Wealth Inequality in Canada

WE NOW LIVE IN A WOLRD OF HAVES AND HAVE NOTS

  • Canada is in the bottom quartile of peer countries in terms of wealth disparity.

 

WE ARE ENTERING A NEW ERA OF MASSIVE INEQUALITY

  • Wealth inequality in Canada has increased over the past 20 years.
  • Each year the Canadian middle-class loses its’ share of total income while wealthier income groups increase its’ share.

 

THE 3 BIGGEST COSTS FOR CANADIANS: 1) TAXES, 2) HOUSING AND 3) LABOUR

 

THE AVERAGE MIDDLE-CLASS CANADIAN PAYS 27% INCOME TAX

THE WEALTHY PAY PAY ON AVERAGE 15% INCOME TAX

 

THE MIDDLE-CLASS IS OBSESSED WITH CUTTING COSTS BUT THE TRUTH IS THAT ONLY THREE MATTER: 1) TAXES 2) HOUSING AND 3) LABOUR

THE ONLY WAY TO ESCAPE BEING A HAVE NOT IS TO REDUCE THE ONLY THREE COSTS THAT MATTER.

THE MIDDLE-CLASS SHRINKS BECAUSE IT HAS NO PRIORITIES AND WASTES ATTENTION (DECISION FATIGUE) ON DECISIONS THAT MAKE LESS THAN A 10% CHANGE IN THEIR TOTAL INCOME.

Priorities

  1. Sell something worth buying, with a story worth telling
  2. Target it for small groups of people (you can not compete with Coca-Cola)
  3. Tell a story (like above) that matches the delight of those small groups
  4. Promote the word
  5. Produce at an elite level, in terms of both quality and speed to build up the brand (personal and business) and inspire confidence and trust.
  6. Plot the worst possible outcome and reverse engineer the opposite outcome.
  7. Get paid by project but pay others by the hour

Qualitative > Quantitative

$3 million earned through investments (real estate, stock, crypto) will never have the same value as $3 million earned through the diligent execution of your craft because of the uncertainty in the former.  Therefore, the only investment that matters is the money you spend into turning your craft into a business.

 

 

 

 

 

 

 

 

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Give your Children an Edge with German

“You don’t have real diversity when you have a group of people that look different but think alike.” – Peter Thiel, Billionaire on Multi-culturism

We all face an extremely competitive landscape in which our customers have a multitude of options.  A truly unique resource in Canada to give your child a competitive edge is to learn German.  Immersing yourself in any foreign language will open your mind to new ways of thinking, but why specifically German?

  1. Ordnung muss sein (There must be order).  The syntax is rigid: German sentences are extremely consistently structured. Training the brain like this prepares the brain to be proficient in computer coding (Python) which similar depends on rigid syntax. If you make a mistake in coding, the program will not work.  In Switzerland/Germany there is only ONE correct answer. The universe is governed by math which in general lends itself only to ONE answer that is better than the rest.  On an underlying level, lack of rigidity/discipline implies we have no standards. Rigid standards and more discipline will bring more freedom. 
  2. “Logical” is the best word to describe how German compound words are constructed which makes comprehension clearer, more accurate and thorough. The German language is also straightforward to pronounce once you know the rules dictating it.  Logical rules again aid with computer programming proficiency.  Logical thinking, clarity, accuracy, and thoroughness are all hallmarks of success in the German-speaking world.  

German Language School Edmonton offers Saturday classes which will give your children the competitive edge they need to harness the traits that the German-speaking world is famous for. (Also eligible for Alberta high school credits)

Germany offers free tuition for all Canadian students.  And as with all things Germanic, the universities there are great and have produced many more deca-millionaires than their equally good but expensive Canadian counterparts.  Germany produces quality companies like Audi, Mercedes, BMW, Bosch, and Miele.

German Language School Society of Edmonton
c/o Rio Terrace School
7608-154 Street NW
Edmonton, Alberta
T5R 1R7

@ symbol     Email: germanschooledmonton@gmail.com

     Facebook : German Language School Edmonton

Business Travel Expenses

You may claim an annual shareholders meeting as long as its reasonable (ie. Banff, Las Vegas for those us in Alberta or 2500km from your corporate home base).

In addition to this, you are allowed to fully deduct all expenses related to attending 2 conventions per year.

Other trips can be partially written off (prorated for personal component) if you can attribute business purposes to the trip. Keep notes/e­mails related to business meetings. You need at least 1 business appointment scheduled before you leave.  Over 50% of the days on a trip must be for business. Your travel days and weekends in between workdays on Friday and Monday count as business. Travel to a destination on Thursday, have a meeting on Friday, stay the weekend, meet with customers on Monday and Tuesday, and Wednesday flying home is 7 business days. This allows for another 6 days at your destination as vacation and still expense your transportation expenses. For everyday that is business, you are able to deduct your lodging, meals, car rentals. So, if your entire trip includes 7 days of business and 6 extra personal days, you will be able to deduct your hotel for only the 7 business days.

