W HY Y OU N EED A H OME -B ASED BUSINESS h
“You can increase your wealth far more quickly if you have a side business to earn extra income while paying little or no tax on such income.” – JEAN-GUY TALBOT, CGA
DON FERGUSON
W HY Y OU N EED A H OME -B ASED BUSINESS Many people rely totally on income earned from employment and investments to accumulate wealth for retirement. I’m a true believer that you can increase your wealth far more quickly if you have a side business to earn extra income while paying little or no tax on such income; then, invest this extra cash either in your business or any kind of profitable investment. This side business can be very simple. Capitalize on what you enjoy doing or what you’re naturally good at - which are often the same. Jean-Guy Talbot, CGA Talbot & Associates 3553 Pembina Hwy, Winnipeg, MB R3V 1A5 Tel. (204) 269-7460 / Fax (204) 269-7096 JG.Talbot@TalbotCGA.ca / www.TalbotCGA.ca
GUARANTEE _____________________________________________________________
“. . . in this world nothing can be said to be certain, except death and taxes.” —Benjamin Franklin, in a letter to Jean-Baptiste Leroy, 1789 1
1
http://en.wikipedia.org/wiki/Death_%26_Taxes (Saturday 24 August 2013)
PREFACE _____________________________________________________________
When I showed the first version of this book to Jean-Guy, he surprised me by being excited about the book and said it's the book he's wanted to write for a few years. He likes the fact the book isn't written by an accountant so those of us who don’t speak “accountant talk” can more easily understand the information. Jean-Guy thinks all accountants should be sharing this book with their clients so they can learn why they need a home-based business to increase their income and wealth. Many of us will not have enough money saved to pay for the lifestyle we want during retirement. Currently, 57% of people over 50 need to work after retiring because of financial need. 2 Some of us tend to put off our retirement planning and saving until we “can afford it”. We wait until we get our university debts paid off or when the car is paid for or when the mortgage is paid off or when our children are finished university. Those delays can cost us a lot of money from our own pockets - the amount might shock you. Whatever plans you develop to increase your wealth, I hope the information in this book is helpful. I wish you well as you take the mystery out of creating wealth and use the information to your greatest benefit. I look forward to hearing about your success. Don Ferguson, Author Profitable Planning & Management Inc. 3553 Pembina Hwy, Winnipeg, MB R3V 1A5 Tel: 204-794-6481 / 1-888-424-7862 Fax: 1-866-417-6699 DonFerg@DonFerg.com / www.DonFerg.com
2
http://www.thirdquarter.ca/en/about-thirdquarter.cfm (Sunday 14 July 2013) ________ 1
“Money, if it does not bring you happiness, will at least help you be miserable in comfort.” — Helen Gurley Brown
W HY Y OU N EED A H OME -B ASED BUSINESS INCOME TAXES INFLATION RETIREMENT FUNDS EDUCATION FUNDS PENSION FUNDS MORTGAGES LINE OF CREDIT SELF-EMPLOYMENT HOME-BASED BUSINESS
HOW DO YOU FIGURE ALL THIS STUFF OUT? HOW CAN YOU PREDICT THE FUTURE? WHAT’S BEST FOR YOU? WHO DO YOU TRUST?
TAKE THE MYSTERY OUT OF CREATING YOUR WEALTH.
Copyright Š 2011 by Profitable Planning & Management Inc. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording or any information storage and retrieval system, without permission in writing from the publisher. Library and Archives Canada Cataloguing in Publication Profitable Planning & Management Inc. As my accountant explains, you can increase your wealth far more quickly if you have a side business to earn extra income while paying little or no tax on such income; then, invest this extra cash either in your business or any kind of profitable investment. / Don Ferguson Includes bibliographical references. Issued also in electronic format. ISBN 978-0-9937224-0-0 1. Business, Home-Based. I. Title. Edited by Don Ferguson Book design and production by Profitable Planning & Management Inc. The following information is intended as a general reference tool for understanding the underlying principles and practices of the subject matter covered. The opinions and ideas expressed herein are solely those of the author. The author and publisher are not engaged in rendering legal, accounting, tax, insurance, financial, investment or other professional advice or services in this publication. The publication is not intended to provide a basis for action in particular circumstances without consideration by a competent professional. The strategies outlined in this book may not be suitable for every individual, and are not guaranteed or warrantied to produce any particular results. Further, any examples or sample forms presented are intended only as illustrations. The author, publisher and their agents assume no responsibility for errors or omissions and expressly disclaim any responsibility for any liability, loss or risk, personal or otherwise, which is incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this book. All inquiries should be addressed to: Profitable Planning & Management Inc. 3553 Pembina Hwy, Winnipeg MB R3V 1A5 204-794-6481 / 1-888-424-7862 Fax: 1-866-417-6699 www.WhyYouNeedAHomeBasedBusiness.com Info@PaySmartIncomeTax.com Printed in Canada by
Lightning Quick Printers, 3238 Portage Avenue, Winnipeg MB R3K 0Y9 www.LightningQuickPrinters.ca ________ 1
TWO QUARTERS OR A DOLLAR BILL A young boy enters a barber shop and the barber whispers to his customer, “This is the dumbest kid in the world. Watch while I prove it to you.” The barber puts a dollar bill in one hand and two quarters in the other, then calls the boy over and asks, “Which do you want, son?” The boy takes the quarters and leaves the dollar. “What did I tell you?” said the barber. “That kid never learns!” Later, when the customer leaves, he sees the same young boy coming out of the ice cream store & says, “Hey, son! May I ask you a question? Why did you take the quarters instead of the dollar bill?” The boy licked his cone and replied, “Because the day I take the dollar, the game’s over!” - Author Unknown
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“Most people work just hard enough not to get fired and get paid just enough money not to quit” — George Carlin
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CONTENTS _____________________________________________________________
1 - WHY DO WE NEED A HOME-BASED BUSINESS?
