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Personal FinanceTax Planning

4 Major Obstacles to Building Tax-Efficient Wealth

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The 4 obstacles that could be holding you back and what you can do to overcome them

“Wealth is not his that has it, but his that enjoys it.” — Benjamin Franklin

Building wealth is hard. This is why most people never achieve financial freedom.

If you search online, you will find millions and millions of books on how to build wealth. You will see the different types of strategies discussed. Some will even say it is easy.

Most will suggest some simple steps to take to achieve financial freedom and the list goes on and on and on.

So, why do most people never achieve financial freedom despite the number of resources available?

The answer is “Obstacles.”

Obstacles prevent most people from building and growing their wealth. To be clear, there could be millions of obstacles. Some within our control and others outside of our control.

There is no way I can tackle all possible obstacles here. Instead, I focus on 4 key financial obstacles that prevent most people from building tax-efficient wealth.


1. Taxes

“The best things in life are free, but sooner or later the government will find a way to tax them.” — Anonymous

Most Canadians will consider housing costs as their biggest expense.

Unfortunately, they are wrong!

According to a recent report from the Fraser Institute, the average Canadian family spent 43.6 percent of their income on taxes in 2018, more than they spent on housing and other expenses combined.

Can you imagine that? This is significant. The average family’s total tax bill at 44 percent is double the amount they’re paying on housing costs each year.

So, if taxes are our biggest expenses, why is it that most people don’t pay attention to it? Why is it that most Canadians and the news media get it all wrong?

There are two main reasons for this.

First, the majority of us are used to withholdings. We never see a good part of our money as our employers take it upfront from our salaries and remit to the government.

Second, other forms of taxes we pay on everyday purchases seem insignificant on a transaction by transaction basis.

The total tax bill considered in the Fraser report reflects taxes families paid to the federal, provincial and local governments — including income, payroll, sales, property, carbon, health, fuel and alcohol taxes.

Consider this. The average person in a developed country (Canada included) spends 20 to 35 percent of their life working to pay taxes. In other words, an average person dedicates more than two hours of every workday to feed the government.

If you do the math, this is equivalent to approximately 13 years in your work life and 20 years in your lifetime.

This is a prison sentence!

And it will get worse. With rising government spending, we expect to pay higher taxes in the future to deal with the rising debt level.

As inflation spikes, the spending power of our currency will be dramatically reduced.

As you put these pieces together, you can now appreciate the impact of taxes on your personal finances. This is one reason why most people never achieve financial freedom.

It is a big obstacle.

To be clear, paying taxes is important for the benefits it provides to our society as a whole. What you have to consider is whether you’re paying more than your fair share of taxes.

While I highly recommend that you pay whatever taxes you are legally required to pay, you should consider legal options available in our Tax Act to reduce your tax burden.

So, what can you do to reduce your taxes?


2. Non-Deductible Interest

“Tax laws favor capital over labor, giving capital gains a lower rate than ordinary income. The rich get humongous mortgage interest deductions while renters get no deduction at all.” — Robert Reich

The biggest asset we own is our primary residence for those that own their own homes. The cost of buying a home continues to rise, and it is getting increasingly unaffordable for most young people today.

As the cost of housing rises, so is our mortgage balance. Added to this is the rising debt of the Canadian household. As a result of all these high debt balances, most Canadians are now burdened with high-interest costs associated with these debts.

Unfortunately, in Canada, our tax rules generally do not permit a deduction for the mortgage interest related to our primary residence.

Furthermore, most interest on other debt we have is also not deductible for tax purposes except the debt that is incurred directly to earn income from a property or business.

Most of us never put a lot of thought on this as we automatically pay our mortgage each month or every two weeks without examining how much of this payment goes towards the reduction of our principal balance.

The fact that you cannot deduct your biggest interest cost is a huge obstacle that will prevent you from growing your wealth.

So, what can you do about this?

  • I encourage you to start by looking at your mortgage statement or your amortization schedule and see the amount of payment that goes towards interest payment alone. You will quickly notice that it is significant.
  • Consider strategies to convert some of these non-deductible interest costs to tax-deductible interest costs. An example is renting part of your home so you can deduct part of the mortgage interest for tax purposes.
  • In certain circumstances, taxpayers can obtain an interest deduction for borrowings made for specific purposes. The general rule of thumb is that interest is deductible to the extent the borrowed monies are used to earn income. Consider strategies that will allow you to pay down your mortgage, then borrow the funds as home line equity to invest in an appreciating asset.

3. Cash Flow Crunch

“There is really only one way to address cash flow crunches, and it’s planning so you can prevent them in advance.” — Elaine Pofeldt

Have you wondered why you have very little or no money left shortly after your payday?

Are you one of those high-income earners that make over $100,000 per annum and still wonder, where is all my money?

The clue may be in the diagram below:

Image Credit: Tax-Free Wealth by Tom Wheelwright

For the average Canadian employee, taxes are taken upfront through payroll withholdings before we see the money.

