Dave's Insights

Dave's Insight is an on-line opinion page giving Dave's opinion on many important issues and some that are not so important. It is part of Financial Insight investment letter but is not meant to be about investments, although some of the topics might effect your investments.

While we will agree with some on many things and others on few things, it is safe to say that we will not agree with anyone on everything and will not disagree with anyone on everything.
WARNING: You may not like some of what I have to say, but hopefully we will find some common ground.

Some Philosophy's from Dave
Work hard and Prosper.
Have fun and remember to be happy.
There is a word for businesses that do not pass all their expenses including their taxes on to their customers. The word is bankrupt.


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So what is this page about? Since 1985 (1995 on-line)we have provided services and advice to our clients and readers. However, like most businesses, we have tried to stay neutral or you might say, A-Political. After all, our role as a business is not to represent any kind of political view, it is to help our clients, regardless of their or our viewpoint. Not to mention it is good business not to tick off customers, potential customers, the public or anyone else for that matter.

Are those days over? No, the rest of our web site and our business has not changed. This page on the other hand is different. We are well enough established, plus near enough to retirement (or at least semi-retirement) that we just are not going to let it worry us. Or maybe we are just too old to care anymore.

So, Who am I? My background can be found here. But what am I about? My wife Marian says that I am more than a little bit eccentric. I always thought that I was just an eccentric want to be. But who am I to argue, after all, no one knows me like Marian does. I have been described as right wing of Attila the Hun. I take that as a complement, although I do not know if Attila was right wing or not, and I should specify that that is the fiscal right. I guess you could say that I am a Libertarian, or maybe as one friend puts it, a real libertarian. That is I believe that while there is a place for government, it should be as small as possible and people should be FREE to live as they please as long as it does not interfere with the freedom of others. Also, Freedom of speech and democracy should be defended at all cost, without them there can be no rights or freedom. This means that sometimes we will be offended by what others say and we may not agree with where democracy takes us. But without them it is a slippery slop to tyranny. Now I am getting ahead of myself as that is what the articles are for. One other thing worth noting, as we learn new things and get new information it is important that we be open minded and adjust our opinions when necessary. Sometimes that can appear as waffling, and maybe sometimes it is, but it is essential for growth and progress. After all, we do not know everything, not even close, and some of what we believe will always be wrong.

With all that in mind: Here is what I believe, or at least what I believed when I wrote the Articles, because that too can change.

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Index

Take the links below to go directly to a specific article or scroll down through all the articles:

The Golden Retriever Rule For your entertainment. (December 21, 2016)

From There to Here How I Became a Skeptic of Anthropological (Human) Caused Climate Change (November 3, 2016) (Opens in a new page)

The New Canada Pension Plan Agreement Sort Of (June 22, 2016)

Are You a Climate Change Hypocrite? Take my CO2 challenge, if you care about that. (May 17, 2016)

A Mornings Hunt We never fired a shot, but nonetheless it was a successful morning. (March 25, 2016)

Women may be From Venus and Men may be From Mars, But Entrepreneurs Live on Pluto (February 28, 2016)

Alberta's New Carbon Tax Will Cost Over $1,000 per Albertan Annually Posted December 19, 2015. Updated April 23, 2016 and on January 3, 2017.

TFSA's Benefit the Young, Elderly and Self-Employed the Most (October 5, 2015)

Ontario's Retirement Pension Plan means reduced pensions for many Self-Employed (October 5, 2015)

Canada's Debt, A Liberal Legacy (September 7, 2015)

Corporate Profits, Critical to Your Canada Pension Plan (July 23, 2015)

Correction on Alberta's Health Care Tax, It's even crazier than I thought. Post Alberta election comments added May 21, 2015 and update again on July 16, 2015.

A Tax, Is A Tax, Is A Tax Original comments on the March 26, 2015, Alberta budget.

Apparently, 970,000 Scientists are Missing in Action (March 2, 2015)

A Riddle From Dave

Computer Models: The Great Deception (Original post November 25, 2014)

Canada Revenue Agency Must Have Missed the Memo (August 5, 2014)

Canada Revenue Agency's Power Grab (March 23, 2014)

I am Sorry Mr. President, but I did build that! (February 18, 2014)

Seeing Can Be Misleading (Original post 2012)

Comment to my Member of Parliament on Crown Corporations. (sent May 8, 2013)

Letter to my Member of Parliament, On Corporate Taxes, Profits and the Economy (sent October 18, 2011)

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Outside Links

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My YouTube Page: For your entertainment.

The Rebel: On February 13, 2015 Sun News channel went off the air. That was both a sad day for Canada and for free speech. You may agree or disagree with most of their right wing coverage. I usually agreed. However, at least they were honest about their bias, unlike the main stream media who pretend to be neutral but in my opinion should be classed as left, lefter and leftest. But there is a bright light, some of their staff have started a new web media site called The Rebel that is providing online news coverage similar to what was provided by Sun News channel.

The Rebel Cruise 2016: In November of 2016 over 100 like minded people joined The Rebel Staff for the first Rebel Cruise. This is my page about the Cruise.

Small Dead Animals provides links and readers comments to many different news and non news items on a daily basis. The site has a very large following. It sure bumps my readership when it links to one of my posts. Thanks Kate. But seriously, it is another place to go on a daily basis and get news that the left wing media does not emphasis.

The Fraser Institute: A leading Canadian Think Tank.

The Heartland Institute: An American Think Tank.

The Friends of Science: An independent non-profit organization dedicated to providing insights into Climate Science.

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Articles


THE GOLDEN RETRIEVER RULE

December 21, 2016

For your entertainment on the less serious but more fun side. As we cruise into Christmas and through the new year, remember the Golden Retriever Rule:

Have Fun and be Happy.

Crocodile Picture


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From There to Here
How I Became a Skeptic of Anthropological (Human) Caused Catastrophic Climate Change

November 3, 2016

Not a skeptic of Climate Change, as long as the Earth has had an atmosphere the climate has changed, sometimes greatly and sometimes very quickly. Nor do I doubt that we humans have had some effect, I am sure we have. The question is how much, and if the effect is overall positive or negative?

So this is my story, written in three parts: Part 1 outlines the journey of how I got to my current opinion, Part 2 outlines what I currently believe and Part 3 gives my recommendations about what we should be doing. At the end I give my confession of my own biases followed by numerous links etc.

Due to its size, this article can be found here on its own page.


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The New Canada Pension Plan Agreement, Sort Of

June 22, 2016

First let's get it straight, from what I can tell, this is not really an agreement nor has it been ratified by Parliament or any Provincial Legislature. It is an agreement in principle to enhance the CPP with a certain outcome in mind. There is little to it, or at least little that is obvious on The Department of Finance web site as of June 21, 2016. Here is a link to the Press Release and a link to the pdf of the 8 sentence agreement. Hopefully the links do not get removed.

So what does it say? Well based on the 8 sentence agreement and the press release here is what I currently believe it says and my comments:

Premiums:

They make it sound small by saying $7 per month for someone earning $55,000 per year. Well that is only the employee portion and only the start, once it is fully phased in, in 5 years, it is expected to be $34 per month or $408 per year for the employee plus another $408 per year for their employer or in total, $816 more premiums per year for someone earning $55,000. This works out to a combined rate of 1.5%. When added to the current 9.9% this means a total premium rate of 11.4% of pensionable earnings. If Ontario goes ahead with their new pension with its combined rate of 3.8%, people in Ontario will be looking at combined premiums of just over 15% of pensionable earnings.

