The Truth about Financial Planning

Financial planning can be daunting, especially when most of us are unsure about what it is. Here are some truths about it.

“You’re a financial planner? So you, like, sell mutual funds and stuff? I’d ask for your advice but I’m sure you’ll tell me I can’t afford the vacation I just booked…”

This in an all too common response when I talk to people about financial planning for the first time. It’s disappointing because it’s wildly inaccurate, so I would like to set the record straight: my job is to help people achieve financial freedom by making smart decisions with their money. Let me explain.

IT’S ALL ABOUT FREEDOM

We all want to be happy, and most people believe that having more money, or being “rich,” will solve their problems and therefore make them happy. What I’ve come to understand is that happiness does not come from simply being rich and having money, but rather from the feeling of freedom that money provides — freedoms such as working because you enjoy it, spending lots of quality time with loved ones and having peace of mind that the bills will be paid.

The purpose of financial planning is to figure out how to use your money to create this financial freedom and feeling of richness. It might not require as much money as you think, and you can do it with the resources you already have.

TWO COMMON MISCONCEPTIONS

Let’s now revisit that opening statement which contains two common misconceptions about financial planning.

First, it’s not about selling financial products such as mutual funds or insurance. These products are simply part of the implementation of a financial plan, and selling these products without going through the planning process is like a doctor prescribing a medication before examining the patient. In fact, many financial planners opt not to sell these products at all, focusing instead on analyzing your financial situation and recommending strategies to achieve your goals.

Second, financial planning is not about making judgments about your priorities. It’s is a very personal process where your unique values and goals are discussed first, followed by strategies on aligning your spending with these values and goals. If regular travel or dining out is important to you, your financial planner will help you understand the trade-offs you can make to include this kind of spending in your budget while working towards your long-term financial freedom. You won’t have to worry that you can’t afford it because you’ll know that you can.

BOTTOM LINE

Money can’t buy happiness, but you can use your money to invest in the feelings and experiences that make you happy. A financial planner will help you get clear on what’s most important to you and design a financial plan that aligns your spending with these values. When you’re clear on the values that bring you happiness, you can find ways to incorporate them into your every day and you’ll feel that you’re living a richer life.

How Much is Your Business Worth? Depends on Who's Asking

It used to be that you’d open a business for the long haul. The concept of an acquisition was foreign and no one had heard of an “exit.” Put a group of entrepreneurs in a room today however and you may hear “what’s your exit strategy” as much as you’ll get great independent coffee shop recommendations.

In an age where startups are sold for millions in what seems to be overnight, it’s hard not to wonder how much your business is actually worth.

Yet before you call up your college buddy turned investment banker or brush up on your Excel modeling skills, you should probably stop and ask a more important question:

Who’s asking?

The value of a business is really whatever someone will buy it for. Crunch as many numbers as you want, but with no buyers, there’s no value.

While it seems like a simple concept, it’s one that’s often overlooked. Consider a graphic design business with three shareholders. Their business is starting to develop a reputation in their community and the founders are all young just out of university.

Now let’s suppose a web development business wants to expand into the community. They could do it by slowly building up a reputation through hard work, or they could buy the graphic design business, with an already existing reputation and essentially boost their profile overnight. The three shareholders however have few dependents and are just at the start of their careers so they may not want to sell so fast. In that case, the value of the graphic design business may be inflated as the incentives of the buyers and sellers and are at odds.

On the other hand, suppose the shareholders get into a dispute. They decide that only one of them can carry on the business and that person must buy the others out. In that case, the incentives are such that everyone wants out, driving the price of the business down.

While it may be the same business, circumstances will significantly affect its value.

So how do you determine how much your business is worth?

While there are a number of considerations and fancy modelling techniques, it’s a question that’s largely subjective. It’s always important to first examine the incentives of the buyers and sellers to get an idea of its perceived value, what will ultimately drive the price.

How Do I Pay My Employees?

Your business is growing and you’ve just hired your first employee. Yet before you issue your first pay stub and get on with your business, you’ll want to make sure you cover your payroll responsibilities!

