Michael Kane
Sun

In the first of a series on consumer decisions, Michael Kane explains how you could be home free in 16 years and save more than $150,000 on the ultimate cost of a $300,000 home.

– – –

It would be nice if you could buy your dream home with cash, but most of us need a mortgage to bridge the chasm between our downpayment and the asking price. We call it taking out a mortgage, but really we’re taking out a loan. The lender holds the mortgage which provides various legal remedies if we don’t make the payments.

WHAT YOU’RE PAYING FOR

Interest rates determine the real cost of your home. By the time you burn your mortgage, you may have paid more in interest than you did for the property itself. For example, that little place listed for $300,000 will ultimately cost $533,876 if you put $50,000 down and spread monthly payments of $1,627 on a $250,000 mortgage at today’s posted five-year rate of six per cent over 25 years.

To keep that in perspective, you will pay a lot of interest many years from now when the dollar will be worth less because of inflation. Meanwhile, your take-home pay and the value of your property should be rising.

For the sake of illustration, we’re also pretending mortgage rates stay constant for 25 years, the standard amortization period in Canada. Mortgage rates fluctuate frequently and are more likely to rise than fall in the coming months.

FINE PRINT

Amortization is just a calculation to determine the time it would take to fully repay the loan given the three other components of a mortgage:

– The principal (the amount being borrowed)

– The interest rate

– The payment

WHAT YOU NEED TO KNOW

Of most pressing concern is the “term,” or how long the mortgage has to run before it matures. Standard terms are between six months and 10 years, although they can be longer. Generally speaking, the longer the term, the higher the interest rate and payment.

When the term is up, the balance of the mortgage is payable. Typically the lender will offer to roll the mortgage over into a new term with the remaining amortization.

We asked Vancouver mortgage broker Rob Regan-Pollock of Invis Inc. to show how buyers in our $300,000 example could potentially save $154,386 in interest by varying each component of the mortgage.

PUT MORE DOWN

First let’s assume a homeowner increases the downpayment to $75,000, perhaps with help from the Bank of Mom and Dad. That’s 25 per cent of the purchase price, which means they won’t be required to buy mortgage loan insurance to protect the lender against default.

The insurance is provided by the federal Canada Mortgage and Housing Corp., or privately run Genworth Financial Canada, which is owned by G.E. Capital. The cost is on a sliding scale up to 2.75 per cent of your loan, depending on how much of the home’s value is financed. There is also an application fee, typically $165. The minimum downpayment is five per cent of the purchase price.

In our example, mortgage loan insurance adds 1.75 per cent or $4,375 to the cost of the home. If that’s not paid up front, it is added to the mortgage, which makes it even more expensive since the buyers will pay interest on a bigger balance.

TRADE SECRET

Ask for a better interest rate. If you have a good credit history, you can shave at least one percentage point off posted rates by shopping around, or threatening to do so unless your bank or credit union offers a deal. A provincially licensed mortgage broker will get you the best available rate for your situation, but if we assume you’re getting today’s best widely available five-year rate of 4.74 per cent on a $225,000 mortgage, the ultimate cost of the home is reduced by $76,224 to $457,652.

HOW TO SAVE MORE

By making payments every two weeks rather than monthly, you can make one extra month’s payment each year.

The average monthly cost goes up from $1,275 to $1,381, but you will own your home free and clear 3.5 years sooner. And your total interest cost will be $132,947, for an additional saving of $24,705.

Next let’s assume that every year you use a $2,000 refund from your RRSP contribution to reduce your principal. That lowers the amortization to 17.92 years and saves another $23,984 in interest.

Finally, if you choose a variable-rate mortgage, you’ve got what is historically the cheapest route to home ownership, but you have to be able to handle sudden spikes in interest rates. Typically the interest on a variable rate mortgage moves up and down with bank prime rate, currently 4.75 per cent, while the payment remains constant. For those with an adjustable rate mortgage, payments would be adjusted on a monthly or quarterly basis depending on the lender.