Many Self-Employed are bound to stop taking salaries and start taking dividends instead to avoid the plan altogether, see my October 15, 2015 article Ontario's Retirement Plan Means Reduced Pensions for Many Self Employed below. Employees may think that they will only pay their half but in reality at the end of the day this money has to come from somewhere, and employers only have so much money to cover salaries, so ultimately, while it will not be obvious, it will effectively be paid by employees through reduced salaries (smaller raises) and/or reduced benefits. Or maybe God will pay, but somehow I doubt it.

Maximum Insurable Earnings:

The Upper Limit, which is currently indexed, will be increased at a faster rate with a target of having the upper limit of pensionable Earnings reaching $82,700 by 2025. While that sounds like a lot, it is really only a growth rate of about 4.4% or a little over double recent inflation rates. Not that big a deal but one wonders if the people with incomes in that range or higher are the ones that are likely to retire into poverty.

Pension Income:

They have indicated that the goal is to increase the benefit from 25% of pensionable earnings to 33%. They claim that means that someone earning $50,000 constant earnings throughout their working life will receive an additional $4000 per year. Since the first $3500 is not pensionable that works out to paying an additional $698 per year [($50,000-3500)X 1.5%] or $31,410 over 45 years. I have not run the numbers to calculate a return on investment but essentially that means that it will take to age 73 to get your money back with no return on investment and at age 85 you will have gotten $80,000 for your $31,410 investment, some of which will have been invested for over 60 years. Maybe, hopefully, the pay out will be indexed, otherwise what are they planning to do with our money.

That leads me to the last point or concern. As I show in my July 23, 2015 article Corporate Profits, Critical To Your Canada Pension Plan below, while originally there was not a fund, today there is and it is managed in a manner similar to many private plans. If the increased premiums go into the plan and the current approach continues, while it may not be a good deal, at least the Plan should be solvent. However, if the current or a future government decides to raid the plan or direct the invests in a manner that meets some political objective, then all bets are off.

My Recommendations:

Here is what I would recommend they do. I realize that most of this is a pipe dream that the current Government will never implement, but nonetheless this is what I recommend. And hey, I can dream, can't I?

1: Remove the 18% earned income limit while keeping the dollar limit on RRSP's. Make it like TFSA's where everyone over 18 gets the same amount of contribution room. I do not get why they want to limit lower income individuals anyway.

2: Increase the annual limit for Tax Free Savings Accounts back up to $10,000. On the one hand they are claiming that Canadians are not saving enough while at the same time they are reducing one of the available vehicles. Also see my October 5, 2015 article TFSA's Benefit the Young, Elderly and Self-Employed the Most.

3: Leave the Canada Pension Plan as it is, but if the Government really thinks that it must require people to put more away, then allow them the option of putting it into either the Canada Pension Plan or a locked-in RRSP. Ideally, reduce the required Canada Pension Plan amounts but require the difference be put into a locked-in RRSP or into the Canada Pension Plan, again, it should be the individual's choice.

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Are You a Climate Change Hypocrite?

Take my CO2 challenge, if you care about that.

May 17, 2016

After watching the huge annual United Nations Climate Change party in Paris late last year where the hypocrisy was rampant, I felt I had to come up with this challenge. Reportedly, there were 40,000 to 50,000 attendees, including over 380 from Canada, and many celebrities flying in on their private jets and in at least one case staying on a private Yacht. The carbon footprint must have been massive. If this was about negotiating some kind of agreement then why were all these people there in the first place? A handful of officials from each country would be the most that could serve any useful purpose. Leads me to wonder how many environmentalist it takes to screw in a light bulb. But I digress.

If you are like me and you believe that the climate changes naturally, that our CO2 emissions will only have a small effect on the climate and that overall the positive effects will outweigh the negative effects, then in my opinion you are not a Climate Change Hypocrite, and you do not need to meet this challenge.

If on the other hand, you are worried that our burning of fossil fuels is causing runaway global warming and that someone needs to do something serious and soon, then I ask: What are you doing? If you are not leading by example, then in my opinion you are a Climate Change Hypocrite. So here is my very doable challenge, it may not be easy or convenient but it is very doable for anyone living in a major city.

The Challenge:

1: Live in a small apartment, no more than one bedroom for a single person or a couple plus one room per child. It may not be what you like but it is all you really need.

2: Do not own a car, use only public transit. It is not always convenient, but can be done in most major cities.

3: Do not fly anywhere in an airplane. I would make an exception for work, most of us have to work to live, but it should only be in economy and only on business. Yes, that means no more exotic holidays or visits to relatives who live a long way away. Let's face it, there are lots of things you can do in most cities that are reachable using public transit and there is Skype or similar ways for visiting distant relatives.

4: Do not use air conditioning, only fans or at least set the air conditioning to 26 degrees Celsius (79 Fahrenheit) or higher.

5: Do not turn up the heat to heat your residence above 18 degrees Celsius (64 Fahrenheit), wear sweaters instead.

I am sure there are those who think this challenge is too easy and others who think it is unreasonable. For the first group, well I tend to agree, but it is a start. For those that think it is unreasonable I note that for my first year or so after University I met items 1 and 2, for many years after High School my wife met items 1 and 2 and my sister, a single parent raised her daughter while meeting items 1 and 2. None of us considered ourselves hard done by.

The other objection that I am bound to hear is that your contribution is too small too matter, so we should concentrate on others who have a much bigger impact. No doubt these are the same people who want Canada to do something, to be a leader. Well, as I understand it, Humans are responsible for approximately 3% of global CO2 emissions (the rest is natural) and Canada accounts for a little under 3% of Human emissions. That means that Canada accounts for less than 0.09% of emissions, or put another way, less than one CO2 molecule per 1,000 emitted. So I think it is fair to say that if you believe that Canada needs to do something, to be a leader, even though it will have no real effect, then it is fair for you to show some leadership and meet my challenge.

So this is my challenge. If you believe that Human CO2 emissions are causing catastrophic climate change and you meet all these conditions, not just for a while but indefinitely, then maybe you can argue that you believe and care. If not, then I find it hard to take you seriously on this issue. Or is it that you want someone else to do something, but do not want to change your own lifestyle. What was that word again? Oh yea, Hypocrite!

Other Related Topics on this page:

From There to Here How I Became a Skeptic of Anthropological (Human) Caused Catastrophic Climate Change (November 3, 2016)
Apparently, 970,000 Scientists are Missing in Action (March 2, 2015)
Computer Models: The Great Deception (Original post November 25, 2014)
Seeing Can Be Misleading (Original post 2012)

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A Mornings Hunt

We never fired a shot, but nonetheless it was a successful morning

March 25, 2016

Now for something that is not so important, or maybe it is what makes the other stuff important.

It could have been any one of a number of November mornings in the 1970's. Like most other times, we never fired a shot, but nonetheless it was a successful morning.

It was a Saturday morning and as usual my father and I were up before the sun. It could have been any one of a number of mornings. It was crisp as the temperature had dropped below freezing overnight. We bundled up into our hunting gear climbed into our 12 foot aluminum boat and headed up the lake. It was a 5 mile trip to the other end of the lake, then past Maplesue Point and a short distance up the Medway River to a small quiet bay where we would pull up. Overnight a thin layer of ice had formed in the bay. It broke up as we entered it. It is still dark and crisp. Pulling up and having secured the boat, we had the area to ourselves, as the only practical way into this area was by boat and we rarely saw another sole. Then we quietly moved to our stands.

It was a short hike, we settled down in sight of each other, but watching different directions and made ourselves as comfortable as possible. Then we waited. After about 20 minutes the sun began to rise and the previously quiet woods slowly came to life. It is magical. The birds begin to shuffle around and chirp at each other, the squirrels wake up, start rustling around and chattering at each other. The forest begins to come to life, we remain quiet, it is as if we are not even there. We spent the next couple of hours quietly enjoying the forest around us. It is a wonderful thing, a morning in the forest.

