Business owners often have reservations about paying into the Canada Pension Plan (CPP). Many think they’re getting a bad deal by paying both the employer and the employee portion of the contribution, but can they do better by paying themselves dividends? In the last two episodes, we did an extensive review of how you can compensate yourself as a business owner through a private corporation. Today, we take a deeper look at two of the payroll expense aspects that often come up in discussions with financial planners: CPP and Employment Insurance (EI). If you are self-employed, there are a few things you need to consider, including your decision to pay yourself a salary or take dividends. We discuss that in this episode, as well as whether self-employed business owners are really getting the short end of the stick when it comes to CPP and EI contributions. Tuning in today, you’ll learn about some of the unique features of CPP, how it’s calculated, and the three major risks it offers protection against, plus we walk you through various models to illustrate the consequences of paying yourself dividends versus salary. We also delve into EI for self-employed business owners, the special benefits thereof, models that consider different amounts of income and consumption, and much more. For a comprehensive guide to CPP and EI for self-employed business owners, don’t miss this episode of Money Scope with Benjamin Felix and Dr. Mark Soth!

Key Points From This Episode:

(0:00:20) Reasons that today’s topic on CPP and EI is so complex.

(0:04:04) How CPP is calculated: an overview of what you pay and what you receive.

(0:05:59) Whether or not business owners get a bad deal with CPP.

(0:11:34) Viewing CPP as a tax and when paying dividends versus salary is favourable.

(0:17:33) The unique features and benefits of CPP and the risk protection it offers.

(0:25:15) Assessing the value creation and performance of a pension fund like CPP.

(0:30:42) Crunching numbers to calculate a combined CPP benefit for a household.

(0:33:52) Making the comparison between paying CPP and investing in a corporation.

(0:37:23) Tax planning consequences of paying dividends to avoid paying into CPP.

(0:41:16) Various models to illustrate many of the scenarios we covered in this episode.

(0:48:36) Why paying into CPP and dying early results in a bad financial outcome.

(0:51:36) Comparing CPP with other corporate and personal investment options.

(0:59:54) Key takeaways on CPP; a chance to buy into a truly inflation-indexed annuity.

(1:01:48) An overview of employment insurance (EI) for self-employed individuals.

(1:05:38) EI special benefits that self-employed business owners can access.

(1:13:55) Insight into EI for incorporated versus non-incorporated business owners.

(1:23:43) Our post-op debrief of today’s episode on CPP and EI!

Links From Today’s Episode:

Dr. Mark Soth (The Loonie Doctor) — looniedoctor.ca

Dr. Mark on X — twitter.com/LoonieDoctor

Benjamin Felix — pwlcapital.com/author/benjamin-felix

Benjamin on X — twitter.com/benjaminwfelix

Benjamin on LinkedIn — inkedin.com/in/benjaminwfelix

Aravind Sithamparapillai — ironwoodcanada.com/aravind-sithamparapillai

Sebastien Betermier — sbetermier.com

Papers Mentioned:

‘Five Examples of Direct Value Creation and Capture in the Pension Fund Industry’ – papers.ssrn.com/sol3/papers.cfm?abstract_id=4616266

When it comes to creating an optimal compensation strategy plan, there’s a lot to navigate. And while there may be a plethora of general rules floating around on the internet, each individual’s optimal strategy is ultimately going to be dependent on their unique situation. That is why we’re using today’s conversation to break down the findings of our mental model algorithm. Tuning in you’ll hear a detailed explanation of the five steps for creating an optimal compensation strategy plan, and how to apply them. Find out how to plan your consumption, account for mandatory income, clear out notional accounts, use salary to make up the difference, and utilize salary dollars that aren’t for spending. We also cover key areas, like Canada Child Benefit (CCB) clawbacks, incorporating income splitting when using your salary, and how to pay yourself a salary bonus to bring the corporate active income down. Join us today to learn how you can implement a dynamic salary and dividend strategy for optimal compensation, and much more. There’s a lot to unpack here, so get your note-taking devices ready, and let’s get started!

Key Points From This Episode:

(0:05:19) Optimizing integration: general rules and exceptions in different contexts.

(0:07:48) The first three steps in our mental model algorithm: planning consumption, accounting for mandatory income, and clearing out notional accounts.

(0:15:25) A quick warning on thinking about money in terms of inflation-adjustments, and why it’s important.

(0:16:11) How to use capital dividend accounts (CDAs) in different situations and why it’s generally the most useful notional account.

(0:28:03) An overview of Eligible Refundable Dividend Tax on Hand (ERDTOH), how to use it, its status as the second most useful notional account, and why it’s considered more useful than CDAs in certain cases.

(0:30:58) Important details on Non-eligible Refundable Dividend Tax on Hand (NRDTOH).

(0:32:42) Everything you need to know about the General Rate Income Pool (GRIP) in various contexts.

(0:41:01) Situations where it may make sense to pay extra dividends and key factors that impact personal tax rates.