If you were taking all the steps outlined above, and making the same $1,381 average monthly payment ($637 every two weeks) with today’s best widely available variable or adjustable rate mortgage at 3.90 per cent, you would be home free in 16.42 years, for a total cost of $379,490 — only $79,490 more than the original purchase amount.

THE CATCH

Mortgage rates fluctuate, so make the deal that lets you sleep soundly. Lock in if you can’t handle rising rates. With the gap between fixed and variable rates being so close, Regan-Pollock says it’s important for consumers to understand the pros and cons of each strategy, including repayment options, pre-payment penalties, conversion terms, blended rates and early renewal. This is where a mortgage professional comes in.

RESOURCES

For information on mortgage brokers visit www.cimbl.ca or www.mba.bc.ca

CUTTING COSTS:

How to bring down the long-term cost of your mortgage:

CONVENTIONAL APPROACH

Home price: $300,000

Deposit: $50,000

Fixed-rate mortgage:

$250,000 at 6.0%

Payments: $1,627 monthly

Home free: 25 years

Total cost: $533,876.

AGGRESSIVE APPROACH

Home price: $300,000

Deposit: $75,000

Floating-rate mortgage:

$225,000 at 3.90%

Payments:

$637 every two weeks

Annual lump sum payment: $2,000 (RRSP refund)

Home free: 16.42 years

Total cost: $379,490

Savings: $154,386

© The Vancouver Sun 2005

 

Province

Home-based work allowed him to be with son during baby years

Province

Name/Title: Jeff Rechner, Voice Boy

Business: Voice Boy, www.voiceboy.com

Address: Somewhere on Vancouver‘s west side

Number of employees: 1

Product/service: Voice imaging for radio and TV, commercial voiceovers, corporate and documentary narration, character voices, via ISDN or mp3 from our home studios

Years in Service: 7

WHAT’S UNIQUE ABOUT YOUR BUSINESS?

I have such a broad range of styles that I get hired for wildly differing voice needs, from a serious “severe weather” news voice to that of a talking flashlight. And around here, whenever somebody seems to need a Tony Parsons or J. Paul McConnell sound-alike, they call me.

WHAT IS YOUR BIGGEST SUCCESS?

Not there yet. However, being able to work from home and be around our son every day for the first 21/2 years of his life has paid huge dividends for our entire family. Professionally, it was completely rewarding to be part of a promotional campaign that lifted a small, underachieving Indianapolis TV station to become the top-rated UPN affiliate in the U.S., all because we used wacky, out-there voices on some amazing, attention-grabbing promos.

WHAT IS YOUR BIGGEST CHALLENGE?

In an industry that’s becoming increasingly clogged with home-based voiceover talent, to continue to market my brand to prospective clients without getting lost in the clutter.

PLANS/EXPANSION?

Lots of them, but if I elaborated, my competition might “borrow” the ideas.

Want to be in Minding Your Own Business?

© The Vancouver Province 2005

 

Knight Ridder
Province

Q: We’re looking for two three-bedroom condos or a five-star hotel with restaurant in Cabo San Lucas that is close to downtown and can accommodate families. Can you help?

A: You’ll find some spectacular luxury resort hotels in Cabo San Lucas, among them Villa la Estancia and Villa del Palmar, which are next to each other on the beach and about a 20-minute walk from downtown Cabo San Lucas.

Both have three-bedroom suites, although Villa del Palmar might be better for families since it offers tennis, miniature golf, ATV and scooter rentals and daily activities. But guests of Villa la Estancia also have full use of Villa del Palmar facilities. Info.: www.villagroupresorts.com

Playa Grande (www.playagranderesort.com) is another five-star hotel and is a closer walk to downtown but it doesn’t have three-bedroom suites. It does, however, have two restaurants on the premises and two others a short walk away.

If you’re interested in a villa, check Earth, Sea and Sky Vacations (www.cabovillas.com), which can find you a beachfront villa or resort.

