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 7 customer groups:

  1. B2B technology
  2. B2B trades (plumbing, electrical, etc.)
  3. CNC machine shops
  4. Single-idea restaurants
  5. Salons
  6. Consumable product subscriptions (Skincare, Makeup product of the month, etc.)
  7. High-end gyms, country clubs

 

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How much taxes should I expect to pay?

The latest audit initiative by the CRA has sent a panic through the population.

How much taxes should I expect to pay?

  1. You can optimize your 2 biggest expenses: taxes and housing by balancing your draws from your corporation
  2. Once you have a business you love (1st) and a home that you love (2nd since your business determines where you’ll live),
  3. 3rd you prioritize health and fun. Assuming you have a spouse you can pay yourselves a combined $100,000 = $250/day in after-tax spending.  With a mortgage out of the way, $50k per year on basic living expenses and $50k per year on extras everything is possible without having to write-off corporate vehicles
  4. You can expect to pay an overall 16% on $200K of profit and less with each additional dollar of profit. Here is the math:
Corporate Income $300,000.00 $200,000.00
Small business tax @ 12% -$36,000.00 -$24,000.00
Net cash retained after-tax $264,000.00 $176,000.00
Dividends payable $100,000.00 $100,000.00
Net personal tax on dividend -$8,532.00 -$8,532.00
Net cash to Shareholders $91,468.00 $91,468.00
The total taxes -$44,532.00 -$32,532.00
Net cash to US $91,468.00 $91,468.00
% of combined taxes of net cash 48.69% 35.57%
% of combined taxes of earnings 14.84% 16.27%
Corporate Income $300,000.00 $200,000.00
Wages -$100,000.00 -$100,000.00
Co. portion CPP -$4,603.50 -$4,603.50
Income before taxes $195,396.50 $95,396.50
Small business tax @ 12% -$23,447.58 -$11,447.58
Net cash retained after-tax $367,345.42 $179,345.42
Personal T4s $100,000.00 $100,000.00
Income Tax -$22,542.00 -$22,542.00
CPP -$4,603.50 -$4,603.50
Net cash to Shareholder $72,854.50 $72,854.50
The total taxes not including CPP -$45,989.58 -$33,989.58
Net cash to Employee $72,854.50 $72,854.50
% of combined taxes of net cash 63.13% 46.65%
% of combined taxes of earnings 15.33% 16.99%

Rather than staying upset, let’s keep things in perspective and even without vehicle write-offs, we still have it better:

$50,000 has $4,555.75 cash advantage to being earned as a T5 vs T4
Personal T4 $50,000.00
Income Tax -$11,271.00
CPP -$2,301.75
Net to employee $36,427.25
Corporate Income $50,000.00
Small business tax @ 12% -$6,000.00
Net cash retained after-tax $44,000.00
Dividends payable $44,000.00
Net personal tax on dividend -$3,017.00
Net cash to shareholder $40,983.00

We are focused on the following 7 customer groups:

  1. B2B technology
  2. B2B trades (plumbing, electrical, etc.)
  3. CNC machine shops
  4. Single-idea restaurants
  5. Salons
  6. Consumable product subscriptions (Skincare, Makeup product of the month, etc.)
  7. High-end gyms, country clubs

 

Claiming a Company Vehicle

Do you use the vehicle for at least 90% of the time for business?

If not, then please have your corporation write you a cheque for a tax-free mileage reimbursement for the use of your personally owned vehicle.   In this case, do not pay for any vehicle-related expenses through your corporation. Pay for all vehicle-related expenses personally and write yourself the tax-free mileage reimbursement each month.

Click here for the current year’s rate.

If you do, and you have a mileage log to prove you use your vehicle at least 90% of the time for business (NOT INCLUDING TO AND FROM HOME/WORK) then you can buy ANY vehicle under $30,000, and lease any vehicle for under $800/month.  Some business owners lease vehicles for under $800/month until the buy-out is under $30,000.

Taxable benefits for the personal use of corporate vehicles used less than 90% of the time for business make both leasings and buying unadvisableVehicles that will cost you less than the mileage reimbursement will be efficient at hauling as much cargo as required (efficiency here refers to the aggregate of hauling capacity, fuel efficiency, and drag coefficient).  Remember do not choose the full-size version unless it will be 100% full at least 80% of the time.