With the funds left, we now have to pay for all our expenses, the majority of which are non-deductible for tax purposes. Payments like mortgages or rent, car payments, childcare expenses, gas, food, clothing, and other household expenses deplete our cash.

At the end of the day, we have little or no cash to invest. In fact, based on the current trend of rising household debt, a good number of Canadians pay for some of these expenses using credit cards, lines of credit, etc. thus, adding layers of non-deductible interest costs.

The tax-smart taxpayer will conserve more cash by reverse-engineering the cash flow pattern so that there is more cash left over to invest and grow wealth.

So, what can you do to maximize your cash flow in a tax-efficient way?

  • Consider obtaining tax planning advice that will enable you to make changes to your lifestyle so you can save more of your cash to grow and accelerate your wealth.
  • Contact your employer to reduce the amount of upfront deductions from your salary.
  • Convert some of the after-tax expenses to before-tax expenses and converting some of your non-deductible interest costs to tax-deductible interest costs.

4. Inflation

“Inflation is like sin; every government denounces it and every government practices it.” — Frederick Leith-Ross

What is inflation?

Inflation is the rate at which the general level of prices for goods and services is rising.

I refer to this as the silent killer as we often don’t see it.

While most Canadians are familiar with inflation, we often underestimate the powerful impact it has on our ability to grow our wealth and eventually achieve financial freedom. Ironically, we often think of financial freedom in terms of dollar value rather than in terms of the purchasing power of our dollars (the amount of goods and services you can buy).

At the end of the day, if you’re unable to acquire what you need when you need it, then you’re not necessarily financially free.

I discuss inflation in detail in the article “The Silent Killer — Inflation”. I encourage you to read this for a deeper understanding of the devastating impact of inflation.

Inflation will rob you. It will reduce your purchasing power. And it will kill you, financially that is, if you don’t pay attention.

So, what can you do to protect yourself from inflation?

  • Invest in real estate — it is a great hedge for inflation.
  • Invest in precious metals like gold and silver — history suggests that these metals hold their values when everything else crumbles.
  • Invest in yourself — arm yourself with the knowledge that no one can take away.

In Conclusion

You now have a better understanding of what may be holding you back from achieving financial freedom.

You are now aware of the major obstacles.

In my upcoming eBook, I go into some details on how you can tackle these obstacles in a tax-efficient manner. In the coming weeks, as I get closer to the release date of the book, I will show you how you can get it for FREE.

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BusinessPersonal FinanceTax Planning

10 Reasons Why You Pay Too Much In Personal Taxes

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Taxes are by far the largest cost that most households face, yet most people do nothing to manage their taxes

“The best things in life are free, but sooner or later the government will find a way to tax them.” — Anonymous

Whether you like it or not, taxes affect all of us. The news media is always talking about the top three costs for households:

  1. Housing (rent or mortgage)
  2. Car (loan payments and interest)
  3. Education or Child Care (student loans or child schooling)

The truth is, they are wrong. Taxes are by far the largest cost that most households face, yet most people do nothing to manage their taxes.

Over the years, I have filed thousands of personal tax returns for a broad range of clients. From those earning half a million dollars per year to clients with little or no income.

With our marginal tax rate system in Canada, the more you earn, the more attention you should pay.

To help you plan better, I’ve put together the top 10 reasons why you may be paying too much in taxes.

These top 10 reasons are of course, my opinion. They are based on my experience from what I’ve seen over the years working with different clients.

Review them and consider what changes you can make today to save on taxes.

1. Lack of a periodic tax plan

If you fail to plan, you are planning to fail.” — Benjamin Franklin

This is a big one. Most people will only discuss taxes once a year during tax filing season.

That’s a bad idea.

Planning is critical for both individuals and businesses to ensure that you’re optimizing your taxes.

Tax laws change from time to time and planning ensures you’re on top of these changes and positioned to take advantage of the changes as they occur.

If you are an individual with assets, you have to plan to ensure assets are transferred to your spouse or kids on a tax-efficient way to avoid significant tax consequences on death.

If you own a business, succession planning is critical as there are significant tax implications if you’re considering selling or transferring ownership of your business.

Overall, significant changes in life and the major transactions we make throughout our life will often have huge tax implications. So, you want to stay ahead of this with proper tax planning.

2. Employment income is your only source of income

“In today’s uncertain economy, the safest solution to be wealthy, be in total control and enjoy freedom for you and your family is to have multiple streams of income.” — Robert G. Allen

If employment income is your only source of income, you have minimal opportunity to manage the taxes you pay.

It’s worse if you’re a high income earner (i.e. you gross over $100,000 per year) as you will be in the high end of the income tax bracket.

The high marginal tax rates on employment income in Canada is one of the major reasons the average middle class person finds it challenging to save or get ahead in this economy.

Another reason is that the average employee pays for expenses using after tax dollars with additional sales tax on these expenses.

So, if you’re employed with high income, you have to be creative and to deliberately plan on how to shift income, income split and convert your employment income to other sources of income that are taxed at far better rates.

