may drastically change, so saving within the corporation gives you one more place to pull money in a way that best works for you. The following year, you have the flexibility to change it up in a way that works better. You don’t need to be limited to only 3 pools of your savings.

Another option that saving within your corporation opens up is the way you withdraw your money – during your prime working years, as you ramp down, and into retirement. Business owners can take money out of the corporation via dividends or salary.

Dividends are not tax deductible for the corporation. But with dividends, there are also no payroll taxes. Dividends also allow for more flexibility around how much you withdraw from the corporation and when. This is a great advantage for changing needs dictated by your personal lifestyle needs.

Withdrawing from your corporation via salary is advantageous due to the tax deduction for the corporation. In addition, salary withdrawal creates personal RRSP investment room. However, you would need to pay CPP at both the personal and corporate level. In addition, other payroll taxes would be required to be paid by the corporation.

Considerations when Saving for Retirement in your Corporation

With so many advantages to saving within a corporation, it may seem like a no-brainer. However, I need to point out some things you should consider as you use your corporation as a retirement savings pool.

Firstly, there is some extra complexity that comes with managing that extra stream of savings, which makes your reliance on a trusted accountant and financial advisor even more important.

Obviously, there are extra costs that come with owning an incorporated business, but if you are reading this blog, you are already paying these expenses. But, due to the extra complexity of managing more, there might be slightly more costs associated for your accountant. Although more cost, it is likely minimal and wouldn’t offset the advantages.

Another consideration about saving in your corporation is how you plan to retire: selling your business, winding down, succession, downsize, family takeover, etc. Thinking about the right path for the specific situation results in questions (and answers) about the best way to proceed. Continue Reading…

Retired Money: What is Infinite Banking and should I consider it in Retirement?

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Image via MoneySense.ca: karlyukav on Freepik

My latest MoneySense Retired Money column looks at a topic I cheerfully admit I’d never heard of until the editors drew it to my attention: Infinite Banking (IB). Not to toot my own horn, but that’s unusual, as I have been writing about personal finance for the better part of three decades.

In any case, you can find the full MoneySense column by clicking on the highlighted headline here: Infinite banking in Canada: Should you borrow from your life insurance policy?

According to a  useful primer in Policy Advisor, Infinite banking is “a concept that suggests you can use your whole life insurance policy to ‘be your own bank.’ “ It was created in the 1980s by American economist R. Nelson Nash, who introduced the idea in his book, ‘Becoming Your Own Banker.’ He founded IBC (Infinite Banking Concept) in the U.S. and eventually it migrated to Canada.

One of the sources cited in the column evinced some skepticism when he said of Infinite Banking (IB for short): “those who have sipped rather than chugged the IB Kool-Aid say it’s a strategy that may be too complex to be marketed on a mass scale.”

If you’re not familiar with life insurance, Infinite Banking does seem a bit arcane. Rather than put your money in a traditional bank – which until the last year or so paid next to nothing in interest on accounts – you would invest in a Whole Life or Universal Life insurance product, either of which provides some “cash value” from the investment portion of those policies. Then if you want to borrow money, instead of paying hefty interest payments to a bank, you borrow against your life insurance policy.

Watch this YouTube video primer

Those new to Infinite Banking should definitely look at a YouTube primer made by Philip Setter, CEO of Calgary-based Affinity Life (Affinitylife.ca). There he readily concedes that much of the marketing hype is to portray Infinite Banking as some kind of “massive secret for the wealthy,” which essentially amounts to buying a whole life insurance policy and borrowing against it. In the video he calls out some of the conspiracy-mongering that seems to be attached to infinite banking, including the primary message from some promoters that traditional banks and governments are out to rip off the average consumer.  Continue Reading…

16 Business Leaders share their best Real Estate Investment Advice

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Alena Darmel – Pexels

Aspiring homeowners and families looking to invest in property often seek expert advice. To provide a range of perspectives, we’ve gathered sixteen pieces of advice from CEOs, founders, and other industry professionals. From understanding the market rather than chasing it, to securing a property warranty, this article offers a wealth of insights for property investment.