Business Vehicles that do not require a taxable benefit to be reported

  1. Mercedes-Benz Metris Cargo Van, Sprinter Cargo/Chasis
  2. Ram Promaster, Promaster City, Chasis
  3. Ford Transit Connect, Transit, Transit CC-CA
  4. Chevrolet City Express, Express Cutaway
  5. Nissan NV Cargo, Frontier
  6. Toyota Tacoma

Heavy-Duty Vehicles that do not require a taxable benefit to be reported

  1. Hino
  2. Mitsubishi
  3. Isuzu
  4. GMC W4500

There are 2 possible sources to trigger the post-assessment review (the precursor to the audit)

  1. When we file the corporate tax return the financial statement will have an account like “Equipment rental” and certain industry codes have an expected equipment rental amount.  For example, salons have 0.
  2. There is also a schedule for non-leased assets which is schedule 8 and they ask the details of additions to Class 10 (vehicle code) especially if they are over $30,000.
  3. CRA has access to registry data and conducts post-assessment reviews to see how vehicles are being accounted for.
Business owners must make a clear distinction between corporate assets and personal assets.  If you can not, then reimburse yourself for the mileage.  The current administration follows Keynesian economic policy, stimulating the economy by adding thousands of jobs to the public sector to chase down money from the business sector. This money is used in turn to fund costly public works projects.
Here is a Globe and Mail article about the changing culture at CRA.
 It’s better to do the current year correctly in order avoid being detected because once CRA does a post-assessment they check back on the last 3 years and reassess any charges in the past 3 years.

Protip: White vehicles are statistically the least involved in accidents. While the darker the color the higher it is statistically involved in accidents. Black is statistically the most involved in accidents.

  1. If you purchase a commercial van/truck, the write-off stems from CRA’s prescribed depreciation rate of 30% of the COST.  This way you save the most in the early years of ownership and less and less as its worthless and less for tax purposes. Keep in mind CRA’s requirements are much stricter than the IRS so much of the information on the internet is NOT applicable. The smartest thing for you to do is to FINANCE the purchase at a low rate so that you don’t miss out on the opportunity cost of forking over a chunk all at once.
  2. Leases reduce your taxes by each lease payment so the write-off matches the payment and spreads it evenly over the term, and in some cases gives you optionality (which you pay for) in returning the lease.

Do Canadians Pay Their “Fair Share”?

The top 20% of income earners in Canada pays 56% of the country’s taxes.  The top 1% of income earners in Canada pays nearly 18% of the federal and provincial income taxes, while the bottom 50% will pay less than 9%.  These are examples of Pareto’s principle.

The current administration in Canada views wealth as a zero-sum game. Canada’s use of extensive regulation leads to asymmetry for the top earners.  We enjoy a finite upside to healthcare, safety, and quality of life, but an infinite downside of taxes and escalating run-ins with the CRA. Top earners use less public resources but pay disproportionately more for everything.

Countries that surpass Canada on the Economic Freedom of the World Index (Switzerland, Singapore, and Hong Kong) all view wealth as positive-sum (benefiting everyone) and accordingly, have 0 capital gains tax and overall low taxes.

But the fact is, more Canadian money is invested in Barbados than in Switzerland, Singapore and Hong Kong combined.  Barbados is the 3rd biggest destination of Canadian direct investment abroad. After which is Luxembourg and Cayman Islands (requires a $600K investment into Cayman Islands real estate), while Bermuda follows quickly.  These tax havens with Canadian money are used by large Canadian umbrellas the 0.01% earners and have strict requirements:

  1. You need to stay less than 183 days in Canada to become a non-resident in Canada for tax purposes while taking up residency in Barbados. The increasingly risky alternative is creating a facade by paying Barbadians to be your board of directors.
  2. No employees in Canada.
  3. Your Barbados company must be registered as an IBC ($2,500 CAD one-time fee with $3,800 CAD annual fees) and can sell goods worldwide EXCEPT in Canada and Barbados.
  4. You must have an audit done annually by an audit firm ($7,000 CAD/year)

One catch as of June 20, 2018 – Barbados is currently not allowed to sell on Amazon so you’ll need residency in another country (but not Canada).