(0:56:31) A breakdown of the Canada Child Benefit (CCB) clawback versus Notional Account Release, and key factors to consider.

(01:03:22) Factoring in RRSP contributions when paying yourself a salary and how to take advantage of them.

(01:08:39) How to incorporate income splitting using your salary depending on the situation.

(01:13:48) What to do with salary dollars that you won’t take for spending.

(01:18:46) Key insights, analysis, and caveats on bonusing down the SBD rate; how to pay yourself a salary bonus to bring the corporate active income down.

(01:30:19) Implementing a dynamic strategy of salary and dividends, how it might unfold over time, and examples of analysis that we’ve done.

(01:37:19) Our post-op debrief: a review of our mental model algorithm and creating an optimal compensation strategy plan to pay yourself from your corporation.

Links From Today’s Episode:

Meet with PWL Capital: https://calendly.com/d/3vm-t2j-h3p

Dr. Mark Soth (The Loonie Doctor) — https://www.looniedoctor.ca/

Dr. Mark on X — https://twitter.com/LoonieDoctor

Benjamin Felix — https://www.pwlcapital.com/author/benjamin-felix/

Benjamin on X — https://twitter.com/benjaminwfelix

Benjamin on LinkedIn — https://www.linkedin.com/in/benjaminwfelix/

Corporate to Personal Salary Dividend Optimizer — https://www.looniedoctor.ca/ccpc-income-disperser/

Whether you’re self-employed or you own a small business, there are many nuances to how you can pay yourself from your business. Our episode today hones in on how we pay ourselves personally from a corporation (along with other key employees, including spouses) and the many intricacies you need to understand when making decisions about this process. While today’s episode may be our most complex and ambitious one to date, we hope it will serve as a useful resource for helping you get the most out of your business. Tuning in, you’ll learn about the benefits and drawbacks of paying yourself with a salary versus dividends, how to optimize your meetings with accountants and financial planners, and much more. We get into key topics such as employee insurance (EI) in different contexts, the benefits of the Canada Pension Plan (CPP), why you need to put together an income smoothing plan, and how to use shareholder loans without consequential missteps. The final portion of our show is dedicated to income splitting, the best ways to go about it, and how to make sure you adhere to Canadian Revenue Agency (CRA) requirements. Today’s episode covers a lot of ground and serves as a useful reference for listeners to return to. Join us today for this expansive conversation and arm yourself with the knowledge you need to get the most out of your corporation!

Key Points From This Episode:

(0:02:42) Important disclaimers and exceptions concerning today’s topics.

(0:05:37) Common questions on taxation of active business income, personal income, the nuances of tax integration, business expenses, exemptions, and deductibles.

(0:19:32) A breakdown of how net active income is taxed, what to do with retained earnings, and navigating the dividend gross-up system.

(0:28:57) Planning for retirement, asset allocation, and determining your time horizon.

(0:34:44) An overview of General Rate Income Pool (GRIP) as a notional account for tax tracking purposes and an example of how GRIP works with active income.

(0:38:03) Looking at tax rates and tax integration as you move through different tax brackets and how rules vary between various jurisdictions in Canada.

(0:56:02) Unpacking what you need to know when it comes to paying yourself a salary and paying employees (including spouses).

(01:01:08) Employee Insurance (EI) in different contexts, the distinctions between arm’s length and non-arm’s length employees, and navigating Canada Pension Plan (CPP) payments.

(01:05:18) The many benefits of the Canada Pension Plan (CPP), and why the reservations people have due to it being government-mandated is not unhelpful in this instance.

(01:08:20) Key insights on the Canada employment tax credit when considering the salary versus dividend debate, and how salaries can create other financial planning benefits.

(01:16:38) Putting together an income smoothing plan, how to keep yourself in a lower tax bracket over your lifetime, and how to work with a financial planner.

(01:25:17) A Breakdown of shareholder loans, how they work, the tax risks involved, and the best ways to use them.

(01:27:32) Other ways to get money out of your corporation efficiently, like with your capital dividend account (CDA), and optimal ways to use your CDA.

(01:34:25) The concept of income splitting, its benefits, the best strategies for going about this, and how to adhere to Canadian Revenue Agency (CRA) requirements.

(01:45:17) A recap of what we covered today and what we have coming up next time.

Links From Today’s Episode:

CRA Interpret Bulletins - https://www.canada.ca/en/revenue-agency/services/forms-publications/current-income-tax-interpretation-bulletins.html

Dr. Mark Soth’s Calculators — https://www.looniedoctor.ca/canadian-financial-calculators/

Dr. Mark Soth (The Loonie Doctor) — https://www.looniedoctor.ca/

Dr. Mark on X — https://twitter.com/LoonieDoctor

Benjamin Felix — https://www.pwlcapital.com/author/benjamin-felix/

Benjamin on X — https://twitter.com/benjaminwfelix

Benjamin on LinkedIn — https://www.linkedin.com/in/benjaminwfelix/