© The Vancouver Province 2005

 

Dad’s workshop, mom’s prop-making launched Kimberly Easterbrook’s pursuit of tranquil spaces

Kimberly Easterbrook
Sun

A couple of months ago, my father met me at the Duke Point ferry terminal on Vancouver Island, very excited to tell me about his latest home renovation. At the house, still very excited, he hurried me downstairs.

There we entered a Greek/Roman bathroom, through mirrored doors between the “spa” and an adjoining oceanview bedroom.

Stone pillars enclosed a sunken tub, marble cloaked the perimeter and a copy of Falconet’s The Bather rested in a stone cave-like shelf.

The space has the kind of personality that encourages instant bonding and contemplation of long, happy relationships. I saw myself enjoying a long luxurious bath.

Romantized and merchandised to perfection, my dad’s new space was the work of a true stager!

Seeing it with him was also one of those moments of a lifetime when you realize who you are and why. I am my 71-year-old father, I realized. He not only designed and built our family homes, he staged them to sell! It was in my blood line!

My apprenticeship as a ”home stager,” I realized, started in my childhood when, on a typical Saturday, I would be helping either Dad in his workshop or Mom, a department-store display-artist, make props and move furniture around in our house. Outside the house, I was typically busy transforming the neighbourhood kids and animals with my parent’s clothes, and then putting on theatrical shows with my sister.

It is no coincidence that my first job was building props, merchandising and designing displays for a clothing store.

I then moved into managing several retail stores where I excelled as a ”visual presentation specialist” for my interior themes. This interest led to another job in which I designed, choreographed and staged fashion shows in golf courses, hotels and restaurants throughout the Lower Mainland.

Then a knee injury prevented me from working for more than a year. It was the best life changing experience that ever happened to me. I wanted to accomplish a lot before I turned 50. So, at 30 years old, I put an ad in the paper to clean houses … something easy to get my feet wet as a new entrepreneur.

This led to helping my clients decorate their homes. That lead to my first business, Display & Design.

Under this hat, I contracted myself out to stores like The Bay and Pearl Vision, in merchandising and window display, staged boats on the marina for resale, decorated and merchandised home offices, designed exclusive floral arrangements, staged scenes for magazine photo shoots as a photography stylist, designed trade show displays for Sears Health Food and Fitness Store and major health companies, designed weddings, and volunteered in staging scenes in several theatre plays.

As a freelancer, I also held a part time job on weekends as a sales presentation hostess. I helped staged show homes, learned market trends, toured and presented to buyers show homes on a variety of sites, and worked with a variety of realtors on different sites.

After staging a friend’s home for sale, and receiving inquiries from prospective buyers and agents asking if I did this for a living, I knew an apprenticeship of almost 30 years’ duration was probably coming to end. I had acquired the tools to transform over to the ”setting the stage” field.

Last year I renamed my business, calling it The Space Stager. That name leaves it open for me to stage a variety of spaces, yet focusing on the real-estate aspect of staging.

There have been many challenges along the way! Like any normal business, I started out doing everything by myself, de-cluttering, organizing, decorating and staging, cleaning, packing, landscaping, painting and washing windows. I even took my own furniture out of my home to stage my first house.

At the same time, it was important for me, as a small-business owner, to be fully capable of handling everything on my own if ever the need should arise.

I have been extremely busy this year with resale properties, attracting very large projects that needed a lot of work, from interior renovations to major landscaping.

Trying to find the right team of people, people who love what they do, was another challenge.

Someone I am so thankful for is Good Riddance Organizing Solutions. Susan Borax helps me take care of the de-cluttering, and packing and storage of client’s possessions, on each project. This can be such a vast area to cover when we have to prepare a house, occupied for 30 to 50 years by the same family, for sale in two to three weeks.

Known as a ”Burlap into Satin” gal when I was younger, I also know how to be frugal and thrifty with building props. This is a major part of how I help homeowners keep within their budgets.