We eventually have to get up and move around, our feet and fingers are near frozen, but it is worth it. Morning has broken, the sun is up, the woods are warming and the forest is alive. I do not remember how we spent the rest of the morning. We probably walked opposite sides of a nearby ridge moving slowly, maybe 100 yards every 10 minutes or so. Eventually we headed home.

We never fired a shot, but it was another successful morning, taking in nature and watching the forest wakeup. Yes, a very successful morning, how could it be considered anything else.

Location: Ponhook Lake, Nova Scotia
In memory of my Father, Laurence (Laurie) S. Heinze (1920 - 2008)

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Women may be From Venus and Men may be From Mars, But Entrepreneurs Live on Pluto

February 28, 2016

And let me tell you, it can be mighty cold out there. More than once, well a lot more than once I have found myself explaining or trying to explain this to Government officials. It is easy for anyone who is gainfully employed and especially easy for government employees to miss how different the world is for most self-employed, especially those in their earlier years. For an employee, it is relatively straight forward. They go to work for a certain number of hours and they get paid for their work, and then there are the benefits like paid vacations. But the bottom line is that they know what they are making and when they will be paid. While it may not always be easy, planning to pay bills and taxes etc. is relatively straight forward here on Earth, or Mars or Venus for that matter. But out on Pluto it is a different story.

For the small business person, they are always at work, or at least work is always with them, but that is the easy part. First, they have to fork out money before any work is started. Then they have to find work or sales, pay any related cost, continue to pay for the cost of doing business, regardless if there is work or sales, then bill and finally hope to be paid, which can be a crap shoot especially as to timing. Add to that the myriad of growing and changing Government rules and regulations plus the often unrealistic expectations of government employees and there you have it, life on Pluto.

These circumstances make life anything but simple. Will I make money this year, how much, after all the putting money into the business and drawing out when I can, will I owe it money or the other way around, can I take a salary or a dividend? All of this has to be sorted out, usually after the fact, not to mention that they keep changing the rules. Oh, and let's not forget that we have to run the business, take care of employees and take care of customers too. Running the business should not be an afterthought. Then there are those government officials who think that they are the centre of the universe.

Obviously not all but a large number seem to think that our life should be simple, like theirs is. Well it is not. Then there are the ones, and there are a lot of them, who seem to think that their objective is to find ways to make the business person offside of the rules rather than find ways to work with the business person to help them and make it easier for them to follow the rules. I would have thought that the latter should be the objective.

Government officials at all levels need to understand these realities. When making the rules, they need to think about what the proper objective is, understand the realities that the business person lives with and try to design the rules accordingly. When applying them, they also need to understand the realities of business and work with the businesses in a positive manner to help businesses to follow and stay on side of the rules. While I have seen good examples of this, it often seems to be the exception not the rule. It should be the rule.

One final thought, business people, especially small business people are not the enemy. They are hardworking, often with a high degree of passion for what they are doing; they want to follow the rules and to create jobs, wealth and opportunities that will benefit us all. They are a pillar of our society and deserve respect. They also live on Pluto and it behooves us all, especially the government to do whatever possible to bring them closer to home, because, after all, it is mighty cold out there.

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Alberta's New Carbon Tax Will Cost Over $1,000 per Albertan Annually

January 3, 2017 Update:

My April 23, 2016 update did not allow for the Carbon Rebate for individuals as the rebates total effect was sort of buried. It appears they expect to return $95 million to Albertans in 2017, and as the increase in 2018 is about 50% they should expect to return about $143 million in 2018 and beyond. Based on a population of 4.2 million, in 2018 that averages $34 per Albertan or $136 per family of 4 once the Tax is in full swing. Making the average annual cost of the tax per Albertan about $586 or $2,344 per family of 4. Still a lot more than they would have you believe and if they do the increases that our Prime Minister and Premier appear to want to be in place by the year 2020, then the amount will be getting very close to the $1,000 per person that I originally suggested.

April 23, 2016 Update:

Now that we have a budget, I can update the numbers. When I originally wrote this in December, the government was suggesting the Carbon Tax would bring in $3 to $4 billion annually at first and growing. According to the Provinces web site, at January 1, 2016 the population was about 4.2 million people. This worked out to close to $1,000 per Albertan and growing. See my methodology and explanation below. Going through the Budget, it appears that once the levy is in full swing, in 2018, they expect it to bring in about $2.6 billion per year. This works out to about $620 per Albertan, or $2,480 per family of 4, assuming a stable population level and that $2.6 billion is what the Tax/Levy brings in. Of course the NDP government is saying that the direct cost of the increase in fuel (auto & heating) to an Albertan family is much lower. While that may be, as I point out below, the added cost to industry and municipalities for that matter is going to have to be paid by someone, and ultimately that means Albertans. Or maybe they think God will pay it, but somehow I doubt that God is feeling that generous.

So the amount may be lower than I first said, but it is still a lot, and it is a lot more than they would have you believe.

December 19, 2015

That's over $4,000 per year for a family of four. Yes I know they claimed a lot less, but mark my words, it will be more.

First, let me set the premise. When giving seminars on Tax and/or Profits, I like to ask the question. What is a word for a Company that does not pass all its expenses, including its taxes on to its customers? The answer of course is bankrupt. Maybe not immediately, but eventually. Something I always ask when dealing with businesses, non-profits and governments when they are talking about spending is: Where is the money going to come from? Well, where is the money going to come from?

The NDP government may claim that it will only be three or four hundred dollars per person, sorry, per family. But let's cut to the chase. In almost the same breath they claim it will raise 3-4 billion dollars per year revenue for the provincial government. Possibly double that in a few years. So where is this coming from? At the end of the day, one way or another it has to come from our pockets. While at first you might think that we export so we can export the tax. However, our exports have to compete with all the other available sources of supply, so we cannot export the tax. If we could, we would still be charging over $100 per barrel for oil, but we cannot. That leads me back to: Where is this 3 to 4 Billion dollars per year (more later) to come from?

Well, there is really only one answer; it might be somewhat invisible, but we Albertan's will have to pay it, and that my friend works out to about $1,000 per person per year, or $4,000 per family of four. And if it brings in $8 billion in a few years, that is over $8,000 per family of four per year. We will pay it in the form of higher transportation costs (both public and private); higher heating costs and to a lesser extend in the cost of everything we buy from groceries to toys. Of course some will pay more and some less, but to be clear, this will hurt the poorest the most.

The only relief is that it is entirely possible that if the new Provincial and Federal governments achieve their apparent goal of destroying or nearly destroying our free enterprise economy, turning us into a socialist nanny state, we will all be much poorer and they will not collect what they hoped to collect. Unfortunately, that will cost us even more in terms of quality of life. But hey, we will all be equal, equally poor that is.

And by the way, for those worried about CO2 emissions, this will have virtually no effect on global CO2 emissions. Well, in fairness, it might transfer activity to jurisdictions with poorer emission standards (or no standards), thereby increasing Global emissions. But they can pat themselves on the back for a job well done.

Sorry folks, but that's reality.

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TFSA's Benefit the Young, Elderly and Self-Employed the Most

October 5, 2015

In April of 2006 in my Pre-Budget letter to the Minister of Finance I wrote the following:

"Currently RRSP contribution room is calculated based on earned income with a dollar maximum. This can discriminate against taxpayers whose main source of income is not earned income or low income individuals. Especially, in the case of low income individuals, these people often pay little tax; however, these are the people who are most likely to need government assistance when they retire. Further, while we recommend our self-employed incorporated clients take some income as salary, we are aware that many accountants are having their clients take all their income in the form of dividends, to avoid Canada Pension Plan. These individuals may not have any funds set aside for retirement."

I went on to recommend that the 18% of earned income rule be changed to a simple maximum amount each year for everyone, regardless of income.

