Business owners tend to pay themselves enough each year to ensure they can maximize their RRSP contributions. Yet given the tax deferral opportunities available to small businesses, Jamie Golombek concludes that leaving funds in the company may make more sense than taking a salary.

If you’re an incorporated small business owner, chances are you’ve probably been advised at one time or another to pay yourself at least enough salary from your corporation to allow you to contribute the maximum amount to an RRSP. This is because the ability to contribute to an RRSP is dependent on receiving “earned income” in the prior year. Earned income includes salary and bonuses but does not include dividends. Subject to an annual cap, the annual RRSP contribution limit is calculated as 18 per cent of the prior year’s earned income. For example, in 2010, you would have to receive a salary of at least $124,722 to be able to contribute the maximum amount to an RRSP ($22,450) for 2011.

There are potentially two flaws with this reasoning, at least for Canadian-controlled private corporations (CCPC) with taxable income subject to the preferred corporate small business tax rate. First, if you need the cash, depending on your province of residence, you may actually pay more tax on the funds withdrawn as a salary than if the same funds were taxed to the corporation and then withdrawn as dividends. Second, if you don’t need the cash, you give up a significant tax deferral by withdrawing the funds as a salary to be taxed immediately rather than leaving the cash in the corporation to be taxed at a much lower small business corporate tax rate.

These two points are based on what is commonly known as the “theory of integration.”

You can read the rest of Jamie’s article here.

I’m a huge bull on this country… we won’t have a double dip recession. I see our businesses coming back almost across the board…

Warren Buffett, September 13, 2010

I’m writing to share some thoughts on today’s economic outlook, looking beyond the headlines and to bring you up to speed on stock markets.

First a short summary of stock market performance in 2010 to date. Markets in the last three months saw a continuation of the roller-coaster like turbulence of the past couple of years.

After a strong first quarter and a big pullback in the second quarter, July saw a solid recovery in global markets.

This was followed by weak performance in August, and September (historically a troublesome month for markets) saw a big bounce back (the U.S. market experienced the best September since 1939). As a whole, global markets were up 9% for the third quarter and are up 2% in 2010 to date.

Here’s how markets have performed in the last quarter and so far this year:

Source: MCSI index. All returns are in local currency.

The importance of a balanced perspective

One of the keys to success for investors is maintaining emotional equilibrium, preventing the highs from being too high and the lows from being too low.

Today, many Canadians are pessimistic about the American and global economies driven by daunting headlines about slow economic growth, depressed housing prices, high unemployment and deficit problems in the U.S. and Europe. This pessimism is amplified by the media coverage given to voices of gloom such as Nouriel Roubini and David Rosenberg.

As a result, it’s easy to miss some of the good news beyond the headlines.

The Big Sky Conference: Looking past short term issues

That’s why a conference that took place in mid September is important, as it provided some offsetting perspective on the mid and long term positives for the United States and globally.

Speaking to 2000 business and political leaders at “The Big Sky Conference” in Montana, here are comments from Warren Buffett, Steve Ballmer of Microsoft and GE’s Jeff Immelt.

Warren Buffett:

“I’m a huge bull on this country… we won’t have a double dip recession. I see our businesses coming back almost across the board… it’s night and day from a year ago.”

“I’ve seen sentiment turn sour in the last three months or so, generally in the media. I don’t see that in our businesses. I see we’re employing more people than a month ago, two months ago.”

“The things that worked for the country through a century of two world wars, a depression and more – all while increasing the standard of living – will work again.”

Steve Ballmer, Microsoft:

“There soon will be more technological advancement and invention than there was during the Internet era and that will help drive business growth.”

“I am very enthusiastic what the future holds for our industry and what our industry will mean for growth in other industries.”

“We will see new technologies that move beyond the Internet to tie together computers, phones, televisions and data centers to create amazing new products. And the pace of innovation will increase as technology makes workers more productive.”

Jeff Immelt, GE:

“Angry political rhetoric is not helpful and headlines are too focused on finding negative indicators.”

“Business at GE is improving. Signs across the world show growth improving as evidenced by a rise in GE’s orders.”

“GE is now finding it profitable to build manufacturing and service centers in the United States rather than overseas, because it is more competitive to do so.”

The path ahead

Of note, these positive views are supported by recent research from McKinsey & Company, a leading strategy consulting firm. McKinsey surveyed 2000 executives around the world in early September:

• Almost 60% said their country’s economy is in recovery.
• Most expect profits to rise from last year.
• And nearly 40% expect to hire employees by the end of 2010.

It’s not realistic to suggest there won’t be challenges ahead, both for global economies and for stock markets. Overall, we remain positive on the long-term outlook for the equity market. Concerns about the economy have caused many investors to make large allocations to cash and bonds. If you are in that category, I believe now is a good time to reexamine your strategy.

As always, should you have any questions on this post or any other matter, my team and I are always happy to take your calls.

More information on the Montana conference:

Buffett Rules Out Double-Dip Recession Amid Growth: http://www.bloomberg.com/news/2010-09-13/buffett-rules-out-double-dip-u-s-recession-says-berkshire-units-growing.html

Buffett, Ballmer predict bright economic future: http://news.yahoo.com/s/ap/20100913/ap_on_bi_ge/us_economy_leaders

Hello everyone. Have you noticed the costs of education lately?

Junior colleges are granting degrees but are now charging almost the same as a full university. With all the costs rising for education, many are asking “how is the best way to save for our children/grandchildren’s education?” We thought this article in the Globe and Mail would help you think of some questions. These are questions to ask your advisor about these plans.

How do I save for my child’s/grandchild’s education?

With education costs rising, it’s harder than ever to send your children to college or university. Learn more here about different ways to save – and how the government will help.

Click here to read the full article.

If you want our opinion on these or any other investment vehicle please call our office and any of our professionals can help. I do hope you enjoy the article.

Photo Credit: “Back to school” by Avolore on Flickr