Articles in this issue:
Investing for Retirement
Saving for retirement can be approached in several ways.
Media ads constantly bombard us with images of happy, attractive couples enjoying their retirement years on a sunny beach in Jamaica or on a cruise ship in the Mediterranean. But to reach that dream, it is necessary to invest today’s earnings so that they will grow into tomorrow’s retirement fund. Certainly, the earlier one starts a systematic investment program, the greater the probability that today’s fantasy will become tomorrow’s reality.
Investing is more than just putting money in Guaranteed Investment Certificates or the stock market. From the start until you actually retire, you must keep reassessing your financial and other life circumstances to determine whether the strategy chosen yesterday is still valid today. Several approaches to investing are available but each is dependent upon your personality, your age and your life situation.
Financial institutions have made self-directed investment websites user friendly for easy buying and selling online. This type of investing requires substantial knowledge of the listed companies, their values and constantly changing prices. This is the approach favoured by traders whose thinking is geared to making short-term profits. However, most people are too busy with a regular occupation to get all the knowledge they need to be active investors, and the risks are enormous.
Invest and Hold Investors
These investors usually build a portfolio of stocks with a history of capital growth and regular dividend payments such as financial institutions, utilities and established corporations. Certainly, there is never a guarantee that quality stocks will always increase in value; however, this approach minimizes risk, and also reduces transaction costs.
For long-term investing, diversification is an essential risk management strategy. The usual basic diversification is to hold about 60% of your portfolio in high-quality fixed-income investments and 40% in common stock. Within the common stock portion, diversification can be achieved through owning companies in various industries, countries, or through exchange-traded funds (i.e., similar to mutual funds but traded like stocks), which give the investor access to a wide variety of asset classes such as commodities and currencies.
Speculative investors buy securities which, in the investor’s judgment, have the potential of doubling or tripling or more in a very short time. These investors think the risk of huge gain outweighs the risk of substantial loss. The difference between investment and speculation is that in speculation the risk of quick gain or loss is much greater than in an investment. Speculators often use leverage (i.e., investing borrowed money) in the hope that a short-term gain in the value of the investment will enable them to repay the debt after making a quick and substantial capital gain.
Companies whose stocks are considered speculative often have no earnings or dividend history and depend for their financing on the company issuing new shares since there are no earnings to reinvest. This is common with junior companies in the natural resources and technology industries. Raising capital with new share issues before the company strikes it rich, however, constantly dilutes the speculator’s original holding and makes hoped-for capital gains dependent on a spectacular discovery. This way of investing is highly risky and not particularly useful for the accumulation of a retirement fund.
Value investing is based on the principle that the prices of stocks of high intrinsic value sometimes sell well below that value. This happened in 2008 and 2009, for example, when the collapse of the subprime mortgage market caused the failure of important financial institutions, which, in turn precipitated the collapse of the stock market. At that time, many fine companies that are the backbone of the economy also saw their share prices drop far below their intrinsic value to levels that were catnip to the value investor.
The stock price of big-name companies can, however, also sometimes decline substantially even under normal market conditions. These companies must be examined carefully before investing because factors such as bad management, risk of a dividend cut, inability to compete, a highly leveraged balance sheet and many other factors can be the real reason they have lost their value. Buyers of these stocks are not value investors; they are speculators making a bet the companies’ performance will turn around and produce capital gains.
Many studies have shown that even the most astute professional fund manager finds it impossible to outperform the market averages year after year by picking stocks. In fact, a great many mutual funds do worse than the market as measured by the Dow Jones, S&P 500 or other indices. As a result, so-called passive investing through funds structured to match the performance of the indices can be expected to perform at least as well as the market overall. Because index-based funds usually do not have research analysts and other expensive overhead, their management fees are lower than conventional mutual funds. Investors who are not confident self-managing their portfolio and are risk averse, may be comfortable holding one or more index funds.
Know Your Objectives and Risks
Your investor profile is a function of your age, ability to take risks, level of investment knowledge and your objectives. Even though young investors have more time to recover market losses, slow and steady saving and systematic investing seems to be the best strategy over the long term.