 

 

  • Understand, Don’t Chase, the Market
  • Consider Property’s Rentability
  • Diversify Your Real Estate Investments
  • Seek Immediate Return on Investment
  • Research and Plan Your Investment
  • Leverage Home Inspection Power
  • Invest in a Fixer-Upper
  • Consider Total Cost of Ownership
  • Have a Clear Exit Strategy
  • Start Small in Property Investment
  • Diversify Your Real Estate Portfolio
  • Think Long-Term for Value Appreciation
  • Look into Emerging Neighborhoods
  • Define Your Investment Goals
  • Establish a Clear Budget
  • Secure a Property Warranty

Understand, don’t chase, the Market

If there’s one piece of advice I consistently circle back to, it’s this: don’t just chase the market, understand it. Now, that might sound a bit cliche, but let me unpack that for you with an example and a personal anecdote.

Many aspiring homeowners or investors get drawn into this frenzy of buying property anywhere there’s a buzz. You know, a new major employer coming into the area, a big infrastructure project announcement, or maybe where there’s a sudden spike in property values. But here’s the twist: not every “hot” market is suitable for every investor. — Shri Ganeshram, CEO and Founder, Awning.com

Consider Property’s Rentability

I’d suggest considering the “rentability” of the property. If your circumstances change and you need to move, having a property that’s attractive to renters can provide a steady income stream. 

Look for properties with features that are in high demand in the rental market, such as a good layout, modern amenities, and proximity to employment centers. I’ve seen clients turn unexpected relocations into opportunities by choosing properties that are easy to rent, thereby securing a secondary income source. — Alexander Capozzolo, CEO, SD House Guys

Diversify your Real Estate Investments

Different types of real estate investments, such as residential properties, commercial properties, or vacation rentals, can react differently to market fluctuations. By spreading your investments across various property types, I’ve seen how it can reduce the overall risk associated with real estate investing.

I’ve witnessed that diversification can provide a more stable income stream. For instance, while one property might experience a vacancy, another may continue to generate rental income.

I’ve found that different markets may perform differently at various times. By advising clients to invest in properties in different geographic locations, I’ve seen them benefit from a broader range of market conditions. — Ritika Asrani, Owner and Head Broker, St Maarten Real Estate

Seek Immediate Return on Investment

One piece of real estate investment advice I’d give is to focus on buying property that can give you a return on investment (ROI) immediately. That’s because when interest rates are high, property prices decrease, making it harder to know what kind of appreciation you can expect in the future.

As a bonus tip, invest where there are median-priced homes to maximize your returns. For example, if you invest in a $300,000 house with an 8% versus a 4% interest rate, the mortgage difference would be just $615 per month. 

On the other hand, if you invest in a $1 million property with the same interest rates (8% versus 4%), the mortgage difference you’d pay would be over $2,000 per month.

Ultimately, to maximize your returns and minimize risk as an investor, buy properties that will give you cash flow from day one and limit your mortgage payments. — Ryan Chaw, Founder and Real Estate Investor, Newbie Real Estate Investing

Research and Plan your Investment

Thoroughly research the local real estate market dynamics. Understand not only current property values but also potential growth or decline in the area. In our global property management experience, we’ve seen the value in choosing properties located in areas with growing job opportunities, infrastructure development, and a strong community presence. 

Additionally, always factor in the long-term perspective: real estate typically appreciates over time, so patience and a well-planned strategy can yield returns. Consider your investment goals and financial capabilities carefully. Determine whether you seek rental income, capital appreciation, or both. Calculate a budget, including property purchase, maintenance, and potential vacancies. 

Finally, don’t underestimate the significance of a property management company, especially if investing in different locations or operating remotely. Their expertise can help navigate property investment complexities and ensure your investment thrives. — Johan Hajji, CEO and Founder, UpperKey

Leverage Home Inspection Power

One tip I’d offer is to leverage the power of “home inspection” before finalizing any deal. A thorough inspection can reveal potential issues like structural damage or outdated electrical systems, allowing you to either negotiate the price or avoid a money pit.