Strategies may include starting a side business, investing in real estate, negotiating compensation with your employer and creating opportunities to income split with other family members.

3. You never review your tax returns for opportunities to save on taxes

“I don’t know if I can live on my income or not — the government won’t let me try it.” — Bob Thaves

It is common to file your tax return and never review it for opportunities to save taxes in subsequent years.

How many times have you sat down with your tax advisor to discuss how to improve your tax position?

How many times have you reviewed each line on your tax return to understand the nature of income reported, and the marginal tax rate applicable to the income?

Without adequate review, you miss opportunities to adjust and plan ahead.

Often, tax credits and tax deductions you may be entitled to are not claimed as a result of lack of review.

If you don’t take the time to review, you will miss opportunities, and you will pay more than your fair share of taxes.

4. You don’t take advantage of the tax breaks from TFSA and RRSP Contributions

“There may be liberty and justice for all, but there are tax breaks only for some.” — Martin A. Sullivan

Whether you like it or not, whether you agree or disagree, Tax Free Savings Accounts (TFSAs) and Registered Retirement Savings Plans (RRSPs) provide tax benefits!

For RRSPs, taxes deferred to future years puts cash in your pocket today that can be invested, spent or put to other uses.

There are so many misconceptions out there about RRSPs.

One that I hear from time to time is that the government has control of your money.

This is not true!

You have total control of your RRSP investments if you self direct it or manage it yourself in a brokerage account.

Others simply refuse to contribute to RRSPs because they say you will pay taxes when you withdraw from the RRSP in future years.

Yes, you will. However, will you rather pay the taxes today or in the distant future?

For TFSAs, you contribute with after-tax dollars but the income and growth in the account is tax-free.

You certainly want to maximize your RRSP and TFSA contribution room before investing in non-Registered accounts to save on taxes. However, tax planning considerations should be taken into account when utilizing these tax breaks.

5. You’re either single or you act like you are

“The purpose of a tax cut is to leave more money where it belongs: in the hands of the working men and working women who earned it in the first place.” — Bob Dole

There is absolutely nothing wrong if you’re single.

However, if you’re single, the Canadian tax law is not your best friend.

Our tax system is more favorable to families as there are more opportunities to share credits and income split.

Despite the benefits of filing taxes as a family, I still find married couples acting like they’re single as they file separately. As a result, they miss out on potential benefits and tax savings had they filed together as a family.

Moreover, filing your tax returns separately is more likely to result in errors where different members of the family are claiming the same credit or deductions. Often, this will result in unfavorable tax reassessments.

6. You file your tax returns yourself

“You don’t pay taxes — they take taxes.” — Chris Rock

There is nothing wrong with filing your tax returns yourself with the number of relatively cheap or free tax software programs out there.

If you have a simple tax situation with only employment income and nothing else, you will likely be fine.

On the other hand, if your tax return is a little complicated with family, investment income, business income or rental income, you will certainly need the help of a professional if your tax knowledge is not strong.

Filing your taxes yourself with limited knowledge is certainly a recipe for missing credits and deductions and paying too much in taxes.

7. You don’t have a competent Tax Advisor

“Today, it takes more brains and effort to make out the income-tax form than it does to make the income.” — Alfred E. Neuman

And this is why you need a competent Tax Advisor.

Whether you file your taxes yourself or not, it is important to have a professional Tax Advisor that can give you a competent opinion and advice on your situation.

Professional Tax Advisors are held to a higher standard, belong to a regulated professional body that requires minimum educational qualification and ongoing professional development.

These professionals often undergo periodic review of their practice and are required to hold the public interest in high regard.

Also, even if you have a competent tax advisor you’ve been working with for several years, it is advisable, particularly for complex situations, to seek a second opinion just to get fresh set of eyes looking at your situation.

8. You lack basic knowledge of taxes

“The hardest thing in the world to understand is the income tax.” — Albert Einstein

Fortunately, today there are more opportunities for you to learn about taxes. So it’s no longer the hardest thing in the world to understand.

Ultimately, you are responsible for information reported on your tax return, not the tax accountant or filer!

At the end of the day, you have to sign and authorize the tax accountant to file your tax return. By doing so, you’re telling the Government (Canada Revenue Agency or CRA) that you have reviewed your tax return and you are comfortable that all information reported is accurate.

To do this correctly, you must have some basic knowledge of tax, without which you cannot complete a reasonable review of your tax returns.

Getting basic knowledge of taxes is particularly more important if you’re not engaging a reputable professional to prepare your tax returns.

9. You never negotiate the structure of your compensation

“We don’t need new taxes. We need new taxpayers, people that are gainfully employed, making money and paying into the tax system.” — Marco Rubio

Given that various types of income attract different tax rates and certain employment benefits are tax-free, there are opportunities to negotiate your compensation to minimize your taxes.

If you are a full-time employee, you can take advantage of these opportunities when negotiating with your current or future employer.

If you’re a contractor, you can also negotiate and structure how you want to be paid for maximum tax benefits.

