Braden Warwick (PhD, PWL Capital) and Joe look at business owner compensation. They examine the often-debated choice between salaries and dividends.

Braden, a financial planning product architect at PWL, shares insights from a comprehensive study he conducted on optimal business owner compensation. They explore variables like provincial residency, corporate revenue, and the dynamics of notional accounts, unraveling the considerations that go into determining the most advantageous compensation strategy for business owners.

What You’ll Learn in Today’s Episode

Optimal Compensation Strategy: There is a nuanced decision-making process behind the optimal compensation strategy for business owners, particularly between salaries and dividends.

Study on Canadian Private Corporations: We discuss a comprehensive study conducted on optimal compensation, tailored for owners of Canadian Controlled Private Corporations. The study considers variables such as provincial residency and corporate revenue.

Notional Accounts Dynamics: The conversation delves into the complexities of notional accounts, including the capital dividend account (CDA) and the refundable dividend tax on hand (RDTOH). The interplay of these notional accounts adds layers to the decision-making process regarding salary versus dividend payments.

Impact of Province of Residency: They examine the impact of the province of residency on business owner compensation. In particular, the focus is on Ontario and New Brunswick, exploring the unique tax implications for small business owners in these regions.

Individual Pension Plans (IPPs): They look at the advantages and considerations associated with Individual Pension Plans (IPPs) as a potential compensation strategy. Factors such as age, contribution room, and the desire for simplicity play a crucial role in determining the suitability of IPPs for business owners.

Ideas Worth Sharing

·       “If you're trying to maximize spending, you're not going to have the same build-up of your investment portfolio that you would have if you're someone that is very content with spending under their means and is naturally a big saver."

·       “The IPP paying the salary and setting up an IPP probably makes a lot of sense, again, assuming that the corporate revenues are high enough to warrant it."

·       “Some of the things you guys have looked at is rather than just thinking dividends versus salary, you're looking at dividends versus salary versus more of a dynamic type income."

·       We're talking to a business owner who is the sole shareholder they set up. The IPP makes a lot of sense, but then they sell their business when they go to retire. What's going to happen to that?"

Resources in Today’s Episode

Braden Warwick

Rational Reminder Podcast – PWL Capital

Joe Curry

Retirement Planning Simplified

Retirement Navigator

Ep # 34 – YRPS – Retirement for Business Owners with Bob Gauvreau

Ep # 50 – YRPS – Managing Taxes: Strategies for Business Owners

Ep # 64 – YRPS – Retiring Business Owners: Success Stories and Expert Tips with Nick Mombourquette

Ep # 68 – YRPS – Business Exit Mastery: Avoid Pitfalls & Maximize Value with David C Barnett, Pt 1

Ep # 71 - YRPS – Business Exit Mastery: Avoid Pitfalls & Maximize Value with David C Barnett, Pt 2

Ep # 72 – YRPS – Tax Planning Opportunities and Pitfalls for Business Owners in 2024 with Matt Holmes (CPA)

Unlocking Tax Savings for Business Owners:

Dynamic Compensation Strategies

Do you want to maximize your retirement savings and optimize tax efficiency? Find out the solution to achieve this result as we explore the optimal compensation structure for business owners.

Braden Warwick, a financial planning product architect at PWL, is an expert in optimizing retirement savings and maximizing tax efficiency for business owners. As co-author of the paper "Optimal Compensation, Saving, and Consumption for Owners of Canadian Controlled Private Corporations," Braden has contributed significantly to the understanding of this complex subject matter. In his role, he is tasked with developing a comprehensive financial planning deliverable at PWL, aimed at providing business clients with top-tier, tailored solutions. With a meticulous approach and a commitment to delivering cutting-edge financial products, Braden's insights on business owner compensation strategies offer a substantial contribution to the field.

We take a deep dive into the optimal compensation structure for business owners, looking at tax efficiency and retirement savings. We examine how to complement existing retirement solutions and fill in the gaps brought to light by the unique challenges and opportunities within the realm of business ownership.

In this episode, you will be able to:

·        Maximize your retirement savings with salary versus dividends strategies.

·        Discover the optimal compensation structure for your business to boost your financial future.

·        Learn how Individual Pension Plans (IPPs) can supercharge your retirement planning.