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Pay “Smart Income Tax” Investment Options Personal Expenses Vs Business Expenses Income Taxes, Inflation . . .
2 - INCOME TAXES
9
Introduction Definition History Home-Based Business Government Encouragement Summary - Canada Questions Potential Savings - Income Tax - Canada Tax Savings Estimator - Canada Potential Savings - Income Tax - United States Summary - USA Tax Savings Estimator - USA
3 - INFLATION
29
Introduction Definition History Future Perspective Life Expectancy Summary
4 - RETIREMENT, EDUCATION & ENDOWMENT FUNDS
43
Introduction Investments Inflation Retirement Funds Education Funds Endowment Funds Summary
5 - PENSION PLANS
55
Introduction Defined Benefit Plans _____________________________________________________________ Profitable Planning & Management Inc. Page 1 of 3
CONTENTS _____________________________________________________________
Defined Contribution Plans Will Our Pension Income Be Enough? Is Our Pension Properly Funded? Summary
6 - DELAY IS COSTLY
73
Introduction Long Term Return On Investment (ROI) Start Early Summary
7 - MORTGAGES
83
Introduction Paying Down Your Mortgage Convert Mortgage Payments To Savings Summary
8 - LINE OF CREDIT
95
Introduction Low Monthly Payments Summary
9 - HOW TO USE A LINE OF CREDIT
99
Introduction Line of Credit Cash Flow Business Expenses vs Personal Expenses Summary
10 - BUSINESS OR NOT A BUSINESS?
109
Introduction Business Or Self-Employment Sellable Or Not? Passive Income Summary
11 - TWO BUSINESS MODELS
115
Introduction Definition Of Pyramid Business Model Network Marketing Business Model _____________________________________________________________ Profitable Planning & Management Inc. Page 2 of 3
CONTENTS _____________________________________________________________
Corporate Business Model Productivity Key To Higher Earnings Is Corporate Similar To Network Marketing? Summary
12 - MARKETING ADVISORS / TRAINERS
125
Introduction Recommended Advisors Full Disclosure
13 - CLOSING REMARKS
129
Build Your Business Free Consulting Communication Public Speaking Recommended Reading To Your Success
ABOUT THE AUTHOR
137
ACKNOWLEDGEMENTS
143
DISCLAIMER
145
NOTE TO READER
147
GUARANTEE
147
APPENDIX A
149
Investing In The Stock Market
APPENDIX B
153
Canadian Income Tax Rates
APPENDIX C
157
Mortgages
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“What is the difference between a taxidermist and a tax collector? The taxidermist takes only your skin” – Mark Twain
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1 - WHY DO WE NEED A HOME-BASED BUSINESS? _____________________________________________________________
Since my early 20s, I’ve been putting money aside for retirement in addition to the pension that was part of my employment pay. I was concerned about having enough money for retirement. Books like The Third Rail confirm that I was right to be concerned. Today, more than 60 per cent of employed Canadians do not have a workplace pension, and most in this group lack sufficient savings to support their lifestyles in retirement. The remaining employees have pensions, but these plans are either insufficient or endangered by demographic and market upheavals that plan designers never imagined. 3 If most of us don’t have a good, solid pension plan or enough savings for our retirement, what can we do to ensure we retire with enough money to live the lifestyle we want? _____________________________________________________________
P AY “SMART INCOME TAX” _____________________________________________________________ If you could get an extra $1,200 income tax refund next year, would that be a big deal? I look at an extra $100 per month and think about how much money we need in a savings account or investments to earn that return. $1,200 per year represents the income from $15,000 at 8%, $20,000 at 6% or $40,000 at 3%.