10. You celebrate when you get a huge tax refund

“Next to being shot at and missed, nothing is really quite as satisfying as an income tax refund.” — F.J. Raymond

Many people celebrate getting a large refund, thinking of it as a surprise bonus.

In some cases, they give too much credit to the Tax Accountant for getting them a huge refund (assuming of course there is no tax fraud).

Often times, this credit given to the Tax Accountant is not warranted.

What it really means is that more of your money was collected for income taxes than necessary.

Rather than leaving that money with the government, you will be better off earning interest of 2 % to 3% on that money left in your savings account.

Careful tax planning can help ensure that you send only the amount necessary in advance tax payments. If you can, send less instead.

In Conclusion

“Some taxpayers close their eyes, some stop their ears, some shut their mouths, but all pay through the nose.” — Evan Esar

Don’t just read this and do nothing…you’ll be in the same situation next year!

Consider one tip you can implement now to be in a better tax position next year.

Remember, money saved in taxes could be put to other uses…

Save it.

Invest it.

Enhance your lifestyle with it.

Give it away.

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Personal FinanceTax Planning

What The Heck Is Financial Independence?

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This past week, I had the opportunity to interview two Canadians that achieved financial independence in their 30’s.

I was curious to hear from them directly and to get a better understanding of how they did it, what it took and their experience along the journey to financial independence.

One thing that jumped out at me during these interviews is that even though they achieved financial independence by deploying different strategies, they did it by focusing on a fundamental concept — increasing their savings rate very early on.

In my future articles in the coming weeks, I will share more about these interviews and let you know how you can get access to them.

I will also write an article on the importance of focusing on your savings rate and share my story of how horrible I was at saving. It was so bad that after my first 5 years of working, I had $0 (i.e. ZERO) in savings.

I will share with you how my wife saved me and how together, we adopted a strategy that allowed us to put money away to invest, knowing my horrible history with saving.

I will also share the correlation between your savings rate and the number of years it takes to achieve financial independence. So keep your eyes peeled for my articles in the coming days and weeks.

Today, let’s talk about financial independence.

What is financial independence?

A google search will reveal many answers. According to Wikipedia, financial independence is the status of having enough income to pay one’s living expenses for the rest of one’s life without having to be employed or dependent on others.

There is a big movement of FIRE (Financial Independence, Retire Early) that is gaining more and more popularity here in North America. Their definition of financial independence aligns well with the Wikipedia definition above.

I totally agree with this and I love all of the underlying concepts taught by the FIRE movement. To get a better understanding of financial independence at a deeper level, let’s explore what it isn’t.

To do this, it is helpful to explore the images that come up in our head whenever we hear or think of financial independence. What comes to mind?

Making a killing?

Inheriting a fortune?

Winning the lottery?

Exotic travels?

Living in Mansions?

Fancy jewels, cars and designer clothes?

This is what I imagine. As Vicki Robin noted in her brilliant book, “Your Money or Your Life”, most of us picture financial independence as an unreachable fantasy of inexhaustible riches. This is financial independence at a material level.

She goes on to make the point that if we look at financial independence at the material level, it will only require us to be rich. But what exactly is rich?

Rich exists only in comparison to something or someone else. What this means is that you may never be rich enough.

“Men do not desire to be rich, only to be richer than other men.” John Stuart Mill

According to Vicki, financial independence has nothing to do with rich. It is the experience of having enough — and then some.

Enough is when you get to the peak of your fulfillment curve. In other words, you have enough money to survive, and get all the comfort and luxuries you require to experience fulfillment in life.

It is quantifiable. It is achievable. Enough for you may be different from enough for your neighbor as what fulfills you may not necessarily fulfill your neighbor.

This concept of financial independence will allow you to dig deeper to find what fulfills you. It will allow you to plan and design the lifestyle that will fulfill you. More importantly, it will save you from all the hassles of trying to keep up with the Joneses.

Conclusion

I’m a fan of financial independence and my commitment is to help as many people as possible reach their goal of financial independence — the experience of having enough.

Getting to financial independence requires clarity. It requires purpose. It requires a change in money mindset. It will take careful planning. It requires a certain level of knowledge. It will require intentional execution using a strategy that makes sense for you.

My upcoming eBook is written to provide a road map to help anyone achieve financial independence. In the coming weeks, as I get closer to the release date of the book, I will show you how you can get it for FREE.

For now, you can join our private “Plan To Retire Well” Facebook community to continue the conversation and to continue to build your knowledge.

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Personal FinanceTax Planning

5 Reasons Why Most People Don’t Use Insurance As A Tool For Wealth Planning

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“You don’t buy life insurance because you are going to die, but because those you love are going to live.” — Unknown author

Of the four tax-free options that the Canadian tax law permits, the use of tax-exempt life insurance is one of the least known tax strategies. You’re likely familiar with the other three options — Principal Residence; Tax-Free Savings Account (TFSA); and Lottery Winnings.

Under section 143(3) of the Canadian federal income Tax Act, assets accumulate within a tax-exempt life insurance contract free of annual accrual taxation.