Dividends vs. Bonuses

Reading a bunch of articles on the internet, an uninformed person may make the conclusion that dividends trump wages every single time.

Although accountants would have you believe they have the magic sauce to navigate their world, their world is governed by the same laws that govern the rest of the universe: math and its marginal effects.

Once you understand this, you will understand that you can make hard categories like dividends = good and wages = bad.

Bad categorical thinking:

  • Dividends are taxed less personally than wages, anyone who takes a bonus is being wasteful” similarly bad is:
  • Dividends require you to pay tax twice – first in the company, then personally, and corporations do not enjoy an exemption amount

Good marginalist thinking:

  • “How much deductions against the corporate income?”
  • “How much personal taxes?”
  • “When does moving in one direction or the other stop being worth it?”

In the case of dividends, corporate income tax is paid on the income earned by the corporation and the dividend is paid out of the after-tax earnings. This dividend is then taxed in the shareholders’ hands which takes into account the dividend tax credit system. Starting in 2016, there was an increase in the effective tax rate on non-eligible dividends. The gross-up factor for non-eligible dividends decreases and consequently, there is a progressive decrease in the dividend tax credit. Under-integration may occur where the tax-payer is being double-taxed since they already paid tax in the corporation and now they pay personal tax on the same income.

As with all convex mathematical functions, there is only one minimal value that describes the combined taxes in terms of its variables. Our job is to find the global minimum of this function, that is, we find the point such that f(x ) < f(x) for all in the domain of the function.

Optimizing combined corporate + personal taxes depends sensitively on draws, income, and dividend-salary mix. For the sake of comparing apples and apples, and to have a reference to the article below, CPP is ignored.

$50,000 has $2,254 cash advantage to being earned as dividends vs wage

Personal T4

$50,000

Income Tax

-$11,271

Net to individual

$38,729

Corporate Income

$50,000

Small business tax @ 12%

-$6,000

Net cash retained after-tax

$44,000

Dividends payable

$44,000

Net personal tax on dividend

-$3,017

Net cash to shareholder

$40,983

$100,000 has $1,224 cash advantage to being earned as a wage vs dividends

Personal T4

$100,000

Income Tax

-23,820

Net to individual

76,180

Corporate Income

$100,000

Small business tax @ 12%

-$12,000

Net cash retained after-tax

$88,000

Dividends payable

$88,000

Net personal tax on dividend

-$13,044

Net cash to shareholder

$74,956

Click on”the link to download a great article by the Managing Director of Tax Planning at CIBC Wealth Services:dividends-bonus

Here he explains that in Alberta, in our second example there is an absolute tax rate disadvantage on paying tax at the corporate rate. In the seven provinces where there is a tax rate disadvantage on SBD income, income must be retained for a period ranging from 1 year (in British Columbia, New Brunswick or Nova Scotia) to 11 years (in Alberta) before paying a dividend at that level for savings to be realized. In the second example, income should be distributed through dividends only if the income is expected to be retained in the corporation for 11 years; otherwise, it is preferable to pay out the income as a wage.

The second, unrelated irritation I have with “the art of paperwork“, is how some accountants miraculously can reduce their clients’ personal taxes by “losing” their shareholder draws between inter-company accounts. If you have two related corporations and one corporation invests money in the 2nd venture, the due-to-related-parties in the 2nd venture should match precisely the investment in the first company. Today, the CRA employs algorithms to match these amounts on your related companies and will eventually find and review the error. Although the accounting practitioner can avoid any serious penalties (by saying it was an innocent paperwork error) the client will be reassessed and have to pay all the taxes + non-deductible interest and penalties = fake accomplishment. Accounting is a beautiful series of debits and credits which must balance.

Make no mistake, these people are cheating their customers. The client signs all the paperwork saying they take responsibility for the reported numbers. We parted ways with one well-known client who was not happy with paying her fair share, only to get an email from this same firm afterward, birds of the same feather flock together.

Any inconvenience you may have suffered can be turned into a learning experience and the future just gets better:

  1. The money you can make back, but the time you can never, so if you are going to work, then hone your hard-to-replicate skills.
  2. Prioritize learning and honesty which builds goodwill and is manifested in referrals and a lifetime of abundance. The inverse of prioritizing earning will ultimately lose you the customer.
  3. Manage your business on a yearly basis, rather than quarterly or monthly. Spend your time doing what you do. Operate on 5-year plans. We focus on doing the right thing each day and creating value for our clients. Most people focus on short-term gains and the expense of building long-term value.