I have a manageable amount of props to fill in where needed, and have a great seamstress, Inna Lookianova, who can create miracles from outdated furniture. Yet, more importantly, I use homeowner furniture as much as possible to save money.

As a part-time researcher on healthy environments, I try to incorporate in my home-staging jobs natural elements as much as possible, to introduce to prospective buyer the space that should naturally surround us, new home, old home, small home, large home

Preparing the Hollingsworth residence for sale has been the highlight of my home staging career. His geometric architecture made it very easy to stage a Japanese “drama.” Nature and the ocean framed throughout the house by generous glazing, I was able to compliment the inside architecture by staging with natural elements, capturing a Zen like sanctuary.

As an entrepreneur, specializing in transformation, I have to be open to constant change and transformation in myself and my business. The time has come for transformation once again in my business.

After witnessing so many of my clients’ health improve after I’ve staged their home for sale, after hearing so many of them say they didn’t want to move from the showcase sanctuary in which they now loved to live, I found myself travelling to their new homes, and some of them out of town, to organize and set up their new homes and offices into healthy, tranquil living environments.

Hence another business, an extension of my existing business. I’ve called it Tranquil Places Decor Group. My business tag line is ”Transforming your space into a tranquil place.”

Space is a part of all our lives. How we live and breathe in these spaces, how clean and organized we keep our spaces, how we place our furniture in them, is of utmost importance to the flow of energy in our home or workplace and, therefore, to our health.

Kimberly Easterbrook can be reached at www.thespacestager.com

© The Vancouver Sun 2005

Paula Brook
Sun

Look down, look way down. In the middle of the living room, where the sofa and a couple of arm chairs used to sit (big enough for two to curl up in, as Friendly used to say), we’re now seeing a collection of cushions and bolsters and ottomans big enough for several people to stretch out on.

There’s a sea change in how we sit, say the decor people. In the modernist lexicon, even the word “sofa” seems obsolete. The new term is “seating system,” though you tend to see the beautiful people in the glossy advertisements lounging more than sitting on their low-profile, Euro-styled sectionals. Turn the page and they’re fast asleep on their modular cushions in the glow of a flat-screen TV.

So much for getting any reading done at night, you might say. Or in the afternoon. Pull up a sectional and have a sleep!

Which doesn’t sound all bad, compared to the stiff-backed parlours and plastic-coated living rooms of bygone times. In fact, there are very good and practical reasons for the sectional sofa’s return to glory, three decades after it made its debut in the conversation pit of early modernism. Then, as now, North Americans were in the midst of social upheaval — feeling raw in the wake of a war gone wrong. In dire need of sectional healing, you might say. At home, with loved ones, in front of a blazing fire — or at the very least, a hot video.

So says Nancy Bendtsen, co-owner of Inform Interiors and Bensen Inc., which makes modern furnishings, including a variety of sectional systems. “There’s been a distinct change in the way people buy furniture since 9/11,” she told me. “People realize that they want to be really comfortable and secure in their homes. The nice thing about a sectional is when you have a group of friends over, you’re close and facing one another. It’s an extremely sociable way to sit.”

Or to sprawl, luxuriously. One of the most striking systems on the market is the Mah Jong, designed in the ’70s by Hans Hopfer for Roche Bobois in Paris, now in its eighth stunning edition. In Europe, the sectional, like modernism itself, has never actually gone out of fashion.

“It’s more of a Rubik’s Cube than a sofa,” says Lesley McDonnell, who recently reopened Vancouver‘s downtown Roche Bobois store. She has given the Mah Jong system pride of place in the brightly renovated Hastings Street showroom, where the hand-sewn cushions, richly upholstered in Kenzo Maison, exert a magnetic power over furniture browsers.

Which is precisely the lure of lowdown lounging, and why Hopfer named it Mah Jong. Like the earthy symbols of the Chinese tile game, this seating system lies close to the ground and invites meditation, if not outright hibernation. In fact, among the dozens of ways you can configure these cushions, which cost anywhere from $700 to $2,000 each, depending on fabrication, is a four-cushion-square king bed — the perfect solution for an upscale den-cum-guest-room.