They did not follow my recommendation, but in 2009 they came out with the Tax Free Savings Account (TFSA) with a fixed dollar annual limit that applies equally to everyone, and in a lot of ways it was a better solution. See our January 2009 article on TFSA's in Financial Insight here.

Recently the government increased the limit from $5,500 to $10,000 per year. This has come under fire as being of benefit mainly to the rich, but unlike RRSP's, where apparently it is okay that high income earners can contribute more, everyone can contribute the same amount into their TFSA and I would argue that the biggest benefactors are young adults, the elderly and the self-employed. Let's take the groups one at a time:

Young Adults:

This can be a great vehicle for young adults to save for things like their first home. They can comfortably put any excess cash into a TFSA knowing that if they need it, they can access it and get the contribution room for the amount withdrawn back. I would strongly encourage any young adult to put as much as possible, maybe even more than they think they can afford into a TFSA. It is still available if they need it in the near future, but having it in the account does create a mental barrier, so in most cases the tendency will be to keep it there if at all possible until it is time to make a down payment on a home or whatever their priority is. Because of its flexibility, they can and should push the envelope. What a wonderful tool for young adults starting out. Why would anyone want to limit it?

The Elderly:

Once you reach age 71 you can no longer contribute to your RRSP and will have to start making withdrawals in one form or another (annuity, RRIF or total withdraw). It is not everything, but it is all they have left to choose from. Again, I ask; why do the progressives want to take that away?

The Self-Employed:

As pointed out above in my letter to the Minister, many small business owners choose to withdraw their earnings as Dividends, which can result in no pension. This may become an even bigger problem thanks to the Ontario Registered Pension Plan (see next article: Ontario's Retirement Pension Plan Means Reduced Pensions For Many Self-Employed). As politicians of all stripes love to tell us; Small Business is the backbone of the economy. For many of them, TFSA's will be their only choice. Not to mention the flexibility of being able to access the funds if needed makes them a much more viable option for many small business people. Access to capital is usually critical for the small business person. Adequate access often makes the difference between success and failure and whether their employees have jobs. I fail to understand why anyone would want to limit TFSA's for the self-employed.

The Wealthy:

Of course they will use TFSA's, maybe even the most, but it is really not that big a deal to them. Chances are that they have maximized their RRSP's and are putting some of their lower return fixed income securities into them, so it is nice but not that big a deal to them. Let's assume it is the year 2055 and a 58 year old now has $400,000 room to contribute (in 2015 dollars as we expect the amount to be indexed). This person is still working, makes $200,000 per year (2015 dollars) has finally maximized their RRSP's, is debt free and has lots of cash to invest. So they now can finally put $400,000 into their TFSA. There was not much there before as they had mortgages, RRSP's, a cottage to pay for and so on. But now they finally made it. The TFSA is nice, if it earns 4% (if they are lucky), it makes $16,000 per year tax free and at a 45% marginal tax rate it saves them $7,200 per year. It is a nice savings, but to a person who makes $200,000 a year and pays over $65,000 a year in income taxes, it is not that big a deal. So the Liberals and the NDP want to reduce the contribution limit of TFSA's for young adults, the elderly and the self-employed just so that they can punish wealthy people, many of whom have worked hard all their life and finally made it. But who do they think they are really hurting? It is not the wealthy.

So I think it is clear that the biggest benefactors of increasing the TFSA limits are not the wealthy but young adults, elderly and the self-employed. It is true that many of them will not take advantage of it, but many will and in a free country it should be their choice. If the progressives really want equality, rather than reducing options to pull everyone down to the lowest common denominator, they should be in favor of increasing everyone's options, keeping the new TFSA limits and taking away the earned income rule for RRSP's, making the RRSP limit a fixed amount that applies equally to everyone regardless of income, just like the TFSA.

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Ontario's Retirement Pension Plan (ORPP)
Means Reduced Pensions for Many Self-Employed

October 5, 2015

Actually, it probably will mean reduced pensions for many Ontarian's, but especially for many self-employed individuals. For many people, especially lower and middle income individuals, the very people the plan is meant to help, more money into a government plan means less into private plans. As pointed out in the Fraser Institute's recent study If Governments Force Canadians to Save More for Retirement, Voluntary Private Savings will Shrink, from 1996-2004 when Canada Pension Plan's contributions raised from 5.6% to 9.9% for each percentage point increase in CPP there was a 0.895% drop in the private savings rates of Canadian households. They further noted that the drop was greater in lower and middle income households than in higher income homes.

You may ask why this is important, as they are still putting money into a pension. Maybe, but I think it is a pretty poor plan. According to the Ontario Government's web site, (and some assumptions as the detail is crappy to say the least) the combined contribution rate will be 3.8% on all earned income over $3,500 up to $90,000. Assuming that contributions limits and pensions will be indexed at the rate of inflation, someone who contributes the maximum over 40 years will pay in $131,480 in today's dollars. According to the web site, starting at age 65, that person will receive $12,815 per year. Again, I am assuming it will be indexed, so in today's dollars. At that rate, they will have to collect for 10.3 years to get a return equal to inflation. If they collect to the age of 82, according to my calculations, they will get a return of about 1.73% over the rate of inflation. Again assuming the payout is indexed, if not then it is just 1.73%. In case you are wondering, using the same methodology the CPP only returns 0.3% (yes, less than 1%). Maybe some of my assumptions are wrong, it would not be the first time, regardless; it seems to me that in most cases taking money from a private plan to put it in the CPP or the ORPP is not a good idea. For many self-employed, the effect will be worse.

For many self-employed, especially the ones struggling the most, this could result in no pension. Most self-employed earn their income through corporations as they provide more flexibility, some creditor protection, improved tax planning and some separation from business. For the owner of an incorporated business, they have the option of taking out their income in the form of salary, dividends or a combination. We usually recommend some sort of combination but it is their choice. Money withdrawn as salary is deductible to the company and fully taxed in their personal hands like any other salary. They also have to pay CPP on that salary and it creates RRSP room. Income that is not paid out as salary is taxed in the company's hands. If it is considered active business income, it is taxed at a fairly low rate. Then when the after tax amount is paid out to the owner as a dividend, they are taxed again, but at a lower rate than normal salary income. This is called integration, the goal is that at the end of the day the total corporate and personal tax will be the same as if it had just been salary, but there can be some deferral until the money is actually withdrawn from the company, and I should point out that this integration works amazingly well.

Few if any of our clients do this, but I know that there are small business owners who choose only dividends, as then they do not have to pay in CPP at the current combined rate of 9.9%. In the short run, this is a savings of 9.9% which is significant, especially to a struggling business. Unfortunately it also means that they are not creating any RRSP room. This can result in no CPP or RRSP income to retire on, which is why we discourage the practice even at 9.9% CPP. However, in Ontario with the Ontario Retirement Pension Plan coming into effect in 2017 at a rate of 3.8%, a total of 13.7% of their income will be going into what I would call sub-par pension plans, CPP and ORPP. If I was in Ontario, I would have to seriously rethink my advice, but I am still worried here in Alberta.

The Federal Opposition parties seem to think that increasing the Canada Pension Plan is a good idea. If they get into power and increase the CPP, or the Alberta NDP implements something similar to Ontario's ORPP, then I will be revisiting our recommendations and may very well find myself reluctantly advising my clients to move entirely to dividends which may result in no CPP and no RRSP.

So as you can see, while these increases will not matter that much to the higher income families, they may very well mean reduced income for lower income families and may result in greatly reduced pension income for many self-employed. Aren't these the very people that the Liberals and NDP say that they are looking out for? Thankfully, hopefully, we will still have the Tax Free Savings Accounts.