When you pass away, any proceeds of the policy are distributed to your beneficiaries on a tax-free basis outside the scope of your estate, bypassing its associated costs.

Insurance is a no-brainer tool that allows for:

  • Tax-deferred growth, similar to registered pool of capital in an RRSP (Registered Retirement Savings Plan)
  • Potential for tax-free income during retirement
  • Tax-free distribution upon your death

“Fun is like life insurance; the older you get, the more it costs.” — Frank Mckinney

In another article, I will discuss how you can leverage insurance and create other streams of income using insurance.

Despite the tax and other benefits that the use of insurance provides, most people resist buying one. There are potentially many reasons for this, but here are my top 5 reasons:

1. Lack of Knowledge

This is probably one of the biggest reasons why people don’t consider life insurance as a tax planning tool or even as a tool to protect the financial welfare of their loved ones.

There is so much misinformation about insurance and in the midst of this kind of information, it’s challenging for most to see the real benefits of having insurance as a great financial and tax planning tool.

“I detest life insurance agents: they always argue that I shall someday die, which is not so.” — Stephen Butler Leacock


2. Insurance is expensive

Truth be told, insurance is expensive, particularly the kind of life insurance (whole life and universal life) that is suitable for tax planning purposes.

With the ever growing costs of keeping up and managing family budgets to pay for things like food, clothing, housing, day care, car payments, kids’ education, etc., insurance is just outside of those “necessities” when money is tight.


3. Insurance provided through your job

Many people are offered life insurance as part of their employee benefit package and often, decide not to get additional insurance.

They forget that coverage provided by these kind of employer-provided insurance is often not sufficient. In addition, if you leave the job, it’s typically the type of insurance that doesn’t “move on” with you.


4. It is intangible

For those like me that prefer to buy things that are real, paying for insurance that we don’t see will seem like a waste of your hard earned money.

All you get from buying an insurance policy is pages and pages of contract that you don’t understand and will likely never read.

A mindset shift is required here to see insurance as an investment, as protection for rainy days and as a hedge for risk.


5. Life insurance — it’s on my list…eventually

There’s no deadline on life insurance, no mandate from the government on purchasing it.

Your parents may have never talked to you about its importance, and it’s certainly not the most invigorating topic for conversation. As a result, most never get to it.

“If a child, a spouse, a life partner, or a parent depends on you and your income, you need life insurance.” — Suze Orman


Conclusion

Consider the benefits of insurance, particularly as it relates to wealth planning and tax optimization. Start by educating yourself. Review your existing policies, if applicable, and engage a knowledgeable professional that can guide you and provide a plan that will match your unique situation.

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Personal Development

How To Avoid The Illusion Of Competence By Mastering The 4 Best Ways To Learn

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I love to learn. I get excited when I learn something new. I’m immediately motivated by the knowledge and I feel like I will change the world with my new found knowledge.

What I did not realize was that all I had was just an illusion of competence. I had not learned. And I was not going to change the world. The knowledge meant nothing. Not to me. And certainly, not to the world.

I must confess that over the years, my approach to learning has been mediocre at best. In fact, I am ashamed to admit that I have spent tens of thousands of dollars learning — buying courses and training programs that I never start or never finish; investing in weekend or week-long training programs that I never act on; and buying books that I either don’t read or finish reading. And the list goes on and on.

“Learning is not attained by chance, it must be sought for with ardor and attended to with diligence” — Abigail Adams

It is a pattern that has developed over time. This is how I grew up learning. Starting from primary school, all the way to my undergraduate degree and to my master’s program. It was all about information intake.

This is how most people learn today. Sitting down in classroom setting and taking information. This is mostly how our schools are designed and structured.

What we fail to realize is that learning does not stop here. Stopping here only creates the illusion of competence. We have to take it a step further by doing something with what we’ve learned. This is where the real learning begins.

Moving from the illusion of competence to real learning requires doing something with what you’ve learned. In other words, some sort of output is required. Input without output leads to shallow learning.

At the end of the day, what’s the point of learning if you can’t do anything with it? Remember the popular saying…

Use it or lose it.

So, what’s the best way to learn?

Truth be told, there are many different ways to learn and many more ways to teach. There are pros and cons to all of them.

Recently, I watched a YouTube video by Nishant Kasibhatla and I love the framework he suggested for learning using these 4 steps:

1. Focus on the Quality of Input

The first step of learning is the input. However, you have to be careful of the kind of input you’re taking in. If you want to learn how to fly, you need quality input from those that can fly. If you want to make money investing in real estate, you need quality input from those that have successfully made money investing real estate.

The quality of your input will determine the quality of your retention. It will affect the quality of recall and ultimately, it will impact your ability to productively use that information for your own good.

So, make sure the quality of information is great.

2. Reflect on what you’ve learned

Once you’ve learned something from the information you’ve consumed, the next step of the learning process is the output. To deepen your leaning, you need to focus more on the output.

One way to do this is to reflect on what you’ve learned. Reflecting requires you to consider how you can apply what you’ve learned. To pause and ask yourself, what’s the takeaway from this lesson? How can I use this new knowledge to solve the problem I have?

