Kent Greaves 1 Comment

Understanding Your Personal Debt Load

Almost every Canadian household has some form of debt or another. And while taking on debt has become a part of Canadian life, it’s important to have a thorough understanding of your debt situation, and where it is taking you. Many of us have debt products thrown at us (every month I get blank cheques in the mail from credit card companies telling me to spend, spend, spend!) and knowing what to do takes education and discipline.

I like to keep things simple, in my mind there are two broad categories of debt – Good Debt and Bad Debt.


Good Debt: Includes a reasonable mortgage, investment debt and student loan debt. Of course, there are limits; here are some notes on each one:

  • Mortgage Debt: This should be less than 3X your annual salary. So if you/your family earn $100k per year, your max mortgage should be $300k. Note there are some minor exceptions here, but this is the rule of thumb I follow myself.
  • Investment Debt: Borrowing money for stable investments, especially when invested in an RRSP, can make a lot of sense. Note that you should be paying this loan back by the end of the current year.
  • Student Loan Debt: Borrowing for your education is good, provided the program has employment potential and you can pay off the amount borrowed in roughly 5 years.

Bad Debt: We all know when we are spending above our means…if you can’t buy it with cash, should you really be buying it at all? Bad debt includes the following:

  • Consumer Debt: T.V.s, vacations, clothes, kids’ toys, and any other item that is not a necessity (i.e. food, shelter or water).
  • Too Much Mortgage Debt: Any mortgage over 3X your annual salary is leaving you very exposed to interest rate changes. I know several people with an $800k or higher mortgage… If interest rates go to 6%, it literally doubles the required monthly payment. Can you afford your mortgage to double? I will be doing a separate blog on interest rates in the coming weeks.
  • Frivolous Student Loan Debt: If you are uncertain your education will get you a job, do not borrow money to fund it. Now, I am not saying a Fine Arts Degree isn’t a good education, but I am saying don’t borrow money to do it. I have met countless 30-somethings still paying off an education they didn’t really want/didn’t really use and, of course, they now wish they never went to school. Universities and colleges are in the business of graduating students and not necessarily in the business of helping you get gainful employment.

Our current spending culture is a “now” culture — we want instant gratification to satisfy our cravings. This impulsive and unprepared spending can lead to bankruptcy, especially if you are faced with a sudden change in income. Being disciplined is hard (I struggle with it from time to time as well!).

When reviewing your debt, here are a few things to ask yourself:

  • How much do you annually spend on interest? Take a deep breath, sit down and add it up. If you pay more than $10,000 of annual interest, that is an absolute sign that you have acquired too much debt. Imagine what you could do with another $10,000 of cash?
  • Are you paying your credit card bill off entirely, every month? If not, then why are you spending more than you earn? That is a good sign that you are acquiring too much material debt.
  • Keeping track of your net worth year over year can also give you an idea of your debt. Your net worth is your assets, less liabilities — year over year. Is your net worth getting bigger or smaller?

Those are all ways to give yourself a quick and healthy self-review of your debt so that you can better take control of your debt and, ultimately, your financial future. Interests rates usually only go one way — up. A 1% change in interest rates can create a significant bump in your monthly payments, as outlined in the chart below.

$500k mortgage, 25 years at 3% = $2,366 monthly payment

$500k mortgage, 25 years at 4% = $2,630 monthly payment

$500k mortgage, 25 years at 5% = $2,908 monthly payment

Could you handle a $300 – $600 increase in your mortgage overnight? Canada is a country that has been spoiled by low interest rates for more than a decade. Many experts are predicting an interest rate bump of 2% within in the coming years. You need to have a financial plan that clearly shows what your income, expense, investment and debt horizons look like so that you can determine if your spending is taking you down a path that is unwise.

It is critically important that you gain a handle on when you will become debt free. Entering retirement age with any debt will significantly limit your ability to have a comfortable retirement. In my opinion, a healthy retirement starts with roughly $2,000,000 in an investment account and no debts at all. Of course, there are always exceptions; give me a call and we can discuss your personal situation.


Disclaimer: Tax and legal rules change frequently and can depend on your individual circumstances. The above is not to be relied upon as legal nor tax advice and is meant for information purposes only. Please consult a legal and/or tax professional.