4 Focuses to make $200+/hour after-tax

Even without fast food or a salon, you can still make $200+/hour AFTER-TAX as a middleman.

What do you sell?

You either sell software (including SaaS), equipment (industrial/medical/data center), houses, vehicles, or something scalable online.

After processing over $2.8 billion in transactions over 10 years, four definitive conclusions is that you need to focus 1) your inventory and 2) your market while optimizing 3) alternatives for your customers and 4) your outsourcing.

 

  1. INVENTORY MANAGEMENT: LESS VARIETY MORE FOCUS

Marginal cost bisects average cost at the minima of the average cost.  If you can reduce inventory you will improve your profit by maximizing your output variables.  Inventory turns, is a measure of how many times inventory turns over in a year. The higher the number of inventory turns-or the lower the inventory days–the tighter your
management of inventory and the better your cash position. As long as you have enough inventory on hand to meet customer demands, the more efficient you can be.

Inventory is “frozen cash” the faster you can get it out of the door, the better off you will be. The longer you keep inventory, the more money you lose in opportunity cost. Low inventories will also mean you can afford to sell your product at comparatively low prices. You would be able to sell your product cheaper because you would be able to sell them more quickly.

Everything in life operates on first and second order derivatives. The second order derivative shows that with each added different item in your inventory, the curve in relation to the cost will get steeper as your costs increase but not pro rata with the different items you add. Each different item/product line takes time and effort to sell (the most expensive things), so trying to sell more different items is like trying to fill many pools with 1 garden hose. Its easier to fill 1 pool rather than 2. The solution is to sell less variety but to make more money off of each product line. Consequently rather than spending $100,000 on X different categories of inventory, you can spend the same money on half the variety.

2. ONLY 2 MARKETS: WOMEN AND RICH PEOPLE

  1. Women
  2. Rich people (people who earn over $137,790 per year in Edmonton) – they control 70% of Alberta’s wealth.

What about men who earn less than $137,790 per year in Edmonton? They simply don’t count – their women control their money – if you’re not selling houses over $500,000 or vehicles over $50,000 then sell what women want.

It’s important to choose your market and your customer. You have to know what the ideal customer wants. Everyone can get want they need, but you will earn more if you can give the customer what they want. When someone wants something they
will pay higher margins compared to when they need something.

3. GIVE YOUR CUSTOMERS ALTERNATIVES 

Not having any reasonably similar alternatives will mean you lose customers.

Brand your company with a compelling and focused mission that leverages your combined special skills. People get rich by adding value to other people’s lives, rather than just acting as a middleman/retailer.

The path to success is not as clear as the path to failure. So by doing the opposite of 90% of your competitors, it will ensure you will succeed. There is always a choice between status and money. Most people choose status and have more variety rather than being content with a smaller presence and more money.

4. OUTSOURCE WHEN APPROPRIATE

Now that you make over $200/hour AFTER-TAX (calculated by taking your after-tax income and dividing into the hours you work. ) you know should enforce it. Like Naval Ravikant iterates in his famous tweet storm, “If fixing a problem will save less than your hourly rate, ignore it.  If outsourcing a task will cost less than your hourly rate, outsource it.”

If your problem is business related than you can use your pre-tax hourly rate since business expenses are paid with pre-tax dollars, while residential repairs and maintenance are paid for with after-tax dollars.

  1. Build scalable brand leveraging algorithms and/or employees.
  2. Invest in real estate

Quickbooks Online vs. THUT Accounting

As Certified QuickBooks Proadvisors we have met many clients who have intended to do their books on a daily basis, but life gets in the way, and depending on how many transactions occur on your synced accounts, even failing to match the transactions after a couple days can lead to a mess.

And if you made 2 sales and deposited the proceeds together at your branch in one lump sum, Quickbooks Online (QBO) is not smart enough to match the 2 received payments to the 1 deposit.

Even as ProAdvisors, if we set up all the “rules” in Quickbooks, you as the user will still need to click “match” when your bank says 1 transaction found.  If you never “lump” your deposits together (more than 1 sale physically deposited into the bank), this will minimize your problems. (meaning, 1 deposit for each sale)

QBO is still not entirely automated and is only as a good as its user.  The categorizing of programmed transactions is automated, but in addition to clicking match, you will need to do monthly bank and credit card reconciliations.  We need to reiterate that 1 error in matching or doing the reconciliation wrong will compound errors throughout the file.