By reflecting, you’re often able to use learning from one area and apply to other areas that may be unrelated. For example, I may reflect on lessons on marketing in the auto industry and consider how I can use this and apply it in a different industry.

3. Implement what you’ve learned

This is where the magic happens. If you learn without implementing, nothing happens. You will only end up with head knowledge. Your life will not change and there will be no transformation for you and for those that matter to you.

As one of my pastors often says,

We are knowledgeable beyond our obedience

In other words, we go to church regularly, read the bible, listen to great preaching, read Christian books but we still live in ways that don’t reflect the faith we profess.

When you learn, ensure you focus more on how you can implement. Stop and write down what you can take action on. Schedule it in your calendar and do it! A lousy action to implement what you’ve learned is far better than no action at all. As one of my mentors puts it:

It’s all about imperfect action

By taking action, you’re actively learning. Active learning goes beyond just memorization or comprehension of information, it gives you the needed experience to transform that information into practical strategies.

Making a cake is the best way to learn how to make a cake…book knowledge of the recipe will only get you so far.

In fact, we learned this during this Covid-19 lock down as we’ve experimented making different types of home-made snacks. Our first attempt at making meat pie was not something to be proud of.

But the second attempt got better, and the third attempt even better. Over three attempts, we moved from talking about how to make meat pie (illusion of competence) to making it right the third time (actual learning).

For true mastery, you need to focus more on the OUTPUT, rather than the INPUT — Nishant Kasibhatla

4. Share what you’ve learned

I wish I had learned this long time ago. For many years, I never considered myself worthy to share. I had underestimated the lessons I’ve learned and the knowledge I’ve gained from many years of experience.

As I considered teaching, these were the thoughts that initially came to mind:

“I’m not qualified enough to teach”

“I don’t have a formal education on how to teach”

“I’m ashamed of my accomplishments”

“I speak with an accent that no one can understand”

“I will be ridiculed”

and on and on and on…

I must admit that the thought of teaching is scary. Standing on a stage in front of others to speak and teach is a frightening experience. I got the courage to start teaching when someone told me that you only need to know 3% more than your audience to teach.

Really? That’s all I need to know to teach? Just 3% more? Yes, it turns out that there is some truth to this. You really don’t need to know way too much to teach. And the great thing is that you learn as you teach.

In fact, it’s one of the best ways to learn. When you share and discuss what you’ve learned, you’re helping your brain pay attention. You’re reinforcing what you’ve learned and you’re less likely to forget the lessons.

In Conclusion

If you want to grow in any area of your life, reconsider the way you learn. Apply these 4 steps when you take on a new hobby or when you want to deepen your knowledge in any area.

Remember, you learned how to walk by taking your first step. You learned how to ride a bike by jumping on the bike, pedaling and taking your first fall.

So, if you want to learn deeply, you need to take in great information; reflect on what you’ve learned; take action and implement at least one idea; and more importantly, share what you’ve learned to create a bigger impact.

If you’re spending “X” amount of time on the input, you must spend at least “2X” on the output.

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AccountingBusinessTax Planning

8 Reasons You’re Having A Tough Time With The Taxman

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Tax issues are complex and dealing with CRA is not a pleasant experience for most people. Often times, it is a roller coaster emotional experience.

This is not surprising as it often involves money. When it comes to your money, emotions get involved.

Below are the top 8 reasons that cause this difficult relationship with CRA. We have included suggestions on how you can successfully avoid or navigate these situations:

1. Ignoring correspondence from CRA

When those brown envelopes come in the mail, you toss them out without opening. If you open them, you glaze over them without understanding the contents, and put in a pile.

Often times, these letters are your Notices of Assessment which confirms your tax liability or refund. Other times, especially when it is in the fall or later in the year, they are letters requesting support for a deduction or tax credit claimed.

Very often, you or your accountant have the supporting documents, but if you don’t open the letter you won’t know. Without your response, CRA will reassess you for a higher amount. And in very adverse cases, CRA may start garnishment, if you have a balance owing.

One way to combat this, is to have your mail directed to your accountant’s office. There is a box on your tax return that you tick to facilitate this. Discuss with your accountant before you choose this option.

2. Corresponding (too much) with CRA via the phone

This seems contradictory, given the previous point. However, after you have opened the correspondence, seek guidance from a professional to thoroughly understand the requests from CRA.

If it requires a phone call, it might be best to have a professional handle the call on your behalf. It’s not that you have anything to hide; it’s just that you may say something that leads down a path you would rather not go.

3. Failure to review your income taxes before submission to CRA

This is such a big one. Your business or personal taxes are prepared; you sign them without reviewing them. In our firm, we always send back the tax returns for our clients to review, before we submit.

Often times, when you see the tax liability or refund, this brings up questions and opens up a discussion about other potential savings that were not taken into account.

If your tax preparer includes data in your tax return that you are unaware of, or don’t understand, ensure you question it, because at the end of the day, it is your responsibility.