You can also stack the cushions two-up to create traditional-height seating, then use singles as ottomans or as a base for your coffee tray. It’s the haut-couture version of the old Moroccan bazaar, suggesting a kind of hitch-your-camel-and-rest-awhile ambience conducive to intimate conversation and boisterous partying and everything in between.

McDonnell calls it “the new art of sitting” — a perfect match for the laid-back West Coast lifestyle. “What our clients are often looking for is low-profile seating that suits open-plan homes, that doesn’t block their views and looks good from every angle,” she notes. “We’re no longer just pushing the sofa up against the wall.”

Nor do we want static rooms where the furniture dictates where and how we sit. The smartest sectionals being designed today can turn on a dime — from loveseat to chaise to arm chair with ottoman. Indeed, Smart is the name of a bright new model from Montreal designer Normand Couture’s Cameleon collection.

“We think of it as a playground for the living room,” says Alan Wilson, owner of Industrial Revolution where you can buy the Smart system (from $5,000 for a small-room setting). “With chairs and tables and a bookshelf combined, it’s almost to the point where you never have to leave your sofa,” laughs Wilson.

That kind of compact flexibility especially suits Wilson‘s condo clientele who want to make the most of small spaces. “Most people don’t have the luxury of an extra room for watching TV or accommodating guests or whatever. A sofa can’t just be a sofa anymore. It’s like, okay, what else can it do?”

Because the Smart modules slide along a wooden trestle, with movable arm and back rests, it can do a lot, easily. End tables pop out, cushions slide apart and presto — two chairs with a coffee table. Take all the bolsters off your sofa and you’ve got a guest bed with night table.

The Modern Addiction system by Thayer Coggin of High Point, N.C., carried at EntreNous in Yaletown, arguably does more. Its eight modular pieces carving graceful curves and angles out of even the squarest room ($7,500 for a small, simply upholstered system to $20,000 for the works in Ultrasuede).

As a bonus, the set’s ottoman opens up for storage, creating more space and better views, the two top priorities of modern decorators, according to EntreNous designer Lorie Grant.

“The original sectionals were big and chunky,” notes Grant. “The best new ones are lower and lighter. They seem to float in space.” Her customers likewise opt for minimal accessories, preferring small multi-function sidepieces and using ottomans as coffee tables.

None of which solves the really pressing question Grant hears again and again from clients: Where do we hide the TV? Stay tuned.

© The Vancouver Sun 2005

 

Sun

Q: A friend tells me that homeowners in B.C. don’t own the land on which their properties are situated. Title gives various rights and responsibilities but we only hold the land at the pleasure of the Queen. Is this correct and is it something to be concerned about?

– Paul Shawcross, North Vancouver

Lawyer Scott Smythe of McCarthy Tetrault, a commercial real estate specialist who is also chair of the real property (Vancouver) section of the Canadian Bar Association, answers:

Technically, no one owns land absolutely except for the Crown. In practice, however, B.C.’s “Torrens” land title system virtually guarantees absolute ownership to landowners in B.C., subject to certain statutory exceptions.

A landowner owns an interest or “estate” in land commonly known as the “fee simple.” Ownership of a fee simple estate represents the maximum legal ownership (i.e., the largest bundle of rights) available to a person in our legal system.

The owner of a fee simple estate has the right to use and occupy the land, and is entitled to transfer it to third parties without restriction. A fee simple estate may also be transferred by will to future generations and, therefore, is potentially infinite in duration.

A “title” to a fee simple estate is registered in the B.C. land title system under which the owner of the fee simple holds “indefeasible” title to land (i.e., title that cannot be forfeited or taken away), subject only to certain statutory exceptions, such as rights reserved to the Crown in the original Crown grant of the land (generally mineral rights) or the right of the Crown to “expropriate” land (i.e., take title to a person’s land, with compensation, where necessary for public purposes such as transit lines).