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Jim Leech & Jacquie McNish, The Third Rail (Toronto: McClelland & Stewart, 2013), 137 _____________________________________________________________ Profitable Planning & Management Inc. Page 1
Introduction
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How long would it take us to save those amounts of money to put into a savings account or other investments? What’s the likelihood of earning 8% 4 return on our investments over a term of several years or a few decades? _____________________________________________________________
I_____________________________________________________________ NVESTMENT OPTIONS Investment options for increasing our wealth include stocks, bonds, cash, cash equivalents and real estate. Of these, the equity market has delivered the largest returns over the longer term. Credit Suisse tracks the long term performance of stocks and bonds across nineteen countries, reporting these annually in the Credit Suisse Global Investment Returns Yearbook. 5 In the February 2012 update, they reported that a globally diversified portfolio of stocks grew in value by an average of 8.5% per year between 1900 and 2011.
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See Appendix A The Blue Chip Report, January 2013,Tony Demarin, MBA, CFA, CIM, FCSI - www.bcvassetmanagement.com (Monday, 18 March 2013) _____________________________________________________________ Profitable Planning & Management Inc. Page 2 5
In Canada, the Toronto Stock Exchange Composite Index has declined by 15% or more 7 times and declined by 25% or more 4 times in the last 20 years.6 Eleven major declines in 20 years! How many of us want to ride on that roller coaster? I think there are more comfortable ways to increase our wealth; for example, setting up a full-time or part-time, home-based business as a sole proprietorship 7. _____________________________________________________________
P ERSONAL EXPENSES VS BUSINESS EXPENSES _____________________________________________________________ Being properly informed about the income tax rules that apply to a home-based business (your hobby?), you can convert some personal expenses to business expenses and increase your income tax refund next April by a few hundred dollars, perhaps as much as a few thousand dollars - depending upon your tax bracket. For example, expenses for meals that you share with friends, coworkers and relatives, your computer, internet, printer, getting your income taxes filed, and your cell phone can be changed from personal expenses to business expenses. Assume these expenses add up to $3,600. Meals and entertainment (allowable part only)
$1,100
Office expenses
$1,500
Legal, accounting, and other professional fees
$300
Telephone and utilities
$700
Total Expenses
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$3,600
The Blue Chip Report, January 2013,Tony Demarin, MBA, CFA, CIM, FCSI - www.bcvassetmanagement.com (Monday, 18 March 2013) 7 http://en.wikipedia.org/wiki/Sole_proprietorship (Monday 26 August 2013) _____________________________________________________________ Profitable Planning & Management Inc. Page 3
Introduction
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As an employee, you pay these expenses with after-tax dollars. If you are in the 33.77% tax bracket8, you have to earn $5,435 gross income from your employment to pay those bills. With a home-based business, you pay those expenses ($3,600) with before-tax dollars.
In April, your income tax refund could increase by $1,215 if you are in the 33.77% tax bracket or more if you are in a higher tax bracket. Then, you use those tax refunds to help pay the expenses of running your business or to pay down personal credit cards and other debts. Of course, you have to show “expectation of profit”9 for your business to meet the requirements of Canada Revenue Agency. However, it’s not unusual to show a loss for the first year or two.
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See Appendix B http://www.cra-arc.gc.ca/E/pub/gl/p-176r/p-176r-e.html _____________________________________________________________ Profitable Planning & Management Inc. Page 4 9
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I_____________________________________________________________ NCOME TAXES, INFLATION . . . My hope is that the information on the previous few pages has tweaked your curiosity about the benefits of setting up a home-based business to increase your wealth and secure your financial wellbeing during the decades of your working career and retirement. However, first we need to consider: • how to reduce our income taxes and use that saved money to make more money, • how inflation affects our buying power and our retirement planning, • how to set up a plan to provide the funds we need for our retirement, • how to set up education funds for our children, grandchildren, nieces, nephews, etc., and • how to set up endowment funds for our favourite church or charity. I’ll discuss: • the pros and cons of two types of pension plans provided by employers, • why delaying our savings plan can cost us many thousands of dollars, • how to pay off a mortgage several years early and save several thousands of dollars to put into our own pockets, • how to use a Line of Credit to keep our monthly costs down while we’re increasing our wealth by building a part-time, home-based business. I’ll also compare: • a “business” to “self-employment” and show why one is much more valuable than the other, and • the corporate and network marketing business models to demonstrate the latter is as valid as the former. _____________________________________________________________ Profitable Planning & Management Inc. Page 5
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Intaxication: Euphoria at getting a refund from the IRS, which lasts until you realize it was your money to start with. – From a Washington Post word contest
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ARE YOU PAYING TOO MUCH INCOME TAX?
PAY SMART INCOME TAX USE THE MONEY SAVED TO INCREASE YOUR WEALTH