Wanting

“Great job with your blog,” writes Jay. “I think of you as the Meredith Whitney of the North.”

Really? Her best-before date was 2007, when Meredith forecast the coming crash. Then she blew herself up, and took a hedge fund with her. Guts everywhere. So I’m not sure that’s a sufficient suck-up, Jay. But do continue.

“I’m an avid reader and longtime believer in a balanced and tax-efficient approach to investing.  I’m currently intrigued by your arguments about the disadvantages of being in a corp, but our accountant has assured us, this is the best path forward.  Here’s the situation:

1.  Wife (veterinarian) started a corp roughly 8 years ago.
2.  She works part-time, grossing 50-60k per year (no, vets do not make a lot of money regardless of how much you feel you paid for Bandit’s broken leg).
3.  Pays herself in dividends
4.  Has roughly 120k in retained earnings that are fully invested (ETF’s)

Considering how little she makes per year relative to the costs of maintaining the corp, I’ve asked our accountant about unwinding it and becoming a sole proprietor.  He says we’ll be dinged roughly 20k (I’m assuming on the taxes from the retained earnings).  Can you please explain what would be required to unwind the corp to a sole prop. and the consequences of doing so?

The accountant is wrong, but understandable since he’s collecting annual fees filing a T2 return. But, seriously, with a gross business income of less than sixty grand per year there’s no reason to be dragging around a corporate entity. Similarly, by taking only dividends your wife is saving no tax and earning no RRSP room. Since she has no pension this is a bad idea.

As for the ‘extra tax’ your guy is hanging over your head, it sounds like the cost of getting assets out of the corporation and into her hands – which could be mitigated by using RRSP room (assuming she has some). The tax is also inescapable. It’ll be due whenever the funds are removed – and there’s no reason to believe rates will be lower in the future.

How to wind up the corp? She must apply to the province, accompanying that with an up-to-date tax return. If all is in order, Articles of Dissolution will be granted. That’s when your lawyer enters the scene to ensure a proper winding-up. She also has to provide the HST people with a request to cancel the sales tax regime.

In many ways, ending is harder than beginning. Yes, being a sole prop is so much easier, cheaper and flies way below the CRA radar. Personally I think vets are grossly underpaid. Let’s socialize the industry, giving free health care to all animals. Then vets can make $450,000 and cats can go on a two-year waiting list.

Now here’s Arthur, also with a wife problem. But this one’s bad.

Mandatory SU: “First off, just have to say I have been reading for a couple years now and make it a very satisfying part of my evening routine every day. Keep up the good work of educating the masses.”

His story:

“I have taken your advice on financial diversification as best I can and trying to be happy with the home I am in without overextending myself.  I have saved for a rainy day (20k in ‘cash’ at orange online bank in TFSA), started saving for my kid’s education with a family plan opened with the green banks e-series lines (37k), and have been putting 5500/year in TFSA spread out across e-series lines for myself and my wife currently sitting at about 38k each.  I have started putting cash into my RRSP in the same style the last few years as my income is in the 125k-150k range with my wife not currently working, the RRSP is sitting at around 68k right now.  For emergencies I have a 25k unsecured LOC set up which has been sat idle for years.  I currently own a home in SW Ontario worth approx. 230k of which I owe 75k.  This mortgage is slated to be done in 66 months, with payments set up so that at end of the term the mortgage will be kaput.  We have no other debts or commitments and try to live a fairly frugal life.

I’m certain you can guess the reason I am writing you, I am looking for some advice on purchasing a new home.  I am 35, 2 kids, stay at home wife and a professional certification that will make me hirable anywhere in the country (Second Class Power Engineer).  I have a pitiful net worth as I worked at a retail place until 26 and went back to school to be hired at a real job when I was 29. My wife is looking at houses, new houses, expensive houses. The places she is most interested in is a sleepy little town surrounded by petro chemical facilities. And new houses are selling for 500k.  Knowing what you know is this a smart move with rising rates?  We have been entertaining idea of keeping the house we own and renting to my mother for 1k/month, the price she currently pays for a much worse place in a worse part of town, is this a smart move?

Also, with the situation I am in, would it make sense to have professional management of the money I currently have?

Appreciate any advice you can give,  everyone around me says to just jump in the deep end of the pool, that I would never regret buying new real estate, etc etc.  Of course the rapid rise in real estate prices in the area has made me look like a fool for staying in a modest place despite a comparably large income.

To recap: you live in an okay home with minimal financing on it. You’ve finally landed a good job after a struggle. You just started to seriously save and invest. You now support three other people. You’re only 35. Your spouse earns nothing, yet is pushing to buy a house more than twice as expensive as the one you have now, plunging the family into debt.

What’s wrong with this picture?

You have liquid assets of about $200,000 and another $155,000 in equity. Net worth is $355,000. Not bad for an uneducated guy who was flogging stuff in a store nine years ago.

To purchase a $500,000 house would require a down payment equal to half your current liquid assets. In other words, the day you pick up the keys (with mom renting your old house) you’ll have less than $100,000, and debt of more than $400,000. How, exactly, does this help your family? Prepare you for retirement? Help pay for the kids’ education? Protect your family if you get sick, laid off, burned out or punted?

It doesn’t. And chances are you’ll never get mom out of that old property, trapping your equity. No balance, no diversity, no liquidity. You are not the fool, Arthur. Instead, a hero.

But you knew this, right? Man up. Show her this blog. Then duck.