Note on CPP and ORPP returns:
One might ask why the ORPP appears better than the CPP in terms of Return on Investment. As I pointed out below in my July 23, 2015 article Corporate Profits, Critical to Your Canada Pension Plan, in 1965 when the Liberals started the CPP, it was effectively an unfunded pyramid scheme. While there is a fund now and the plan is considered solvent, we are still paying extra for the sins of the past. Hopefully all of the ORPP contributions will go into a fund and there is not a back door tax hike involved.

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Canada's Debt, A Liberal Legacy

September 7, 2015

The press and the Liberals would have you believe that the Conservatives are responsible for the Debt and the Country's largest deficit. It all sounds believable until you look carefully at the last forty or so years and adjust for inflation.

Here is a chart showing who was in power going back to 1957:

PM History

With the exception of a nine month period when the Progressive Conservatives had a minority government that got defeated on its first budget, the Liberals were in power from April 22, 1963 to September 17, 1984. Since the Progressive Conservatives never got a budget passed, it seems fair to say that the Liberals controlled the public purse for the 21 year period ending September 1984.

I only have numbers going back to fiscal 1966/67 but from then to the fiscal year ended March 31, 1974 deficits remained below $2 Billion equal to less than 11 Billion in 2015 dollars. Then, starting with the fiscal year ended March 31, 1976 (under Prime Minister Pierre Trudeau's watch) the deficit started increasing greatly, until it peaked in fiscal year ended March 31, 1985 at 75.1 Billion in 2015 dollars. Adjusted for inflation, that was the largest deficit in Canada's history. While the Progressive Conservatives were in power on March 31, 1985, they had only been in power for 6 months, so really this deficit, a debt of almost 400 billion in 2015 dollars and rising interest costs was the Liberal legacy that the Progressive Conservatives inherited.

While many will argue that the Progressive Conservatives should have done more, and that may be a fair argument, they did not create the problem, and by March 31, 1988 under the Progressive Conservative watch we were in an operating surplus. What that means is that if it were not for interest cost, which had grown to $31 Billion, 51.9 in 2015 dollars, there would have been a surplus.

Then in late 1993 the Liberals got back in power. Paul martin was Minister of Finance and based on discussions that I was involved in and what I have observed over the years, I am convinced that he was, and still is a tax and spend Liberal. However, luckily, the senior staff at the Department of Finance explained the realities of our fiscal position to him. Once he understood the seriousness of our financial position, which included a Debt nearing $500 Billion, about 700 Billion in 2015 dollars, and a large deficit thanks to interest cost of about $40 Billion or 60 Billion in $2015 dollars, he realized that more had to be done, and he had the tenacity to do it. They, the Liberals, claimed that they had no idea how bad things were before coming into power, which seems odd to me as I and my friends at the Calgary Chamber of Commerce were painfully aware of the situation and had been sounding alarm bells for some time. However, and it pains me to say it, I have to give him credit for going the extra mile, and to Prime Minister Chretien for letting him do what had to be done to finish the job that the Progressive Conservatives started. Finally, in 1998 we had a surplus, the first one since 1970.

Then the Conservatives got into power and we had surpluses for the next couple of years. Then came the 2008 recession. Luckily, we had the government we did. Both the NDP and the Liberals pushed hard for massive government spending. Reluctantly, the Conservatives did undertake projects of an infrastructure nature to help spur the economy. Of course, this was not good enough for the opposition who constantly complained that the government was not spending enough. Then we had the obvious result, a deficit that reached $55.6 Billion 60.6 billion in 2015 dollars and of course the Liberals and NDP howled at what they called Canada's largest deficit. How hypocritical was that? Of course it was not really the largest deficit, as shown above, by 1986 the Liberals pushed the deficit to 75.1 billion in 2015 dollars. The other reason we are lucky is that instead of developing programs that would take on a life of their own, as the Liberals did in the past and I am certain that both the Liberals and the NDP would do in the future, the Conservatives developed temporary projects that could be run under existing administrations and that would run their course then disappear, resulting in a temporary deficit and we returned to surplus or near surplus relatively quickly.

Here is a chart showing Canada's Surpluses and deficits since 1975 in 2015 dollars:

Budget History

So as you can see, the Debt and the large interest payments that we have to pay every year are a Liberal legacy. Also, the largest deficit in Canadian history belongs to the Liberals.

Yes, there is an argument that the Mulroney government should have done more and it is fair to say that the Chretien government did the heavy lifting to get us into Surplus, although some of us have concerns about how they did it, mainly cutting transfers and the Military, it was in fact a problem created by the Liberals.

Here is a chart of the National Debt going back to 1975 in 2015 dollars:

National Debt History

The final issue I want to discuss is affordability. When a bank looks at an individual, they may look at what they are currently borrowing, but they will or should concentrate on what is the total amount they are borrowing, the total debt if you will and their income to determine if they can afford the debt. So is the case for a country. In the case of a Country, like Canada, we would normally look at its total debt and compare it to its income as measured by its Gross Domestic Product (GDP). The question to ask is: What is the Debt as a percentage of the Country's GDP? Put another way: How does the debt stack up against what the Country produces?

Below is a chart showing Canada's National Debt as a Percentage of its GDP:

Debt to GDP History

As you can see, in 1975 National Debt to GDP was under 20%, so adding more debt was not a great problem as our total debt was affordable. Then it grew and by the time the Progressive Conservatives got it, it was over 40% and growing out of control. It peaked out in 1996 at 67%. Now it is a little over 30% and in the affordable range again, as long as we keep it under control.

Our Future

As in democracy, voting is always a compromise. There will be no perfect candidate or party. We need to determine what the most important priorities are. I believe the economy should always be near the top, if the economy falters significantly, all the other stuff will not be affordable and the most vulnerable will be hurt the most. So, when you go to vote this October, maybe you should ask yourself who do you trust the most to keep our total debt under control and affordable? I know what I think!

References:

Budget History including the numbers used to create the above charts can be downloaded here.

Prime Ministers of Canada can be found here.

The numbers in the Budget history come from the Department of Finance's Fiscal Reference Tables, October 2014 which can be found here.

Inflation adjustments were calculated using the Bank of Canada Inflation Calculator that can be found here.

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Corporate Profits, Critical to Your Canada Pension Plan

July 23, 2015

If you are like many Canadians, especially those with little or no investments or pension, Canada Pension Plan (CPP) may be an important part of your retirement. In which case, the success of the Canada Pension Plan and by extension Corporate Profits will be important to you, probably more important than you think.

Originally, in 1965, the Canada Pension Plan was started by Lester B. Pearson's Liberal government. Unfortunately, it was effectively a pyramid scheme. The population was growing quickly and life expectancy after retirement was not very long. So the plan was started with the money collected being used to pay the pensions of those who were already retired. No need for funding, revenues will cover expenses on an ongoing basis due to a growing population and short life expectancies. Kind of like "the pensions will fund themselves," but I digress. Of course it did not work out that way. How could it?

So by the Nineties, we, Canada, had a sort of invisible unfunded liability that was considered to be around $600 Billion, comparable to the national debt, and growing. At the time, I was a member of the Tax and Economic Affairs committee at the Calgary Chamber of Commerce, and we along with others were sounding alarm bells. This was not sustainable and eventually something was going to have to give. Most working people that I knew figured that they would have to continue to pay into the plan but did not expect to get anything out. A lot of people still believe that. Luckily, the warnings were heard.

According to the Actuarial Reports, the plan is now solvent. This was accomplished by significantly raising the premiums that employees and their employers pay in, creating a fund and investing the funds in a manner similar to what other pension plans do. Now the funds are about 33% invested in fixed income investments, 17% in real assets and 50% in equities (corporate stocks).