·        Implement a dynamic salary strategy for maximizing your retirement savings.

·        Gain insights into the considerations for choosing between salary and dividends.

Your personal situation and preference play a crucial role when choosing between salary and dividends for retirement planning. It's key to prioritize what feels comfortable and makes sense to you as an individual. Your cash flow, past service, retirement goals, and even your temperament towards financial planning largely drive these decisions.
Braden emphasizes the role of individual circumstances in deciding between salary and dividends. Strategies like the dynamic salary and using an IPP can be highly effective for maximizing retirement savings. However, as Braden points out, it always boils down to what’s suitable for a specific situation. Financial decisions should always factor in one's comfort and preferences as much as they accommodate tax codes and estate plans.

Sometimes, the beauty of a financial plan lies in its simplicity rather than its complexity. While striving for the maximum accumulation of wealth for retirement, one shouldn't overlook the prospect of simplicity. Not everyone is inclined towards intricate financial structures, especially if they may not fully understand them or if they feel it needlessly complicates their financial landscape.
Braden and Joe acknowledge this and point out that not everyone is willing to deal with the overhead and complexity an IPP brings along. They might prefer a quieter, simpler approach, which could mean sticking predominantly to dividends or a less complicated strategy.

The resources mentioned in this episode are:

·        Visit pwlcapital.com for more information on financial planning, investment strategies, and access to the research paper Optimal Compensation, Saving and Consumption for Owners of Canadian Controlled Private Corporations.

·        Check out Braden Felix's YouTube channel Common Sense Investing for insightful videos on investment strategies and financial planning.

·        Listen to the Rational Reminder podcast for in-depth discussions on investment, financial planning, and wealth management.

·        Access additional content and resources related to the topics discussed in the transcript by exploring the PWL Capital website.

·        Stay informed and engaged with the latest insights and updates by following PWL Capital and Braden Felix on social media platforms such as LinkedIn, Twitter, and YouTube.

Timestamped summary of this episode:
00:00:01 - Introductions and Roles at PWL
Braden discusses his role as a financial planning product architect at PWL, focusing on building a roadmap for financial planning deliverables. His work involves analyzing variables for optimal business owner compensation.

00:02:22 - Research on Optimal Business Owner Compensation
Braden explains the research on optimal compensation, saving, and consumption for owners of Canadian controlled private corporations. The study focused on the province of Ontario and highlighted the impact of passive investment income on tax rates.

00:04:02 - Key Findings and Variables
The discussion delves into key findings, including the impact of corporate revenue on compensation decisions. Variables such as notional account balances, CDA, and RDTOh play a crucial role in determining the best approach for business owner compensation.

00:06:30 - Notional Accounts and Dynamic Income
Braden explains the concept of notional accounts, CDA, and RDTOh, emphasizing the importance of prioritizing the passing of dividends through to the owner of the corporation. The dynamic nature of income and its impact on purchasing power is highlighted.

00:12:04 - Maximizing Lifetime Income with IPP
The discussion focuses on the suitability of Individual Pension Plans (IPP) for business owners looking to maximize income throughout their lifetime. Factors such as corporate revenues, savings accumulation, and spending habits are considered in determining the effectiveness of IPP.

00:16:58 - Dynamic Salary Strategy
The discussion revolves around the dynamic salary strategy, which prioritizes passing through notional account balances and taking salary for the remainder of consumption. The strategy can make a ton of sense depending on the client's personal situation.

00:18:14 - IPP and Age
The conversation delves into the age at which it makes sense to start using an IPP. Typically, in the early 40s, the IPP contribution room starts to exceed the RSP contribution room, making it a viable option for maximizing retirement savings.

00:21:47 - Drawbacks of IPP
The potential drawbacks of an IPP are discussed, highlighting the fact that some individuals may prefer simplicity over the potential boost in retirement savings that an IPP can provide.

00:23:35 - Maximizing Estate Value
The conversation explores the scenario of individuals who prioritize maximizing estate value over current spending. It emphasizes the importance of tailoring the approach based on the individual's lifestyle and financial portfolio.

00:25:03 - Dynamic Salary Strategy Evolution
The dynamic nature of the salary strategy is highlighted, showcasing how it evolves over an individual's lifetime as notional account balances grow and investment portfolios within the corporation increase.