While a B.C. landowner’s fee simple estate cannot be disturbed or taken away other than in very limited circumstances, if the landowner dies without a will and with no next-of-kin, the interest in the land would go back or “escheat” to the Crown.

© The Vancouver Sun 2005

 

Michael Kane
Sun

Small business is the engine of British Columbia‘s economy, responsible for about 60 per cent of all jobs and more than three out of four new jobs created since 2001.

Risk-taking entrepreneurs with firms employing fewer than 50 people continue to build the province’s prosperity despite the administrative burden of taxation and regulation, shortages of skilled labour, challenges around productivity, emerging competition from low-cost markets, dramatic increases in energy and insurance costs, and cost pressures wrought by the leaping loonie.

Coming soon will be a succession crisis, with as many as 60 per cent of the owners of B.C.’s small and medium-sized enterprises hoping to retire within the next decade. There is no guarantee they will find someone willing or able to buy them out.

Yet small business start-ups continue at a healthy pace. According to Statistics Canada, there were 160,197 businesses remitting payroll deductions in B.C. in the second quarter of 2005. This marks a 3.6-per-cent increase over the same period in 2004, and the biggest jump in the number of businesses with employees in a decade. It puts B.C. well ahead of the Canada-wide increase of 1.9 per cent.

B.C.’s small-business owners are also among the most optimistic in the country, with 60 per cent expecting a stronger year ahead versus only six per cent expecting a weaker year, according to the latest survey by the Canadian Federation of Independent Business.

In terms of those all-important jobs, 39 per cent of B.C. businesses surveyed by the CFIB in September said they plan to hire more full-time workers over the coming 12 months, compared to 26 per cent nationally.

B.C. business is bullish thanks largely to strong consumer confidence, relatively low interest rates, soaring non-residential construction, and robust global commodity prices that have restored the fortunes of a business-friendly provincial government.

The recent announcement of a reduction in B.C.’s corporate tax rate from 13.5 per cent to 12 per cent is helping to fuel further optimism because tax relief is the No. 1 priority of small-business owners, says Laura Jones, the Vancouver-based vice-president of the CFIB.

Jones also congratulates Gordon Campbell’s Liberal government for cutting red tape by about 40 per cent during the past five years, but contends that complying with rules and regulations continues to hit pocketbooks almost as hard as taxation because costs are passed on to the consumer.

Despite the headaches triggered by sales taxes, the demands of WorkSafeBC, employment standards, municipal requirements, environmental rules, and privacy laws, research suggests that the self-employed and employees of small companies are more satisfied with their jobs than those working in large firms, although they generally work longer and earn less.

Jones says being your own boss is the main attraction, followed by flexibility. Business owners work longer hours, but they choose them.

While it is difficult to quantify the failure rate of small business — some research suggests that as many as 50 per cent fall by the wayside within their first five years — there is no question that business owners take huge risks for their piece of the economic pie.

“They take risks that most of us aren’t prepared to take, and then they face challenges that would make most of us rip our hair out,” Jones said in an interview. “But there are also huge rewards.”

Helmut Pastrick, chief economist at the Credit Union Central of B.C., notes that business incorporations continue to rise and business bankruptcies remain on a downward trend.

“The business sector is expanding, businesses are profitable in aggregate, and business is growing,” Pastrick said. “It is certainly reflective of the improved state of the economy.”

Improving the productivity of small business remains a major challenge, says Wellington Holbrook, Vancouver-based senior vice-president of the federally owned Business Development Bank of Canada.

“Small business has been performing very well across the country, but is facing bigger risks in the economy because of the emerging economies in China and India,” Holbrook said in an interview.

“One number I saw recently suggests that Canadian small business is investing about 35-per-cent less in improving productivity than their American counterparts.”

The Business Development Bank offers financing “for the 10 per cent of businesses that can’t get served 10 per cent of the time” by the banking and credit union sector.