As at March 31, 2015, the fund held 372 Canadian Publicly-Traded Equity Holdings worth $17.595 Billion, and 2,337 Foreign Publicly-Traded Equity Holdings worth $66.815 Billion. Here are some examples of the holdings at March 31, 2015:

Canadian Equities:

Canadian National Railway Co $554 million
Finning International Inc. $48 million
First Quantum Minerals Ltd $79 million
Fortis Inc/Canada $70 million
Gildan Activewear Inc. $73 million
Goldcorp Inc $170 million
Gran Tierra Energy Inc $26 million
Kinross Gold Corp $39 million
Magna International Inc $270 million
Manulife Financial Corp $444 million
Potash Corp of Saskatchewan Inc $333 million
Royal Bank of Canada $1,175 million
Seven Generations Energy Ltd. $590 million
Suncor Energy Inc $268 million
TelusCorp $87 million
TORC Oil & Gas Ltd $232 million
TransCanada Corp $213 million

Foreign Equities:

AT&T Inc $383 million
Agriculture Bank of China $23 million
BP PLC $144 million
Bank of America $412 million
Bank of China $37 million
Exxon Mobil Corp $334 million
Hitachi Ltd $94 million
Pfizer Inc $110 million
Procter & Gamble Co/The $540 million
Toshiba Corp $75 million
Toyota Motor Corp $542 million
Verizon Communications Inc $519 million

Corporate Profits are important to all or nearly all of us. Corporate Profits are what pay dividends and grow stock values. Both of which are critical to the success of the Canada Pension Plan as well as other pension and retirement plans. Without them, the plans will not be able to support those that are depending on them to fund their retirement. It is also worth noting, that this should be more important to those of lesser means than the wealthy.

It is true that the wealthier you are, the more benefit you are likely to gain from Corporate profits. However, the less dependent you will be on those profits and for the very wealthy it just becomes a number, as it really only effects what they have to reinvest into the economy, not how they live their life. For those of lesser means it is a different story, as they will be more dependent on the Canada Pension Plan, and for them if the Canada Pension Plan is not solvent, then they have a real problem.

So, as you can see, Corporate Profits benefit us all and it is fair to say that they are critical to the success of your Canada Pension Plan.

Previous Posts:

Corporate Profits benefit us in many other ways too. For more on this see my October 18, 2011 letter to my Member of Parliament on Corporate Taxes, Profits and the Economy.

Other Relevant Information:

Canada Pension Plan investment details and actuary reports can be found here.

More details on the CPP can be found here.

CPP contributions start at $3,500 annual income.

The contribution rate on income is 4.95% of income for both the employee and employer. Combined rate is 9.9% of income.

Maximum employee CPP contributions in 2015 are $2,479.95.

Maximum Employer CPP contributions in 2015 are $2,479.95 per employee.

Self-employed pay both the employee and employer portion.

In 2015 CPP contributions are maximized at $53,600 annual income.

In 2015 the CPP paid a maximum annual pension of $12,700 for those who started at age 65.

You can start taking CPP as early as age 60 or defer it to as late as age 70. Taking it early will decrease the pension while delaying increases it.

In 2015 Old Age Security paid $6,778.44 per year to those ages 65 and over.

You can delay your Old Age Security up to age 70 and increase the amount you will receive.

In 2014 if your income was over $71,592 your Old Age Security was clawed back at a rate of 15% of the amount of your income over $71,592.

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Correction on Alberta's Health Care Tax, It's even crazier than I thought

July 16, 2015 Update:

On May 21, 2015, I said: "As for our new Premier: Despite our differences, so far I believe she is an honorable person." I also indicated that I believed she understood the importance of the Petroleum Industry to Alberta and Canada and that she needs to tread with caution. Well, she certainly is not treading with caution, and so far based on her actions, who she is hiring in many senior positions and how what she is saying seems to change depending on the audience, in two short months I have come to severely question my comments of May 21. I hope I am proved wrong, but I am very concerned about the coming four years under this new Alberta government.

May 21, 2015 Update:

As the Progressive Conservatives (PC) lost the election, the budget items discussed below will never see the light of day. We will see what the NDP has in store for Alberta, in the meantime here are my initial thoughts: I give credit to the NDP for running a solid campaign, however, this was a protest vote, it is not so much that the NDP won but that the PC's lost. It is worth noting that the PC's plus the Wildrose got about 55% of the vote. I believe that the old Alberta PC party is dead, they just do not know it yet. Hopefully, either the two parties will merge or the Wildrose will swallow the PC's whole. I prefer the latter.

As for our new Premier: Despite our differences, so far I believe she is an honorable person, which is more than I care to say about the last two Premiers. I also think she knows that the petroleum industry is Alberta's, and Canada's for that matter, golden goose. She needs to tread with caution. I am sure that she also knows that while her majority assures her party's security as government for the next four years, she is effectively on parole, and in four years Alberta's voters will decide if she is a one term wonder or if this is a new beginning for Alberta's NDP party. Maybe she will read and consider my recommendations below. For now I will be optimistic and hope that we do not find ourselves regretting the election of May 5th, 2015.

April 2, 2015

On March 26th a few hours after the Alberta Budget came out I posted some comments. While my comments stand, thanks to a blog from our friend Kim Moody I now have more detail on how the Health Premium actually works. Let me say: "I stand corrected." It is even more convoluted than I first thought. Only a silly.... I mean civil servant could come up with something this ridiculous. Someone has way too much time on their hands. But apparently there is no fat to trim?

Anyway, as I currently understand it, here is what the Health Care Premium Tax effectively works out to (rounded):

$0 to $50,000 Taxable Income: 0%
$50,000 to $54,000 Taxable Income: 5% (this equals $200 at $54,000)
$54,000 to $70,000 Taxable Income: 0%
$70,000 to $74,000 Taxable Income: 5% (this equals another $200 at $74,000)
$74,000 to $90,000 Taxable Income: 0%
$90,000 to $91,333 Taxable Income: 15% (this equals another $200 at $91,333)
$91,333 to $110,000 Taxable Income: 0%
$110,000 to $111,333 Taxable Income: 15% (this equals another $200 at $111,333)
$111,333 to $130,000 Taxable Income: 0%
$130,000 to $130,800 Taxable Income: 25% (this equals $200 at $130,800 for a total of $1,000)

The final maximum is $1000 per person. While I completely disagree with the whole concept, wouldn't it have been much simpler to just make a 1% tax as follows: "A 1% health Care premium/surtax on income between $50,000 and $150,000" which BTW would have the same maximum of $1,000 per person.

So after adding in the tax rate increases and the Health Care Premium tax here is about what Alberta's currently fairly straight forward 10% flat tax will look like in 2019:

0.0 to $19,000 Taxable Income: 0%
$19,000 to $50,000 Taxable Income: 10%
$50,000 to $54,000 Taxable Income: 15%
$54,000 to $70,000 Taxable Income: 10%
$70,000 to $74,000 Taxable Income: 15%
$74,000 to $90,000 Taxable Income: 10%
$90,000 to $91,333 Taxable Income: 25%
$91,333 to $100,000 Taxable Income: 10%
$100,000 to $110,000 Taxable Income: 11.5%
$110,000 to $111,333 Taxable Income: 26.5%
$111,333 to $130,000 Taxable Income: 11.5%
$130,000 to $130,800 Taxable Income: 36.5%
$130,800 Taxable Income and up: 11.5%

Not so flat anymore and when added to the federal tax, Alberta's highest combined tax rate is 62.5% (not 72.5% as I previously stated) in 2019, albeit only on the $800 between $130,000 and $130,800. The Prentice government would have you believe that Alberta still has Canada's lowest top tax rate. Well, sort of.

My Recommendations:

I have been asked what I would do. Fair question. I have not spent a lot of time on this, something to do with running our business; however, here are some simple thoughts.