No matter what kind of a portfolio you have (non-registered, RRSP/RIF/TFSA), or how it is managed (self-directed, or managed by an investment advisor), have a well-defined objective and understand the risk you can tolerate to get there.
Taxation – Small Business and the CRA
Ensure your books are always in order for the CRA.
Owner-managers work hard in their businesses but are often overwhelmed by the reporting requirements for the Canada Revenue Agency. Few owner-managers enjoy the time spent and cost required to meet the CRA requirements, let alone the actual taxes that have to be paid; nevertheless, owner-managers must establish good business habits to ensure they stay on the right side of the tax authorities.
So, here are a few suggestions on how to make your relationship with the CRA much easier for yourself over the long run.
Establish the Correct Legal Structure
First of all, it is important to understand the tax and legal consequences of your form of business: sole proprietorship, partnership, or corporation. Each category brings with it different legal, tax and reporting issues.
Ensure Proper Bookkeeping
Recording transactions on a regular basis not only keeps your records up to date so you know where you stand at all times with respect to your receivables, payables and bank balances as well as any profit or loss, it also has your books in constant readiness for the tax authorities. Failure to routinely record all business transactions may mean missing out on taxable deductions or payment requirements. Maintaining up-to-date records also ensures that all documents required for the CRA are regularly matched and filed to the bookkeeping records.
Segregate Business from Personal
Regardless of the legal structure of your business, ensure that business transactions, bank accounts, lease agreements, and loans are maintained separately from any personal accounts. For record keeping and tax audit purposes, a clear division between personal and business finances makes for easier bookkeeping and a cleaner tax audit.
Contractors versus Employees
Make sure you distinguish the people who work for you as employees and those who work for you as contractors. Far too often, employers have persons who work for them whom they consider to be contractors. The CRA and The Workplace Safety and Insurance Board (WSIB) rules make a sharp distinction between contractors and employees; inappropriate classification by your payroll department will mean reassessment for Canada Pension Plan and Employment Insurance deductions as well as problems with the WSIB if premiums have not been paid for the employee incorrectly accounted for as a “contractor”. To correct any potential inaccuracy, you will have to go through the expensive process of making adjustments, and this may not be a simple process if the person is dismissed or resigns.
Legitimate business expenses are those expenses incurred to earn income. Far too often, expenditures are run through the business that have little to do with earning income. The most common areas subject to CRA review are vehicle expenses, meals, entertainment and promotion of a product or service.
Failing to File
When cash resources are not available, whether to remit payroll deductions, income tax or HST, owner-managers may decide not to file the required return. BIG MISTAKE. Better to file on time, even if the business does not have the cash flow to make the required payment. Late filing incurs penalties and interest. Filing on time without payment will probably not incur penalties but will incur interest. Additionally, the CRA is open to establishing a payment schedule as long as you contact them with a proposal before the payment deadline.
Payroll is a business’s biggest expense and involves more than just writing a cheque or depositing money in the employee’s bank account. Payroll requires calculation of source deductions, the employer’s share, vacation pay, WSIB calculations, a monthly remittance for withholding taxes for each employee, data for year-end T4s as well as records of employment in the event of layoffs or dismissals. Understanding payroll will assist in determining cash flow needs as well as job costing and ultimately the bottom line. Failure to remit payroll withholding taxes will definitely invite an audit along with penalties and interest.
Far too many entrepreneurs use inefficient and ineffective accounting software. As a result, the information created is inadequate for a company’s own purposes and creates additional issues not only for regular government remittances but also for the accountant preparing year-end statements and tax returns. Poor accounting systems cost money in the long run.
Bookkeeping is more than entering data. A qualified and experienced bookkeeper not only understands the accounting system but will understand payroll, HST, WSIB, account allocation, reconciliation, online banking and a host of other business requirements. A good bookkeeper managing an accounting system suited to your business will provide information to management that is critical to making effective business decisions and also generates information critical for proper reporting to external sources such as the bank or the CRA. An inept bookkeeper is a recipe for disaster as the errors or omissions will result in mistakes in financial and tax reporting as well as the consequent cost of repairing the damage.