I‘ve had clients who saved thousands by using the findings of a home inspection to negotiate a lower purchase price, turning what could have been a costly mistake into a savvy investment. — Gagan Saini, CEO, JIT Home Buyers

Invest in a Fixer-Upper

My career in remodeling and carpentry started with a real estate investment. I bought a home in disrepair for very little money and began piecing it together, learning how to perform various construction tasks along the way. 

At first, I just got one room livable. Then, at night and on weekends, piece by piece, I finished the kitchen, then the bathroom, then the basement. If you enjoy problem-solving and working with your hands, you’ll enjoy a fixer-upper much more than a property that you paint and resell. — Rick Berres, Owner, Honey-Doers

Consider Total Cost of Ownership

One piece of advice would be to think long term and consider the “total cost of ownership,” not just the purchase price. This includes property taxes, maintenance, and potential homeowner association (HOA) fees. 

I recommend it to create a detailed budget that accounts for these ongoing costs to ensure the investment is sustainable in the long run. Clients who’ve taken this holistic approach have been better prepared for the financial responsibilities of property ownership, avoiding unexpected financial strain down the line. — Erik Wright, CEO, New Horizon Home Buyers

Have a Clear Exit Strategy

Have a solid exit plan from the get-go. It’s not just about buying a property; it’s about understanding how you’re going to profit from it. Are you looking for long-term rental income, or do you plan to flip the property for a quick return? 

Having a clear strategy helps you make informed decisions and ensures that your investment aligns with your financial goals. Real estate can be a fantastic wealth-building tool, but knowing your exit strategy keeps you on the right path to success. — Loren Howard, Founder, Prime Plus Mortgages

Start Small in Property Investment

Start small. For aspiring homeowners or families looking to invest in property, it is important to start small. While it may be tempting to jump into a larger, more expensive property as your first investment, starting with a smaller and more affordable property can be a smarter financial decision in the long run. 

By starting small, you will have less risk and financial burden, allowing you to learn and gain experience in the real estate market without being overwhelmed. Additionally, starting small will also give you a better understanding of your financial capabilities and help you make more informed decisions for future investments. 

Furthermore, starting with a smaller property can also provide potential for quicker returns on investment. With lower purchase prices and potentially lower maintenance costs, you may be able to see profits sooner than with a larger, more expensive property. — Keith Sant, CMO, Eazy House Sale

Diversify your Real Estate Portfolio

I would advise diversifying your portfolio if you’re searching for real estate investment tips. Think about making investments in a variety of real estate, including commercial, residential, and even holiday rentals. This diversification can create several income streams while reducing risk.  Continue Reading…

ETF Fees: What you need to know before investing

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By Sa’ad Rana, Senior Associate – ETF Online Distribution, BMO ETFs

(Sponsor Blog)

Investing in Exchange-Traded Funds (ETFs) can be a smart move for many investors, but it’s crucial to have a clear understanding of the costs and fees associated with these investment vehicles. In this blog post, we will decode the various expenses and provide valuable insights to help you make informed decisions.

Expense Ratio: Unveiling the Components

The expense ratio is a fundamental factor to consider when evaluating ETF costs. It encompasses several elements, including:

  1. Management fees: ETFs charge management fees for the professional management of the fund.
  2. Operating expenses: These expenses cover administrative costs, custody fees, and legal fees.
  3. Trading costs: ETFs incur costs associated with buying and selling the underlying assets that make up the fund.
  4. Taxes: ETFs may also be subject to taxes including, interest, dividend, and capital gains taxes, which are passed on to investors.

The expense ratio is typically expressed as an annual percentage of the total assets under management (AUM) and is deducted from the ETF’s net asset value (NAV). For instance, if an ETF has an expense ratio of 0.50% and an NAV per unit of $100, the annual cost to investors would amount to $0.50/unit.