Things not to do:

It is usually not a good idea to raise your prices during a recession. The same goes for governments. Raising taxes may not result in the increase income the Province is expecting, it takes money out of the economy and as capital is mobile, it moves taxes to other jurisdictions. Something that has been working to Alberta's advantage lately. It is quite conceivable that these tax hikes will result in less tax revenue in total.

On the same note, they are correct that it would be an especially bad idea to increase corporate taxes. As I often note: There is a word for companies that do not pass on all their expenses including their taxes to their customers. The word is bankrupt. Increasing corporate taxes would ultimately increase prices to consumers and probably result in layoffs as well. This would be harmful to the economy and to society's most vulnerable.

Things to Consider:

Roll back civil service salaries. As the Premier loves to point out, we are all in this together. That should include the Provincial employees too. That is how it works in private industry, in real life. Hit the people at the top first and the hardest. For example: Nothing on the first $50,000, 10% on the next $100,000 and 20% on anything over $150,000. If the unions complain they will look very hypocritical and garner little support given the circumstances.

Put an end to all Corporate/business subsidies. Crony capitalism does not work.

Give bonuses to those who find ways to streamline processes and reduce their budgets/spending.

Review spending habits and reprimand those that go on spending sprees at the end of the fiscal year to use up their budgets.

Implement zero based budgeting.

Create an independent review board, mostly from the private sector (yes I hate creating another bureaucracy too) to review all government operations to ensure they are justified and not just empires. Shut down all those activities that do not serve a necessary purpose.

I am reluctant to touch this, but if you must raise taxes, and I reiterate, I strongly oppose raising taxes, then keep the flat rate and raise it by a small amount, maybe from 10% to 10.5 % but also raise the personal exemption by an amount like $8,000 to around $26,000 which will protect the lowest income earners and do the least harm. I hate raising taxes, it is self-defeating, but this beats the increases to income taxes and the Health Care Premium tax that the Provincial Government is planning. It beats it by a long shot.

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A Tax, Is A Tax, Is A Tax

March 26, 2015

Correction: While my comments below still stand, my original understanding of the actual mechanics of the Health Care Premium were not correct. For the actual effect of the Prenium, see my posting from April 2, 2015, Correction on Alberta's Health Care Tax, It's even crazier than I thought.

I may write more than this later, but suffice to say that I am very disappointed with the Prentice PC Liberal Party budget. They will no doubt claim to have only raised the personal tax rates a small amount, from 10% to 10.5% on Taxable Income over $100,000 starting in 2016 and try to claim the lowest rate in Canada for the highest income earners. But it is more complicated than that.

Let's face it, they can call it anything they like, but the new Health Care Premium, which they admit will not be put towards heath care, or at least not at first, is really a tax. So, while in 2014 there is no Provincial tax on the first $17,787, then there is a flat tax of 10% on everything over that the rates are going up over the next few years and if I understand it correctly, after adding in the tax rate increases and the Health Care Premium tax here is about what our fairly straight forward 10% flat tax will look like in 2019:

0 to $19,000: 0%
$19,000 to $50,000: 10%
$50,000 to $100,000: 11%
$100,000 to $150,000: 12.5%
$150,000 and up: 11.5%

Yes, in reality, our top bracket will be for the income group of $100,000 to $150,000 and is going from 10% to 12.5%. That is a 25% rate increase for that $50,000 by the way. Then the income over that will drop to 11.5%, but still a 15% rate increase. These plus of course the federal tax rates are the rates that any half decent tax planner will use when planning for their clients.

It is also worth noting that for the Health Care Premium, I guess to confuse everyone, they came up with the most complex way to say, or at least I think this is what it says: "there is a 1% health care premium/surtax on income from $50,000 to $150,000."

So apparently to the Prentice government who admit that we have the most expensive Provincial Government in Canada, the solution to our problems are to increase taxes and to make them more complicated. So I guess to them maybe that is tax reform?

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Apparently, 970,000 Scientists are Missing in Action

March 2, 2015

Before addressing the 970,000 I want to talk a little about the importance of skepticism. In business, while optimism is necessary for success, a healthy degree of skepticism is what keeps us out of trouble and from suffering excessive losses. For investors, it is always critical to be skeptical as that is what helps us avoid both scams and bad advice, especially when that advice sounds really good. In November of 1994 I wrote the first rule for Dave's Rules with the rule Guaranteed, the world's greatest false sense of security. Since then I have written over fifty rules, many of which were meant to help investors avoid serious mistakes by exercising a degree of skepticism. In science, without skepticism there is no science.

The scientific method, as taught in grade school, or at least it used to be taught, is that you develop a hypothesis, then you test it and try to disprove it. If it stands up, then it is accepted as a possibility, if it fails, then you have to rethink the hypothesis. Throughout history scientists, often lone scientists, have challenged accepted theories, sometimes at considerable cost to themselves. It was accepted that the earth was the centre of the universe and to suggest otherwise was blasphemy. You might even say that 97% of scientists agreed, or at least dared not disagree. However, a few brave scientists dared to question the settled science. Unfortunately, even though it is accepted today that they were right it did not end well for some of those scientists.

So I think it is fair to say that in most if not all fields, a healthy degree of skepticism is very important. It keeps us out of trouble and without it progress is difficult if not impossible. This leads me to my concern about how we just accept certain things that we are told. You might call them truisms. I often find myself frustrated by statements made by politicians and especially the press (who should be the ultimate skeptics) that are just accepted, yet if put to the test often do not pass muster. When people make blind statements, they should be brought to task. What is their basis for the statement? Does it just seem to be true? Show me the evidence! Is it based on a study or report? Show me the study or report! How did you come to this conclusion? Is it a fair conclusion? Can we duplicate your work? And that leads me to the 970,000 missing scientists.

It is stated over and over again that 97% of scientists, or was that climate scientists, or published climate scientists, or specifically selected scientists, or specifically selected from those that answered a survey, or maybe 97% of a group of papers might agree with...... and agree with exactly, What? Do they agree that the climate changes as it has for over four billion years, sometimes abruptly, that it is warmer now then it was 150 years ago at the end of a cold period referred to as the Little Ice age, that CO2 is a greenhouse gas and without greenhouse gasses there probably would be no life on earth? What is it that they agree on and who are those 97%? Not to mention, when did they agree, do they still agree? Show me the evidence, do not just make blind statements.

Here is some evidence? Over 30,000 scientist signed the petition for the Global Warming Petition Project. Of these over 9,000 held PHD's. The petition stated:

"We urge the United States government to reject the global warming agreement that was written in Kyoto Japan in December 1997, and any other similar proposals. The proposed limits on greenhouse gases would harm the environment, hinder the advance of science and technology, and damage the health and welfare of mankind.

There is no convincing scientific evidence that human release of carbon dioxide, methane, or other greenhouse gases is causing or will, in the foreseeable future, cause catastrophic heating of the Earth's atmosphere and disruption of the Earth's climate. Moreover, there is substantial scientific evidence that increases in atmospheric carbon dioxide produce many beneficial effects upon the natural plant and animal environments of the earth."

So does this mean that 97% of scientists disagree with above petition? Thirty thousand is 3% of 1,000,000. Ninety-seven percent of 1,000,000 is 970,000. If 97% of scientists disagree with the above petition, then someone should be able to provide a list of 970,000 scientists who disagree with the petition. Or are those scientists just missing in action. I have to ask again, where does the 97% comes from.

When a lot of people, especially influential people, say something, and repeat it over and over and over again, a healthy degree of skepticism is always in order. Even, maybe especially, if it rings true or is considered a truism. Why do they say that, what exactly are they saying and what is the evidence that they are correct? These are the kinds of questions that always need to be asked, and I encourage you to ask them.