Measure Twice, Cut Once
This old carpenter’s maxim is just a pithy way of saying that errors are unnecessary and correcting them is costly. Before making decisions on major purchases, financing, staffing, accounting systems or tax strategies, do your homework. Getting and using expert knowledge ensures that decisions will not run afoul of tax authorities or other regulatory bodies.
Let Others Attend to the Details
Dealing with the CRA and other regulatory bodies is not always what entrepreneurs do best. Nevertheless, establishing procedures that will allow other staff to attend to the details will make life easier for you while making sure your business meets all regulatory requirements.
Technology – Using Technology for Gain
Abandoning paper-based processes can improve productivity and profits.
The more a task can be automated, the greater the increase in productivity and the greater the reduction in employee overtime and management frustration. Even though technology can speed up operations and reduces costs, far too often owner-managers continue to embrace legacy behaviours that keep their businesses from being as productive and profitable as they could be.
Implementing some or all of the following suggestions could be the first step to increasing productivity and making the workplace more efficient and more enjoyable.
Track Your Behaviour
Before you adopt a new technology, make sure you understand how the job to be automated is currently being done and how technology could make it cheaper and/or more productive.
Use Digital Communication
Consider examining the communication protocols in your business.
Use teleconferencing to keep everyone up to date, for example:
If you are still on a largely paper filing system, consider moving to digital.
Streamline Business Transactions
If your business does not have sufficient employees to justify the cost of new software, develop standardized spreadsheets that staff complete for time and expense reports and create an online process for employees to submit data in a timely fashion to the bookkeeping department.
All businesses need an accounting system that incorporates sales, purchases, payroll, accounts receivable, accounts payable and job costing. Even if you do not have the expertise or the need for a full-time bookkeeper, you can use remote communication software or an online accounting platform to enter records online that will provide you with the up-to-date information you need for everyday operations.
All tax data, financial statements, personal and corporate tax filings and enquiries exchanged between your office and your CPA should be encrypted before transmission.
Other uses of electronic technology include:
Marketing and Selling
Because your website is often the first contact a potential client has with your business, make sure it is attractive looking and the text is well written. That first impression may make the difference between getting and not getting a client.
Use Technology Wisely
Certainly a business can be overwhelmed with the ever-changing technology, but in the final analysis, technology is not about what is available to use, but rather how we use what is available to better our business and personal lives.
Management – Jet Lag
A little adjustment to your sleep schedule before you travel can make you alert and ready for business when you reach your destination.
Despite the ease and relatively low cost of modern telecommunications, it is still necessary for business people to travel to be onsite. This is especially true for business owners who want to grow their businesses internationally and need to meet suppliers and customers to establish the personal connections that will be the foundation of future success. Flying to remote suppliers or clients makes jet lag a reality that should be factored into travel plans.
Jet lag or “circadian rhythm desynchronosis” results when high-speed travel from east to west or west to east through multiple time zones interrupts the 24-hour or “circadian” rhythm that regulates our sleep-wake cycle and controls the biochemical, physiological and behavioural activities in our bodies.
Symptoms of Jet Lag
The following are the classic symptoms of jet lag:
Facts about Jet Lag
The effects of jet lag vary from person to person and the distance and direction travelled:
Combating Jet Lag
There are several ways to minimize jet lag but they are not always effective. Suggestions made by researchers include the following.
If you cannot prepare for the time zone of your destination, you may want to consider arriving two or three days earlier to give your body the opportunity to adjust. Not only will this tactic increase your level of performance, it will also enable you to learn about points of interest, the culture and the people at your destination, all of which can be topics for discussion when meeting with your new contacts.
The Final Analysis
Business travellers want to make the most of their time, establish solid personal relationships with their business peers and negotiate the best possible deal with new suppliers or clients. To do so it is in the best interests of your company to minimize the impact of jet lag so you and your staff are at the top of your game when you represent your business whether it is on the other side of Canada or on the other side of the world.
Business Matters deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein. Although every reasonable effort has been made to ensure the accuracy of the information contained in this letter, no individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.