Exploring Other Cost Considerations

  1. Tracking Error: Although ETFs aim to replicate the performance of an underlying index or asset class, certain factors such as fees, market conditions, market timing, currency, and tracking methodology can lead to a difference between the ETF’s returns and the index it tracks. This disparity is known as tracking error.
  1. Bid-Ask Spread: The bid-ask spread represents the difference between the highest price a buyer is willing to pay and the lowest price a seller is willing to accept for an ETF. Liquidity, market conditions, ETF characteristics, trading volume, and market maker activity influence the bid-ask spread. Narrower spreads are generally observed with higher liquidity and trading volumes, while wider spreads are prevalent with lower volumes and niche markets. Investors should consider bid-ask spreads, as they can affect transaction costs and overall investment returns. To mitigate these costs, investors can use limit orders to specify their desired price and potentially minimize the impact of wider spreads.
  1. Currency Hedging: ETFs provide easy access to assets from different regions worldwide. Investing in non-Canadian assets expose investors to two potential sources of return: the return of the security and the return of the foreign currency relative to the Canadian dollar (CAD). Currency fluctuations can have either a positive or negative impact on your total return. Currency-hedged ETF solutions are available and aim to mitigate the impact of currency fluctuations, allowing investors to participate in global markets as if they were local. It is important to understand however, that there is a cost for currency hedging. At BMO ETFs this cost is minimal as we use forward currency contracts to hedge purposes which are very cost effective.   Continue Reading…

Harvest launches HRIF – a multi-sector income ETF with no leverage

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Image courtesy Harvest ETFs/Shutterstock

By Michael Kovacs, President & CEO of Harvest ETFs

(Sponsor Blog) 

The Harvest Diversified Monthly Income ETF (HDIF:TSX) was built to meet Canadian investors’ need for income and sector diversity. We built it with a straightforward thesis, by holding an equal weight portfolio of established Harvest Equity Income ETFs, we could deliver growth potential and high monthly income. That made it one of the most popular Canadian ETFs launched in 2022.

Each of the ETFs held in HDIF captures a portfolio of leading large-cap businesses. They also each employ an active and flexible covered call option strategy to generate high income yields, offset downside, and monetize volatility. HDIF combined those ETFs with modest leverage at approximately 25% to deliver an enhanced income yield.

In April of this year, we launched the Harvest Diversified Equity Income ETF (HRIF:TSX). It holds the same equal-weight portfolio of Harvest ETFs, but without the use of leverage. Put simply, leverage adds a level of risk that some investors are not comfortable with. Therefore HRIF can deliver that same diversified portfolio of underlying ETFs and a high income yield in a package that more risk-averse investors may want to consider.

A truly diversified portfolio

At Harvest ETFs, we always start with portfolios of what we see as high-quality businesses. The ETFs held in HRIF capture companies that lead their sectors. By combining those portfolios into a single ETF, HRIF delivers a very diverse exposure to these companies.

The equal-weight portfolio held by HRIF at launch holds the following six ETFs.

Each ETF holds a portfolio of leading companies in their particular sector and market area. We define that leadership through quantitative and qualitative metrics such as market cap, market share, performance history and — in the case of certain underlying ETFs — dividend payment history. The companies selected in each ETF’s portfolio demonstrate leadership across those metrics.

HRIF also delivers a diverse set of performance drivers. Tech has been a market growth leader for over a decade and remains a key allocation for investors. Healthcare shows significant defensive qualities, especially during inflationary and recessionary times. The brand leaders in HBF and Canadian leaders in HLIF are selected in large part due to their resilience across market cycles, market shares, and dividend payment history. US banks have faced headwinds lately but have long-term positive exposure to interest rate increases and remain structurally important to the global economy. Utilities are an almost textbook definition of defensiveness, providing stability and ballast for the ETF.

Taken together, HRIF delivers leadership from a wide set of companies which, combined with its high income yield, makes it an attractive ETF for many investors.

HRIF’s High Income Yield Explained

HRIF launched with an initial target yield of 8.0% annually, paid as monthly cash distributions. That yield is earned by combining the underlying yields of its component ETFs, each of which employ an active & flexible covered call option strategy.

Covered call option ETFs effectively trade some upside potential for earned income premiums by ‘writing’ calls on a percentage of the ETF’s holdings. Where many covered call option ETFs use a passive strategy, writing calls on the same percentage of holdings each month, the Harvest ETFs held in HRIF use an active strategy. Continue Reading…