It is a sign of the sector’s virility that BDC lending rose 23 per cent last year to $183 million from $148 million. Increasingly, that money is being invested in training and in more efficient machinery and equipment to boost productivity, Holbrook said.

© The Vancouver Sun 2005

It comes with a lot of costs, while sole proprietorship offers many tax writeoffs, expert says

Ray Turchansky
Sun

The first and often most important questions people ponder when starting up a small business are which structure to pick and how to pay themselves.

Basically there are three structures –sole proprietorship, partnership and incorporation — and each has its pros and cons.

“I think there’s a real perception that incorporation is so much better, and I think people have to be very careful about that perception,” said Jim Yih, of Core Financial in Edmonton.

“There are a lot of times when incorporation doesn’t make sense right off the start. A lot of times people should try the sole proprietor route just to see if it’s successful, because there are lots of costs with incorporation. People think you’re getting all these tax benefits, but you’re getting a lot of tax benefits with sole proprietorship in terms of write-offs.”

Sole proprietorship and partnerships are similar in that the owner or owners assume unlimited liability for company operations, and the structures have no legal status.

Advantages include low start-up, legal and accounting costs, plus little government regulation. Disadvantages include unlimited personal liability for the debts and obligations of the business, difficulty in raising capital, little flexibility in paying yourself, and few options for succession.

With a partnership, you can share skills, spread the risk of the business, and have greater access to capital. Conversely, there can be disagreements in the running of the business and disbursing profits, as well as difficulty in getting rid of a partner and dealing with succession.

“Make sure that you walk into it with your butt protected,” said Yih. “I see more problems with partnerships, because at the end of the day it’s very difficult to make things equal, and sometimes equal isn’t fair.”

A corporation is a separate legal entity with an unlimited life expectancy. The major attractions are that debts and liabilities are usually limited to corporate and not personal assets, and that tax can be deferred using lower corporate tax rates.

Yih notes that while incorporation may limit liability in the case of lawsuits, “if a corporation is borrowing money from an institution, they require a personal guarantee anyway.” Furthermore, members of a corporation’s board of directors may be open to legal charges.

Among disadvantages are the legal fees to set up a corporation and accounting costs to prepare annual corporate financial statements and tax returns. Costs usually start at around $1,500 and can quickly become tens of thousands. Also, non-capital losses can only be carried back three years or forward seven years to be claimed against business profits, thus they may become trapped within the corporation. On the other hand, proprietorship or partnership losses may be claimed against personal income.

Profits earned by proprietorships and partnerships are taxed as personal income of the owner or owners.

Profits earned by corporations can stay in the company or be distributed to the shareholders in the form or salary, dividends, repayment of shareholder loans, capital dividends or repayment of capital.

The system, called integration, is designed so that the corporate tax a firm pays plus the personal tax paid on salary or dividends should total about the same as if the money were earned by a proprietor without a corporation. The tax advantage comes if you take little money out in salary or dividends and leave profits in the corporation to grow it.

“As a business owner one of the dilemmas is how do we derive our income, what is the best split?” said Yih. “One advantage a corporation does have is control of how that money is drawn out of the company, whereas a sole proprietorship doesn’t have that much flexibility. I can choose to take dividends one year, I can choose to take a salary, I can choose to take shareholder loans.”

How you withdraw money is important.

If you take a salary, it is earned income that creates RRSP contribution room, and the salary is deductible to the corporation. If you take dividends, the dividend tax credit reduces your taxes, but the dividends are considered investment rather than earned income and don’t create RRSP room, and the dividends are not deductible to the corporation.

One strategy is to pay yourself enough in salary or “bonus down” by taking a bonus before your year-end to reduce your corporate income to $300,000, the level at which the small business tax rate expires.

Generally $200,000 in annual revenue is suggested before incorporation.

Ray Turchansky is a freelance writer and income tax preparer.

Small Business Report 2005

© The Vancouver Sun 2005

 

Simple set of standards is working to hrlp bovernment respond to business

Wendy McLellan
Province