But I’m going to really emphasize the disability insurance. You should have both short-term and long-term as the sole bread-winner.

To put this into perspective, the average job search here in the US is taking 3 to 6 months. I know that Alberta is doing better, but as a contractor you have to carry at least 3 months living expenses in an account (I’ve heard contractors argue 6-12 months).

In the same vein, you are currently carrying the risk of being a contractor. You’re balancing those risks against the increased income that comes from paying less tax through your corp. But you’re still carrying a lot of risk. So you have to mitigate with insurance and cash buffers and professional development and advertisement.

That said, you probably want to look at your rates. $40 / hour (80k / year) is not a rate that gives you very much room to buffer against big problems.

Before moving to the US two years ago, I worked for a private consulting firm in Edmonton. We started at $75 / hour for basic software development / website work. Previously, I worked a government of Manitoba gig at $65 / hour or so. Big firms (IBM, Accenture, Thoughtworks, etc.) charge in the $100++ range for their development and sys admin services.

I want to be clear this isn’t a personal slight, I’m not disparaging the value of the work you do. But if things feel tight in terms of covering “employee” disability and life and cash reserves, then I would personally point at the $40 / hour as being “not enough”.

It is a complex topic but basically if you are planning to split income with your spouse and you want to avoid future tax troubles you’d better be able to “attribute” to her the initial source of investment funds that generated that income. E.g. a properly set up interest-bearing investment loan from you that she used to invest; her own inheritance; previous savings from her job, etc… Having her name on the title to the rental property does not in itself enable you to split the capital gains or rental income with her in the eyes of the Taxman. Check out Interpretation Bulletin IT 511R available on the CRA website (www.cra.gc.ca). Probably the same thing goes for the allocation of dividend income between you two from your corporation though there isn’t enough info in your postings to be sure.

It isn’t too difficult to do the paperwork to make things right from a tax perspective (but doubt it can be retroactive). One way is to set up a formal investment loan to your spouse so she can “invest” in the property and corporation; but again there are rules to be followed and she has to actually write you a cheque for loan interest each year (another FT column perhaps?) which can be deducted by her on her return. May seem a bit of a hassle and who wants more paperwork, but taking the time to do it right it could save you and your spouse all kinds of grief later.

As far as paying her a salary, make sure you can show the Taxman she is paid a market rate (can be high end of scale) and actually doing something to earn it like filing, keeping records, answering business phone/email and setting up appointments. When the kids are older, you can get them to do the something for the company too and in effect split the income even further.

I *think* what the author meant was that if a TFSA is opened in 2010 then you get the previous year’s contribution plus the current year.

Oh ya and I agree with the article – another winner from MDJ! Thanks.

When I looked at CPP, I approached it from the standpoint of “how much money do I need to accumulate to buy an annuity that pays the same as CPP?” Looking for an annuity calculator and some crunching, and assuming 30 years to go, the total lump sum required was basically the same as the contributions (thus, the 1% return). I didn’t keep the spreadsheet.

When you are self-employed, you pay a maximum of $4,300 in CPP between your corp. payment and personal. Your maximum benefit is $935 per month ($11,200 per year). I just looked at a quick calc at:
http://www.seclonlogic.com/demo/comparator.asp

And at age 35, no assets currently, contributing $4300 per year for 30 years, 0 inflation and a 2%, your annuity is $11,600 for a lifetime pension.

I am NOT a financial expert, would love to see an article on this and some other readers thoughts. Would need to investigate how much CPP benefits have increased relative to premium increases (both employee and employer). I suspect rates are increasing faster than benefits. I looked at the HRDC website and currently I qualify for about $350 a month in CPP based on my years as an employee.

Mark – FWIW I expense about 20-25% of my income through my corporation each year. This covers PHSP, our nominal salaries of $3500, and then use of house, internet, meals, travel, acctg fees etc. Just a guideline, my first couple of years it was closer to 10%. Get over 30% and you will probably attract unwanted CRA attention! Last year my total taxes paid (corporate and personal) as a percentage of my corporations revenue was 8.5%. Trying to get it lower though!

I’m 34, not doing much retirement saving at the moment, but am entirely focused on that (along with the emergency fund) once the debt is paid off.

