Posted by Tim Stobbs on June 9, 2010
I’ve mentioned before that I work for a Crown corporation, which means a certain amount of political interference occurs at my day job. Nothing too bad, so overall it is a more of a quirk of the job. Perhaps the biggest adjustment I had moving to the company was the Annual Payee Disclosure Report by our parent company, which lists the salary and taxable benefits received for every employee who earns more than $50,000 in the previous year.
This basically means I can look up just about anyone I work with and find out roughly what they make all the way to my VP or the CEO. So it ends up being the most open environment about salaries that I have ever been in. Just about everyone is willing to tell you approximately what they make. So as the annual cost of living adjustment just came in, I’ve heard lots of comments by people that drop how much they now make.
After being in the private sector for most of my career it’s still a little shocking to hear everyone discussing salary so openly. Yet perhaps the most interesting thing I learned about knowing this information was it doesn’t change much of anything. Knowing what people make doesn’t change the fact who I’m friends with or how they treat me. If anything knowing the number allows me to put their spending comments into context. Let’s face it if you earn over $70,000 you can afford a new truck a lot easier than someone who earns $50,000/year.
Actually the forced disclosure provides some benefits to the work environment. For example, it gets rid of any speculation on who earns what and removes a lot of discussion of what is fair. It also provides some unusual career planning since I can look at my pay range for my job and know down to the dollar the maximum I can earn at my job (just over $100,000). So if I want to earn more than that I know I have to look for a new job with a higher job class number. Or if I’m ok with that maximum I can plan to stay in my job for a few years.
In the end, I have to confess knowing the salary of everyone isn’t that big of a deal. It’s just a number and not even a very important one since with such heavy use of credit today, you can often have a big salary but be very poor in net worth. So how do you think your workplace would be if everyone knew your salary and you knew their salary? Would it improve things or makes things worse?
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Filed Under: Misc
Posted by Dave on June 8, 2010
As I frantically study for an exam on the Canadian Tax System tomorrow, I came across the above topic that I thought would be worth discussing.
Many people who are aiming for early retirement are planning on using dividends to at least partially replace income previously earned through employment. I think most people know that investing in Canadian public companies gives the benefit of dividend tax credits, and today I thought I would explain why there are dividend tax credits and how these credits fit in with the Canadian tax system.
The dividend tax credit system is set up to eliminate the potential of double taxation of investment income. Without special tax rules, dividends would be taxed once at the corporate level and then again at the shareholder level when dividends are paid. Although this would be ideal in the current economic climate (our government would end up with more tax dollars, which is something they are searching for at the moment) it is not all that equitable to businesses and individuals, hence Canada’s integrated tax system.
The best way to explain this premise I think is an example. For this theoretical example, I’ve simplified some of the information, but it should provide an explanation of what I’m talking about.
A corporation earns $100, of which all after tax dollars are to be allocated to dividends. The gross-up rate being used in the example is 1.45, which is the rate used on active publicly-traded corporations for last year. The tax credit calculated is 31%, which is what was applied in British Columbia for 2009:
Federal Tax rate on $100 19.50
Provincial tax on $100 11.50
Total 31.00
Dividend Available 69.00
Grossed up at 1.45* 100.00
Dividend tax credit 31.00
So, essentially what the dividend tax credit ensures is that the $31.00 already collected by the Canada Revenue Agency is not collected on again. Dividend income itself is taxed on the individual, but if you follow the math, the individual would have a credit from the $69.00 received and would only be taxed on $38.00 of dividend income in this simplified example.
The dividend tax credit is only available to Canadian dividends. The Canada Revenue Agency really doesn’t care if they’re double taxing you on foreign dividends, as another government received the benefit of the corporate portion ($31.00 from the example above). The ramification of this double taxation means that other than allowing your portfolio to become more diversified on a currency basis, you lose out if you’re investing in a foreign company if there is a comparable domestic stock that could be bought.
The dividend tax credit also makes it much more beneficial (tax-wise) compared to other sources of income (such as interest) which don’t have similar credits available.