Conclusion

Until an expensive offshore tax-haven is feasible, everyone should:

  1. Focus on building a  scalable business.
  2. ONLY once you have #1. Then buy a home no more than 4x your gross annual household income, with no less than 30% down. If you don’t have 30%, either continue to rent or buy a home 2.5x your gross annual household income with 20% down. Once you are ready to retire offshore, take advantage of Canada’s capital gains exemption on principal residences.
  3. Until then, continue to collect $3+ million in cash

Why $3+ million?

  1. You’ll have $500K entrusted to each kid invested until they have followed your entrusted plan and presented their business idea to the board around age 25-28.
  2. You’ll have $500K+ for high-risk investments that could give 10x return, but not affect your life if lost
  3. You’ll have more than enough money not to have to work for the rest of your life not even accounting for $90K in interest $3million could pay you each year at a conservative 3%.

What about the taxes?

You can optimize your 2 biggest expenses: taxes and housing by balancing your draws from your corporation:

If you make the minimum payments towards your mortgage your home will cost you a lot more than it should.  The more aggressively you pay off your mortgage the more taxes you pay since your draws from your corporation determine your personal income taxes.

 

Part 2: Get Big, Stay Lean: A How-To Guide For Clean Bulkers

Before looking to grow you need to get lean first.  Once you have downsized until the marginal costs of outsourcing exceed the cost of doing it internally, you are ready to get big.

Contrary to popular belief, you can get big without becoming inefficient. Here’s how to get the best results from your bulking plan!

Spend more!

Most people focus on cutting costs, but since most people are unsuccessful, logically you should do the opposite.  In the case of a scalable business, spending more money should result in you earning more money.  Proper scale dictates your earnings increase exponentially as you increase your spending anything that saves you time (employees & outsourcing everything where you don’t have the greatest competitive advantage).

Other than payroll, the only other costs that are worth your brain cells is optimizing your taxes and mortgage interest with your corporate draws.

Target 1 or 2 niche markets and hit it hard!

Spend more specifically targeting paid advertising to dominate niche markets.

We spent the last 2 years of Alberta’s downturn dominating 2 sectors with recurring revenue:

  1. Single-idea restaurants (targets what the average person wants) ex. Vietnamese, Donair, Italian
  2. Salons (targets insecurities)

Next on our list are the 5 worthwhile segments we have not dominated yet:

  1. B2B technology
  2. B2B trades (plumbing, electrical, etc.)
  3. CNC machine shops
  4. Consumable product subscriptions (Skincare, Makeup product of the month, etc.)
  5. High-end gyms, country clubs

Choose similar markets 

It is important that when you scale to adjacent sectors, that you are “selling” to the same type of customer you dominated earlier.  Our biggest mistake in business was at the onset of Alberta’s downturn we aggressively marketed our high-end service to the mass market customer.  Mediocre customers are looking for motivation and a magic pill to cure their predicament rather than dealing with the cold truth – that they alone are responsible for their situation. Similarly, our clients that have had success selling to the masses would not be able to upmarket their product with the same marketing and pricing.

Both our new target sectors, together with the first 3 sectors we dominated, have the ability to scale to more employees and more capital assets.  Scaling compounds in favour of these 5 segments since the fixed costs of creating the output are being spread over higher and higher revenues to yield increasing pricing advantages for their inputs, which leads to the same elite customer:

  1. Disciplined and definite people that do the single best valuable thing they can focus on rather than being a “Jack of all trades, master of none”.
  2. A compelling and focused mission that leverages proprietary skills/equipment too hard for average people to acquire or learn from youtube.
  3. Minimum 20% pre-tax margins on annual revenues in excess of $400K.
  4. $1M valuation based on a 2.5x-5x earnings multiple

 

 

 

Part 1: Get Lean before Bulking

What happened to THUT? At its height, we employed 6. Today, with more and larger customers, there is only 1 employee.  In order to grow, older companies (4+ years) need to get lean first: downsize until the marginal costs of outsourcing exceed the cost of doing it internally.

  1. Staying lean is key to operational efficiency.  For a company with healthy revenues, the fastest way to increased profits is to cut costs.  You’ll need to eliminate product lines/customers that are responsible for a disproportionately small part of your revenue.
  2. Getting lean first sets your company up for better scale. Efficiency compounds so you will grow exponentially faster if you get lean first and improve your margins.