So just what exactly are your payroll responsibilities?

As an employer, you’re responsible for remitting employment insurance (EI), Canada pension plan payments (CPP) and income tax on behalf of your employees. The concept of withholding taxes on employee’s salaries goes back a number of decades and is now common across many countries. The thought is that taxpayers need to pre-pay their income taxes throughout the year otherwise they won’t have anything left to pay the government at year-end!

The responsibility is then placed on the employer to remit those amounts to the CRA on the employee’s behalf. At the end of the year, you’ll need to produce a T4 information return- a record of the employer’s salary and what was remitted on their behalf.

How are payroll deductions calculated?

The CRA has a special formula for calculating the proper remittances. For income tax purposes, the idea is to closely lineup an employee’s salary with their respective income tax bracket. In a perfect world, when they file their T1 personal tax return in April, no further income taxes would be owing and no refund would be issued. Tax refunds arise when additional deductions that weren’t accounted for such as child care, donations, or medical expenses are claimed by an employee.

For CPP and EI, there is both an employee and employer portion. As an employer, that means if you pay out a salary of 40K, you’ll need to factor in an additional 2-3K (as amounts vary per year) for these amounts on top of the original salary.

At WS Accounting Services, we offer full payroll solutions for your company. You have to worry about the work, Let us worry about the details!

The tax of gift giving: are employee gifts tax deductible?

Josh Zweig - live.ca

It’s that time of year again – office secret santas and overdoses of Turtles and Ferrero Rocher as you anxiously count the days until the office holiday party. Yet, while you plough through department stores or stare incredulously at your Amazon shopping cart, you probably haven’t pondered whether or not that “World’s Number 1 Employee” mug should be recorded on a T4.

As may expect, the CRA has some pretty strict rules when it comes to gift giving.

Their official policy:

You may give an employee an unlimited number of non-cash gifts and awards with a combined total value of $500 or less annual.

If you have a practice of giving your employees gifts throughout the year for various accomplishments and holidays, you may be running close to the $500 limit. For example, being the generous employer that you are, let’s say you gave your employee:

  • The box set of “Breaking Bad” DVDs for her birthday (Retail value: $75)
  • A romantic getaway at the Sheraton for her engagement (Retail value: $349)
  • A pair of Book of Mormon tickets for her holiday bonus (Retail value: $400)

Total gifts for the year = $824

Are employee gifts tax deductible?

Are employee gifts tax deductible?

With the shopping list above, the CRA would expect you to show $324 ($824-$500) of a taxable benefit on your employee’s T4. That means your employee will have to include $324 in her income and pay additional tax on it. If she’s in the highest tax bracket, those “Book of Mormon” tickets actually cost her $149 ($324 x 46%). Who said anything in life was free?

But wait – in case you thought that was all there is to it, there’s more:

A gift or award that you give an employee is a taxable benefit from employment, whether it is cash or near-cash.

Not everybody is going to like those “Breaking Bad” DVDs (well almost everybody) and you want to give your employees some flexibility by purchasing them a gift card.

By CRA standards however, a gift card is considered a near-cash item and is therefore taxable no matter what the amount. If you give them a $250 Amazon gift card, the full amount must be included in their T4. Assuming you follow the rules, it actually works out cheaper for your employees if you buy them the box DVD set yourself, rather than have them buy it using a gift card. Bah humbug.

So what can you do to steer clear of the CRA without being labeled a Scrooge?

If you know what your employees like, it’s always best to purchase non-cash items. Ipads and eReaders can be good ideas, and hey – you can always provide a gift receipt just in case (not to be confused with a gift certificate!). If you’re going to purchase a gift certificate, you may want to increase the amount slightly if you know it’s going to be taxable in the hands of your employees. If you choose not to include the gift certificates on your employees’ T4s, at the very least, it would be prudent to keep the gift amount less than $500.

Now, next time you look at that “World’s Number 1 Employee” mug, you can view it with a newfound appreciation given that you may have paid for it with some good tax dollars.

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