Summary for QBO
  1. Never lump deposits
  2. Never let your account be disconnected from your bank (or you will lose transactions which automatically downloads and you would need to manually type in each one)
  3. Daily: match transactions
  4. Weekly: keep in touch with your ProAdvisor with any problems before they compound
  5. Monthly: account reconciliations
  6. You’ll still need another vendor, an accounting provider (plus if they are a Certified Quickbooks ProAdvisor) to compile the corporate tax return.

While QBO is the most popular cloud accounting solution, THUT Accounting is a 3-step Software-as-a-Service:

  1. Data capture and coding: THUT extracts data from receipts, bank and credit card statements. Cleansing algorithms allow it to extract transactional data that is 100% accurate (no error-prone and costly manual input).
  2. Computing: We use mathematical optimization algorithms to save you money. As with all convex mathematical functions, there is only one minimal value that describes the combined taxes in terms of its variables.
  3. Reporting: Promise kept – you receive your clear and thorough reporting package in PDF with full-text search and we file everything with the Canada Revenue Agency- on-time and with the best result.  You will receive unlimited support and access to business advice including Grenzplankostenrechnung (GPK) – German accounting to effectively price your product or productized service.  We immediately respond to questions and concerns. After we save you thousands in taxes, what will you do with the money?​

 

Which one is right for you?

Use your pre-tax income to calculate your pre-tax hourly rate (since Accounting is paid for with pre-tax dollars).  If THUT Accounting’s SaaS cost less than your hourly rate than THUT is for you.  If THUT Accounting costs more than your hourly rate than Quickbooks Online is right for you.

Once you make more than the average person ($95k/year in Edmonton or $50/hour), it does not make sense for you to specialize in something that is not directly related to your ability to generate revenue. This is because of the minimum efficient scale.

 

3 reasons why I started a business in Edmonton

I run an Accounting Sofware-as-a-Service business based in Edmonton. Accountants are all about cost-cutting, but the truth is that it’s all worthless compared to the big 3: taxes, housing, and payroll. Our mission is to reduce costs by 15-25% for businesses with recurring revenue. Please reach out to us at help@christianthut.com

1. Taxes

Combined, the corporate and personal taxes in Alberta amount to only 15% of earnings for $300,000 in income (compared to 20% in Switzerland and 45% in Germany). In Alberta, you can earn more than $20,000 per month after-taxes and become a multi-millionaire within a short time. Making more money has a bigger impact on your financials than reducing your spending since there is a ceiling to cutting costs, you can not go below 0 while there is no ceiling to earning.

2. Housing

Until you have the cash to optimize your taxes and your mortgage interest you should be keeping your cash flow down by renting. It is a common mistake to think that buying a house saves you money. Buying an asset with debt is merely renting money you don’t have.  In addition to the interest, buying a house has more costs:  property taxes, home maintenance, repairs, upgrades.  A $700,000 house can be rented for $2,550 CAD, so the price-to-rent (P/R ratio) is 23 (700k/ (2550*12)). You should only buy if the P/R ratio is less than 15  unless you are optimizing your opportunity cost of other assets (a scalable business).  Focus on delivering value, and you’ll see the priorities in building a scalable business since real estate does not normally add comparable value except in gentrification during times of shortage.

3. Conflict

Conflict is the raw material of natural selection and pushes evolution forward toughness, heroism, and social utility. Canada is big enough and diverse enough that without learning to scale on an international scale, there is enough opportunity to inject small amounts of stress in your life to push yourself to self-improvement all the while avoiding stress from real problems like feeding yourself.

Only through conflict do humans force themselves to be the best version of themselves.  As the Roman statesman said, “Comfort leads to waste.” Hostile and diverse surroundings (both climate and humans) challenge us both physically and mentally every day, forcing us to get stronger and smarter.

1 Thing Switzerland does better than Canada

In Canada, we have a socialist system where the cost of health care is built into our taxes and dependant on our income and not on our risk optimization like in Switzerland.

In Switzerland, you can pay out of pocket for everything under your deductible. Costs above your deductible are taken care of by your insurance policy to which you pay a monthly premium.  You can reduce your monthly premiums by reducing your deductible.  The Swiss system is more sustainable since there is less asymmetry (where the largest cost to the Canadian health care system is also the smallest contributor).

If you want to maximize your life, read on. I run an Accounting Software-as-a-Service (SaaS) company based in Edmonton.  Accountants are all about cost-cutting, but the truth is that it’s all worthless compared to the big 3: taxes, housing, and payroll. Our mission is to reduce costs by 15-25% for businesses with recurring revenue. Please reach out to us at help@christianthut.com If you like this article, you might like:

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We are focused on the following 3 customer groups:

  1. E-commerce
  2. Fast food
  3. Nail salons