Kent Greaves 365 Comments

The Pros and Cons of being an Incorporated Business versus a Sole Proprietor

Your business is growing — in fact, it’s booming! For many entrepreneurs in your position, this big picture question might be in the back of your mind. Should you incorporate or run your business as a sole proprietor? There are pros and cons to each choice, and making the decision can be challenging. Understanding each option thoroughly before you make the decision is critical – read through our brief overview below and contact Kent Accounting today for a more thorough analysis on the future of your business!

As with everything in life, there are pros and cons no matter what path you choose.


INCORPORATION – PROS

  1. Limited Legal Liability: Operating a small business can be risky. Despite our best efforts, mistakes do happen — not to mention simple risks like a slip-and-fall on your business’ premises. When incorporated, Canadian law will treat your company as its own ‘person,’ which means that when there is a legal issue, that issue is directed at your company, not necessarily at you as an individual (see disclaimer at the bottom of this post). Incorporation provides an added layer of security against claims and adds peace of mind.
  2. Tax Planning: Incorporated businesses can take advantage of tax planning. Tax planning is such an important concept that I wrote an entire blog about it (click here to read it). Long story short, a proper tax plan can save you tens of thousands of dollars every year.
  3. Increased Professional Image: Businesses often prefer to deal with other businesses — as opposed to sole proprietors — as there is an added brand value to seeing a fully established (i.e. incorporated) business. Essentially, there are brand development and business development benefits that can help your business grow faster than as a sole proprietor.

Kent Accounting understands all the growing pains of incorporating your business — contact our team for a consultation.


INCORPORATION – CONS

  1. Cost: There is a cost associated with incorporating your small business, including filing a tax return every year, which carries an average annual cost of $1,000.
  2. Paperwork: As a corporation, there is more legal paperwork that must be filed each year (such as an annual return, a corporate tax return, etc.) so costs and time spent with your legal representation will also grow.
  3. Losses Remain in Your Business: On the off chance that you lose money for your first year or two, these losses are ‘trapped’ in your company (i.e. you can’t apply them to other sources of personal income). But you can carry those losses forward into future years to deduct against future profits.

Don’t incorporate your business without understanding whether it’s the right time — the Kent Accounting team will help you see the full scope of your position.


SOLE PROPRIETOR – PROS

  1.  Simplicity: To start your small business as a sole proprietor, there is very little for you to prepare; you really just start doing it (note: there are items like business licensing and insurance that you would need to attend to). All you need are the basic tools to get going — a website, a phone number and business cards. As a sole proprietor, make sure to register for a GST number so that you can collect and pay GST. Registering your trade name is also an option for sole proprietors, and this can be done at any provincial registry (the same place you get your driver’s license).
  2. You Can Incorporate Later: There’s no harm in waiting to incorporate — you can always incorporate after you’ve grown your business to a place where you have the funds to pay the additional costs, and when you reach a point where your clients would rather work with you as a business.
  3. Business Losses Offset Other Income: If you have losses from your new venture, you can apply those losses against other sources of income. This can be beneficial in the early days of your business when it’s likely that you will have expenses greater than revenues.

SOLE PROPRIETOR – CONS

  1. Personal Assets are at Risk: There are risks if things go awry. As a sole proprietor, all of your personal assets (i.e. your home) are at risk. With risk, there is reward, but the financial and personal consequences can be great if someone gets hurt or killed on your job site.
  2. No Tax Planning: As a sole proprietor, there are no tax planning options, which can result in a higher bill at tax time.

As an entrepreneur, there are a few additional elements to consider when you’re building your business that are best addressed sooner rather than later! Regardless of the path you choose, get insurance! And make sure it’s large enough to handle potential claims — we would recommend $2,000,000 as a minimum amount.

For a better understanding of what insurance coverage you should be looking for, contact Kent Accounting to set up a consultation.

Our founder, Kent Greaves, CPA, CA, offers this additional advice: “If you know you’re going to make a profit in the next 24 months, and your business has any real amount of risk (note: I have yet to come across a business that doesn’t have any risk) and you know (for sure!) that you want to be a small business owner and you are going to ‘do what it takes,’ then just incorporate. The tax planning, risk mitigation and brand pros are significant relative to the cost of filing a tax return. Most incorporated small businesses pay less than $3,000 per year for their filing requirements.”


Disclaimer: Tax and legal rules change frequently and can depend on your individual circumstances. The above is not to be relied upon as legal nor tax advice and is meant for information purposes only. Please consult a legal and/or tax professional.