And often times, your accountant or tax filer may not be available when you need input from them to address questions from CRA.

To protect yourself here, always use a trusted and competent accountant to prepare your business or personal taxes. It is not worth the headache to use a cheap alternative.

4. Failure to remit HST payable and payroll deductions

This one speaks for itself. How would you feel in the following scenario?

You asked your friend to collect money on your behalf from someone else (because it is more convenient for them to do so), and then hand over that money to you.

In fact, you gave them an incentive to do this, by allowing them to retain a portion of the funds they collect, or by giving them a few days to hold onto the funds before you ask them to remit it to you.

Your friend instead, collects the money, and keeps all of it. Never handing over a dollar to you! Wouldn’t you be mad? Wouldn’t you pull out all stops to get your money from that friend?

Well, this is how the CRA feels and acts regarding HST and payroll deductions.

When you collect HST or payroll deductions, put it in a separate savings account. When the time comes to remit the funds, it will be there.

Also, consider setting up automatic withdrawals from that account, so that CRA will get paid on the due date.

5. Failure to discuss a payment arrangement with CRA

Once CRA has assessed you, and you agree with the assessment, you may become overwhelmed at the size of the bill. Often times, you pay what you can, whenever you can. Bad idea.

When you find yourself in this position, it is best to call CRA’s Collections department, and arrange a payment plan suited to your needs. Normally the Collections department will only do a one year plan. If you need a plan longer than one year, you will be directed to another CRA department.

To qualify for a payment arrangement longer than one year, you will need to supply supporting documentation for your income, family budget etc.

A good accountant will be familiar with this process, and may be able to assist with guiding you through this process.

It is a good idea to have your accountant by your side during these payment negotiations to ensure that what you agree to will in fact be something you or your business can afford, and fits into your cash flow.

6. Failure to adequately keep proper books and records to facilitate a CRA audit

I cannot stress this one enough. I guess the best example I can provide is how we do business at our firm.

The personal, sole proprietorship and corporate tax process we employ is very rigorous. We don’t just take what you give us, record it and send off to CRA.

We record what you give us, ask questions, ensure that you have supporting documentation for things you claim (if you don’t, we caution you to get it, and have it handy), and we also keep soft copies of certain items that we know CRA typically asks for when doing a post assessment audit, a Payroll or an HST audit.

By doing this, when CRA calls for an audit of our clients, we NEVER sweat or panic, because we have all the records available that CRA will need.

Additionally, the clients don’t panic either, because we usually ask CRA to conduct the audit at our office.

7. Failure to actively manage the CRA audit process

The audit process needs to be managed. You cannot refuse to provide CRA with requested books and records, but you need to ask and understand why they need certain documents.

You must be prepared to answer questions smartly, without exposing yourself to further questions that may result in potential future audits.

You must be able to assess the direction CRA is taking the audit, and respond appropriately e.g., could they be looking into fraud or negligence.

You must also understand their calculations of the assessed balance at the end of the audit. For these very reasons, we always suggest to our clients that they conduct the CRA audit at our office.

8. Failure to understand the garnishment process before it is too late

Garnishment is one of the last tools CRA uses in its toolbox. For you to get to this stage, you must have ignored previous CRA correspondence, made no payments on a balance owing (after repeated requests for payment), reneged on a payment agreement, or failed to make an agreeable payment.

By the time you get into garnishment, it is very difficult to stop it. It can be stopped, but this is where you will need your trusted and competent accountant right by your side to guide you through this, and to stop the garnishment.

Don’t expect a miracle to stop the garnishments, there will be very clear requirements made of you, and if these are not met, CRA will likely restart the garnishment, or move to their next tool, usually a lien on your property.

Conclusion

If you’re having issues with CRA, consider reaching out to a professional for help. If you currently have no issues, pay attention to these 8 items to stay away from potential issues with CRA.

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Business

5 Cash Flow Traps That Almost Ruined My Business and How You Can Avoid Them

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Several years ago when I started a business with my business partner, we faced a number of cash flow challenges as we did not pay close attention to these 5 key drivers of poor cash flow. 

“Never take your eyes off the cash flow because it’s the lifeblood of business.” — Sir Richard Branson

If you run a business you will agree that cash is critical to keeping your doors open. As they often say, cash is king! 

Here are the 5 key insights I learned from my experience dealing with cash flow issues and under capitalization of the business very early on.


1. Low gross margin

Following a close analysis of our margins, we realized that the low margins on our sales was a critical contributor to lack of sufficient cash flow in the business. 

This was primarily due to the low fees we charged early on in the business. In our attempt to quickly acquire clients, we went low on fees and provided services similar to other providers. We essentially competed on price rather than on value.

We could not justify charging a higher fee due to the lack of differentiation in the market place. To address this concern, we now invest in ways to differentiate our services from the rest of the market. We are continually working on different ideas to change service delivery and add more value to our clients.

If you are able to offer more value to your clients, you can charge higher fees for the value you provide — value that clients cannot get from your competitors.