As far as CPP and RRSP limits, we discussed that with our accountant and given that I have over $70,000 in eligible RRSP contribution room from years as an employee, I’m not too concerned with creating more space.

With regards to the dividends, the way I wrote my initial e-mail is somewhat confusing. We dividend out to either/both myself and my wife in whatever manner is most tax efficient. Once you subtract eligible write-off’s in the corp (paying ourselves mileage, PHSP, office supplies, etc) we figure to end up with about $60k in corporate income. at $30k each in dividends, there is minimal personal taxes to worry about.

We already have a PHSP setup and have used it a bit. We have a number of eligible expenses which we have not yet funneled through the corp, as I am expecting to earn more next year, so this will help to reduce the corporate tax burden.

Thanks again to everyone for the suggestions and to FT for posting this. Keep ‘em coming!

In Mark’s situation however, it appears that they are doing no other retirement/long term savings, so having both CPP and the RRSP contribution room might be hugely important in the future.( Though we don’t know Mark’s age…it might make a difference if he’s 25 or 40!)

My parents are also self-employed and only claimed dividend income…they are now 63 and 65 and eligible for very little in CPP….and-you guessed it…they have no significant savings aside from their home equity.

I would also definitely second the motion that Mark and his wife consider paying themselves salaries out of the corp so they can contribute to CPP and establish RRSP room. With their debts repaid they will be in position to begin a long term savings plan…something the self-employed especially need to be diligent about.

Good luck~

Mark should pay himself at least $3,500 salary per year (as well as to his wife) since the first 3.5K is CPP exempt. And he should be splitting the dividends equally between himself and his wife, to maximize income splitting and to minimize taxes.

Another consideration is to setup a PHSP (Personal Health Spending Account) so that his corporation effectively pays any medical costs. You can setup a PHSP for around $150 plus 5-7% of any claimed amount. Google PHSP for details on how these work.

Totally agree with the advice re: Emergency fund and TFSA. I have 3+ months of dividends in my corporation (at ING), plus a personal fund, but then I earn more and seem to have been doing contracting longer. The emergency fund is ultra-important as contractors are at the whim of the economy and employers. However, about $40 per hour seems really on the low side for IT contracting (though it depends on what exactly Mark does).

Love all the other advice; reminds me I need to look at disability insurance for myself. My wife teaches piano 3 nights a week for a few hours, which helps too. Also, gets her some ‘adult brain time’ away from the kid (who is a teenager now), which is MORE important than the income.

Personally, I find CPP to be not worth it. By the time you pay personal share, and you pay the corporations share (it’s all you money really) you are paying 10%+ of the insured amount. I ran the math and figured at the max CPP was returning around a 1% return. I would rather save that 10% personally and invest it – which is why TFSA’s are so awesome. But even in a non-registered investment you can do better than CPP. My thoughts.

Good luck Mark!

I’d invest in dividend producing ETFs (like XFN, XRE and XTR). In 2-3 years you might earn enough in dividends (assuming nothing unforeseen happened causing you to liquidate your position) to pay for a 1 week cottage rental for your family vacation. Also look to use an Aeroplan or Airmiles based credit card for all your expenses if your vacation plans might include flying. If you want the utmost in flexibility you can go for cash back credit cards (http://www.milliondollarjourney.com/top-cash-back-credit-cards-in-canada.htm). Of course, never carry a balance unless you can get a 0% interest credit card (http://www.canadianmoneyforum.com/showthread.php?t=1414).

Your corporation probably doesn’t have much in the way of expenses. Thus, I don’t know if it would make sense to look at cash flow damming (http://www.milliondollarjourney.com/the-cash-flow-dam-explained-cash-damming.htm).

I like the fact that you are paying down your mortgage at a rate closer to a 20 year amortization rather than the safe 35 year amortization you initially took.

Try tracking all of your expenses for 3 months – you may find easy ways to divert $100/month from unwise spending to something you need (emergency fund) or want (vacation).

Try to determine what would happen if something with significant negative impact occurred. How could you cope financially? If you get scared enough, you might find the motivation to activate a plan to minimize the risk to your livelihood.

Finally, discuss with your wife the possibility for her to earn some income to assist with your family’s goals. Perhaps it is working from home when she is not caring for the kids, or on weekends, or evenings. You can only cut expenses so far but earning more is almost limitless.