For us getting lean, meant realizing no one has ever gotten rich doing everything for everyone: In 2016 we cut down our contacts because it made no sense to corrupt our Dunbar’s # when half the people we dealt with only generated 10% of our revenue.  2017 we have improved where  14.67% of our revenue comes from 37% of our customers.  But it clearly makes more sense to give up $115,000 of revenue (14.67%) if we can save 37% of our time, hence we have eliminated even more.

Now in 2018, we slashed product lines to focus on being the best platform designed to meet the needs of recurring revenue. The best being defined as precision, ease of use and comprehensiveness.  Now, we are a fully integrated blockchain solution that brings together payroll, bookkeeping, accounting, corporate taxes, personal taxes, banking and wealth management.

Lessons in staying lean:

  1. Never hire managers or business grads – as employees or as contractors (ie external accountants).  Hire doers instead (trades/technical experts). Engineers can do the work of 10-100 accountants, so our company will never hire an accountant. The best financial planner I know was an Electrician by trade.
  2. Business plans, financial projections, budgets are all a waste of time – simply reframe your focuses as a function of time and get better every day.   Prioritize maximum effort and make sure taxes, payroll and housing are planned for – no other cost-cutting matters compared to those big 3.
  3. 80% of your time should be in delivering your product and only 20% on support and marketing (AI powered online advertising).

Check out the archive and like us on Facebook to continue our journey to financial freedom in an increasingly complex world.

 

Scale, Derivatives & the Most Important Ratios

Since we have agreed that math is the key to escape the middle class, we must go further to how to apply math in your business.

Everything operates on first and second derivatives, marginal effects, and ratios.

Algorithms are the key to scale:

  • Find a problem that you can address that will bring value to customers.
  • Re-frame this problem as a function of time and build your process to deliver to the customer.
  • Continue to define and simplify your process to facilitate scale.

Derivatives tell you the marginal cost (change in cost/change in unit produced) of each additional unit of production.  Lesson: unless you scale a simple business, you should not grow indefinitely since the increase in size will increase the complexity to the point that profits will decrease. The second derivative shows that with each added unit, the curve in relation to the cost will get steeper as your costs disproportionately increase.

Systemization is important because even slight differences will cause your costs to go up disproportionately with the volume increases.  The cost of interruptions, cognitive residue, and communication between steps of your process between extra people will slow you down.  The solution is to sell a narrower range of products (or services marketed as products) to fewer customers (not applicable to e=commerce and casual dining) and have fewer vendors.

 

Avoid the traps: If you see poor choices, recognize that poor choices= poor character. Do not give second chances: if you see a single-character flaw (ie: blames others) you must not do business with that person. Also, don’t forget to measure the math strengths of your competitors. Find the minority fraction of your profits and revenue that are disproportionate to the number of customers it is generated by. Eliminate the product line/customers.

 

Analyzing the aforementioned for 12 years has allowed me to make several conclusions: Long-term sustainable business will need to have at least 20% pre-tax margins.  This is only possible by charging market rates, having a good reputation, the best people,  a high ratio of production vs support costs, and efficient quality – with efficiency defined as value created/time spent creating value.

 

The next most important ratio is your payroll: revenue. Remember, machines give 80% of a human at 20% of the cost.

 

Another conclusion is that there are 7 customers for us to work with:

  1. B2B technology
  2. B2B trades (plumbing, electrical, etc.)
  3. CNC machine shops
  4. Single-idea restaurants
  5. Salons
  6. Consumable product subscriptions (Skincare, Makeup product of the month, etc.)
  7. High-end gyms, country clubs

What all groups need to do is have high-quality product and marketing which scales to more employees and more capital assets (software, equipment, work van).

The pseudo-intellectual trend of Anglo-Saxon business has taken “accounting” too far, and to avoid analysis paralysis we subscribe to the simplicity of the math-based-Germanic-style. This is also representative of the simple, yet effective models of the Asian mass-market dominance, simple restaurant (ex. Pho), or nail salon.  Complex businesses are more difficult to scale.

Here are MORE math hacks!