Entrepreneurs believe that profit is what matters most in a new enterprise. But profit is secondary. Cash flow matters most.” — Peter Drucker


2. Slow-paying invoices

At some point in my business, this was a big concern as we had thousands of dollars in receivables that were 30 days, 60 days and sometimes 90 days past due. 

The impact on cash flow can be significant when invoices are not paid on time. For some understandable reasons we were shy to ask our clients to pay. 

Our clients are busy professionals and business owners, so most often they simply forget. 

As business owners, it is our responsibility to remind clients to pay. To address this problem, we implemented a few things like:

  • Requiring upfront payment of a certain percentage of the total fees prior to commencing the engagement; 
  • Invoicing more timely; 
  • Following up more frequently on unpaid invoices;
  • Offering early payment discounts; 
  • Implementing monthly or quarterly recurring pre-authorized payments; and 
  • Automating the process to remind clients of unpaid invoices.

3. High overhead expenses

Every business will have overhead expenses that must be managed closely. The overhead expenses impacted our cash flows and we found it challenging to cut in this area. 

What we did was to look for cheaper ways to pay for the key things we needed. For example, we cut our radio advertisement which was expensive and spent a fraction of that money in running events and online marketing. 

“The more a business owner knows about their cash flow, the more empowered they become.” — Nick Chandi


4. Bad debt

If you’re in a business like ours, you will likely deal with bad debt. While the impact on our cash flows is less for this issue compared to the others, we have had our share of bad debts. 

These are clients who just don’t pay part or the entire invoice. Requiring upfront payment has minimized this and implementing a more robust client engagement process is something we are refining to help substantially reduce the likelihood of bad debt.

“If I had to run a company on three measures, those measures would be customer satisfaction, employee satisfaction, and cash flow.” — Jack Welch

5. Slow investment or capitalization of the business

A growing business requires capitalization to fuel that growth. You can capitalize one of two ways — reinvest your profits into the business or add debt to the business by borrowing. 

In running our business, we’ve used both options but to a limited degree. Although our business has grown over the last couple of years, the growth has been slow, principally because we’ve not been aggressive in throwing more capital to fuel growth.

Growing a business is a double-edged sword. On the one hand, it can put significant pressure on your cash flow. On the other hand, if successfully implemented, it can add a lot of new cash flow stream to your business. 

We’re now at a place in our business where we feel comfortable increasing the capitalization of the business a little bit more aggressively than we’ve done in the past. 

We continue to minimize owners’ draw from the business so we can leave the capital to invest in growth.

“There is really only one way to address cash flow crunches, and it’s planning so you can prevent them in advance.” — Elaine Pofeldt

The key here is to have a long-term view of your business that will enable you invest more in the capitalization of the business.

I hope you find a few points from this article to improve your business cash flow. In upcoming articles, I will look into other core areas of running your business.

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Personal FinanceTax Planning

Tax-Deferred Is Not The Same As Tax-Free

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This is often misunderstood. To be clear, “tax-deferred” does not mean the same thing as “tax-free.” Tax-deferred is something that must eventually have taxes paid on it. On the other hand, tax-free will not need any tax payments made.

Tax-Deferred

Tax-deferred accounts allow you to realize immediate tax deductions up to the full amount of your contribution, but future withdrawals from the account will be taxed at your regular income rate. The most common tax-deferred account in Canada is the Registered Retirement Savings Plan (RRSP). Essentially, with these accounts, taxes on the income are “deferred” to a later date.

This account has its benefits as you get the immediate advantage of paying less taxes in the current year. Promoters of this plan often encourage high income earners to max out their tax-deferred accounts to minimize their current tax burdens with the assumption that when they retire, they will likely generate less taxable income and, therefore, find themselves in a lower tax bracket.

Tax-Free

Tax-free accounts, on the other hand, don’t deliver a tax benefit when you contribute to them. Instead, they provide future tax benefits, i.e. returns on the invested funds grow tax-free and withdrawals at retirement or at a future date are not subject to taxes. In Canada, the most common type of this account is the Tax-Free Savings Account (TFSA).

With these accounts, the benefits are realized further in the future as time is needed to grow the funds in the account and to subsequently grow the returns in a tax-free manner. So, this account is ideal for young adults who have more time to save within this account.

In general, low-income earners are encouraged to focus on funding a tax-free account on the assumption that they are not currently in a high-income tax bracket. Higher-salary earners are encouraged to contribute to a tax-deferred account to get the immediate benefit of lowering their taxable income, which can result in significant value.

While I love both of these plans and use them as tools for wealth accumulation, careful planning is required when investing in these accounts, particularly, in the tax-deferred account. There are a number of factors to consider when using these accounts to ensure you achieve permanent tax savings and not just tax deferral to a future date.

Some of these factors will certainly include how you intend to withdraw funds when you retire, the world economic trends, including rising government debt, government spending and inflation. It is important to consider these factors and intentionally plan how you use these accounts today to maximize permanent tax savings. I go into a little bit of details on the strategies you can use in my upcoming book.

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