Of note, dividend credit is going to be decreasing over the next few years, as corporate taxes are declining and in order to match the lower amount of taxes being paid by corporations, shareholders will get less as a credit. The following amounts show the federal dividend tax credit amounts on dividends paid from a public corporation in Canada (provincial amounts vary across the country).
2009 = 27.5%
2010 = 25.88%
2011 = 24.12%
After 2011 = 22.35%
So, I hope I have provided some information as to why we have a dividend tax credit and the overall implications of the credit on the Canadian tax system. Any questions?
Posted by Robert on June 7, 2010
Few people ever seriously contemplate retiring before age 55. Of those who do, not everyone is able to retire early. So how will I be able to retire around age 35? It has taken planning, good decisions and a healthy dose of luck. Let’s see how it has happened so far.
My wife and I were married while I was still in university. Because she had already graduated, she worked while I continued my studies. Both of us have a real aversion to debt, so we spent very little. It was helpful that I was able to qualify for the local student rate at Laval University, making tuition about 60% of the cost at other universities. We also rented a very small apartment for $350 a month. We ate mostly rice and noodles, and rarely ate out. Looking back, it seems incredible that we lived on about $900 a month for the two of us (including tuition and books). When I finished, we had no debt and some small savings.
I say “finished” because I hadn’t graduated yet. I had four or five Chinese language and culture classes to finish, and we decided to move to Taiwan for a year. I was able to complete my classes while my wife worked at a private pre-school. We enjoyed it and we earned good money, so we decided to stay a second year. Even though the Canadian dollar strengthened while we were there (eroding our savings), we came back with enough money for a small, one year old, used car and a 25% down-payment on our home.
When we moved back to Calgary, I started work as a financial advisor. Our first child would arrive in a couple months, so we decided to buy a home. Since it’s a big commitment and we planned to have more kids, we made a choice to buy as large a home as we would need, so we wouldn’t HAVE to move later. We didn’t qualify for a mortgage, since I was just starting to work, but my parents co-signed the loan for us. In hindsight, buying a home worked out very well. Home prices in Calgary have soared since that time, and our home value increased by about 75%.
Since I work as a financial advisor, I have access to a lot of information about investing. Even though in our office, we focus on financial planning and generally use investment funds, I took an interest in buying individual stocks. We invested our own money and I learned by doing. As in anything, especially when learning, you win some and you lose some. What worked especially well was buying income-paying equities like income trusts and REITs. Having cash distributions deposited to our investment account each month makes up for other mistakes.
Then the market crashed. It wasn’t fun, but after realizing that I had no control over the market, I started to see it as an opportunity. One of the REITs we owned was being given away at little more than a third of its previous price. We bought as much as we could afford, $15,000. That’s when it was useful to have excess equity available in our home. In a couple months, we sold the REIT for a 70% gain, and bought another REIT, which subsequently doubled in price. Our new REIT was worth about $50,000, which I attribute to good timing and a lot of luck.
These days, we almost exclusively buy investments that pay income. In fact, we get so excited about buying shares that when we feel there is a bargain available, we stretch to buy as much as we can. It leaves little money for extravagances, but our investment accounts produce almost as much cash as we spend. Because we took a chance and bought income trusts and REITs while the market was low, we got some yields over 15%. We can no longer find deals like that, and can’t expect all income trusts to maintain their distributions. We’ll spend the next two years paying off our debt and adding to our investments. Our goal is to have enough income to cover our after-tax spending, with some excess, just in case. Because we are focused on income, market fluctuations matter less, and it’s fairly simple to tell how well we are progressing towards our goal.
Through good choices, fortunate timing and a healthy dose of luck, we’re very close to our retirement goal. We spend only a relatively modest amount, and we use our cash to buy investment income. When our income is equal to our spending needs (with some excess for safety) and our debts are paid off, we will be able to retire. This strategy should work for anyone, but the timeline is very dependent on external circumstances. We’ve been “lucky” in that, as the saying goes, luck is when preparation meets opportunity.
What are the events that have moved you toward your goal of early retirement? How much of a role did luck play?
Disclaimer: There is a real risk that companies can go bankrupt and, even if they don’t, cash distributions are never guaranteed. Nothing in the preceding should be taken as investment advice.
