The Gen Xers Kick Butt

From Prospera Chartered Accountants |

CPA Firm Calgary Alberta

The Gen Xers Kick Butt

Brian and Maria are 35 and have just had their first child. Maria works for a large Oil Company in Calgary in an administrative role and makes $40,000 a year. Brian is self employed, also working in the oil patch in a job that is subject to the ups and downs of world oil prices.

When Brian first came to us for advice, I strongly urged him to incorporate his business to protect him from liability. It also had the advantage of maximizing the tax planning strategies we then implemented.

We recommended that he and his wife own the company 50:50, so that the future growth in the value of the company could be shared. However we recommended that he own a different class of share from Maria, so dividends could be declared to him but not to Maria, who already had a salary.

We then suggested that he consider leaving as much as he could of his earnings in the company, as was practical. They decided to live on Maria’s salary and about $20,000 from Brian, which due to the share ownership planning could be earned tax free. 

From a tax planning strategy that was ideal. By taxing his profits in the company at the small business rate of 18%, and taking dividends, which at that amount were tax free to him, we created a very low tax environment.

To do this he gave up CPP contributions and RRSP eligibility, neither of which is earned with dividends. In return he benefited from low taxes and an ability to invest his after tax earnings within the company. 

Over the years Brian’s earnings fluctuated widely from a low of $40,000 sales before expenses to a high of $300,000 sales and hiring one employee. He has consistently kept to his personal draws target. A major benefit to this strategy is to take full advantage of the good years and set him up to weather the storms of the oil industries often turbulent ups and downs. We ensured that regardless of draws from the company we maximized his tax-free dividends and built up his shareholders draws. 

Since marrying Maria, the couple bought a modest bungalow and paid off the mortgage with Brian’s draws.Today they sit in an enviable situation, with a fully paid for residence worth $100,000, $250,000 in their company, invested in diverse mutual funds and the ability to move into a larger family home which with prudent cash and tax planning, can be debt free within three years.

When asked if this frugal lifestyle has made them feel cheated of the extras in life, Maria stated that they have enjoyed wonderful holidays in their camper, eat out when they wish and have a full family life.

At thirty-five, they can look forward to a comfortable retirement with multiple millions of dollars of assets in their net worth.