Other Related Links

Here are some other relevant Links (hopefully they do not get moved or disappear on us.):

International Conferences on Climate Change (ICCC)

Dr. Patrick Moore's keynote presentation (30 minutes) at the International Conference on Climate Change #9, July 2014

Presentation by Dr. Arthur Robinson about the Global Warming Petition Project (15 minutes)

Why Scientists Disagree About Global Warming: The NIPCC Report on Consensus. (This link was added on December 26, 2015.)

Patric Moore's The Truth About Carbon Dioxide A 20 minute video. (This link was added October 4, 2016.)

Why Scientists Disagree About Global Warming A 96 minute Video presentation by Joseph Bast. (This link was added October 9, 2016.)

Friends of Science - 97% Consensus? No Global Warming Math Myths & Social Proofs PDF file. This link was added October 9, 2016.

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A Riddle From Dave

February 28, 2015

What do you get when you cross a Union with a Government?

See my answer below the Crocodile, which in my opinion is where Governments, Unions and their offspring usually belong.

Crocodile Picture

The Question was: What do you get when you cross a Union with a Government?

My Answer: A Marketing Board.

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Computer Models: The Great Deception

This is published in Financial Insight in the Articles section. However, I am also including it here, as we are constantly hearing about the use of computer models that claim to make a point on all sorts of topics and given way too much credibility without any real scrutiny, even when they are obviously failing. Hopefully, this will encourage a healthy degree of skepticism whenever and wherever computer models are used.

Published: November 25, 2014

Like many tools, when used properly computer models can be a great aid. They allow us to efficiently run what if scenarios and make some useful comparisons. In the investment world, these kinds of analysis can be very helpful. We even have one that is available free on our website, IFC Stockvaluator. It is a wonderful tool that helps us evaluate different stocks. It allows us to see different ratios, their trends, to chart different growth rates and to calculate an intrinsic value of a stock. This can be very helpful when kept in perspective; it can also be very dangerous if overemphasized.

There are two glaring weaknesses in any model. The first more obvious one is the old garbage in garbage out rule. If the data you input is not correct, well then neither is your output. The second less obvious weakness is that if the model does not correctly identify how different parameters interact (or omits important parameters) then the results will be wrong regardless of how good the inputs are.

So let's take a look at Stockvaluator. It calculates an intrinsic value of a stock based on one very important premise. It assumes that a stock is worth the discounted value of all its future earnings. We believe that is what a stock is ultimately worth. If however, our assumption is incorrect, then all bets are off. We would argue that while many things affect a stock's price, at the end of the day, it usually comes down to future earnings. If we are right we may have a useful tool, if not then we have a disruptive tool. Of course, even if our premise is basically right, if we do not correctly get how the variables interact, or miss some important variables, then even if the calculations are perfect our results will be wrong. Then there are the inputs.

In the case of Stockvaluator, there are several inputs that you have to enter after reviewing the company's ratio and earnings history. First there is the earnings per share starting point. This may seem simple, but maybe the current year is an anomaly. Then there are the growth rates. Crystal ball anyone. Finally there is the discount rate. You may know what you expect but what does the market expect and how quickly that can change.

So you might ask why we use this modeling tool. Well, it does allow us to run what if scenarios, for example, what if we raise or lower the discount rate, or what is the effect of different growth rates. We can also compare our results to what the market is telling us. Does the stock appear to be of good value, or are the differences significant and maybe we should have a lot more questions? Again, a great tool when used correctly and we do not over rely on it. This brings us back to our title, The Great Deception.

If you watch the investment press or listen to many if not most brokers and portfolio managers, it seems as if no one wants to do their job any more. Instead of doing the work of carefully analyzing companies and building solid portfolios of high quality companies, everyone is looking for a short cut. They seem to believe that they can create these computer models that will identify key factors and move in and out of stocks or markets and thus outperform them. Well, if you build enough different models, some will work, some of the time, sometimes for quite a while, but none will work all the time and some will build your confidence before letting you down in a big way.

While models have a place, they are just a tool. The world is just too complicated and it is constantly changing. There is no way that any model can take into consideration all or even most of the different parameters, know what they will be and how they will interact with one another. Yes, you can figure what would have worked for the previous year, maybe even decade, but nothing stays the same. We have no doubt that many if not most of the people building and promoting these models really believe that their models will work. Maybe after all their time and effort, they need to believe it. Maybe that is the Greater Deception. But do not be taken in, when it comes to something as complicated as the investment world, Computer Models are a tool, one of many, nothing more, nothing less.

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Canada Revenue Agency Must Have Missed the Memo

August 5, 2014

Recently the Federal Government of Canada while working with the Canadian Federation of Independent Business undertook an initiative to reduce red tape for business, more specifically for small business. While I applaud them in this initiative, it seems clear that someone forgot to send Canada Revenue Agency (CRA) the memo.

While I will give them credit for improving on line access to client accounts for accountants and must say that while it is not always the case, many of CRA's employees do a very good job, under what are sometimes difficult circumstances, helping taxpayers to sort out issues. However, in the area of rules and regulations, the organization, starting at the higher levels, seems to be looking for ways to push taxpayers offside of the rules, when the goal should be to try to make it easy for them to stay onside. It is clear to me that I and many other accountants believe that CRA is increasingly seeing penalties as a revenue tool rather than as a reasonable deterrent to non-compliance. So much so that many accountants are questioning why they should stay in public practice as all we seem to be doing is trying to avoid missing a form or some minor detail that will cause our client to have to pay a significant penalty even though there is no discrepancy in the tax calculations and it is all paid as required. Actually, tax is becoming the easy part, it is the minor non tax compliance rules that are killing us. One unfortunate consequence of this may be that many of the best and most conscientious accountants will eventually decide that they have many options and will leave the area of public practice.

Here are some examples of some of the totally ridiculous requirements of Canada Revenue Agency:

Foreign Property Disclosure Form T1135:

This form was introduced several years ago, presumably to make it difficult to hide offshore assets or income. Fair enough, however, this is just a disclosure of certain foreign assets, regardless if there is tax or not. Taxable income from these is required to be reported on Personal and Corporate tax returns. Not filing this form or filing it incorrectly does not affect the taxes due, and if you do not report taxable income on your tax returns, there are consequences. Again, fair enough. However, the penalty for not filing the form is effectively $2,500 dollars for every year that you should have filed the form. So, for example, let's say you reported all your income and paid all taxes due, but for 4 years, you do not realize you should have filed the form as you hold foreign stocks in your Canadian Broker account. The penalty would be $10,000 even though you reported and paid all the applicable taxes. This is just preposterous, as it would be so easy to not think to file the form or assume it is not required as it would be impossible to hide assets in a Canadian Broker account. But it gets worse.

Now the form is being expanded, and it appears that there are horrendous penalties for making mistakes. Before 2013 taxation years you just indicated the types of assets and the value by range for each category. For example, $0 to 100,000 worth of foreign stocks. Now for property held in Canadian registered security dealers you are expected to list the asset classes by country giving the maximum month end market value of each during the year and the market value at year end. For property not in these accounts, much more detail is required. For some things this may be fairly easy, but it will be very time consuming and not always a straight forward task. And, according to CRA's Table of penalties dated February 26, 2014, the penalty for making a false statement (could simply be a mistake) or omission (again could easily be a mistake) even though all applicable taxes are paid is the GREATER of $24,000 and 5% of the false statement or omission, with no exception for due diligence? Let us be clear, there are many ways to make an honest mistake when completing this form, not to mention that in some cases it is going to cost more to have an accountant complete this form then to prepare the clients tax return. Tell me that is not a revenue grab and an exceptionally erroneous and unnecessary requirement.

I repeat: Will someone please send the Minister the memo?

Update/Correction, November 7, 2014: It has come to my attention that for the Table of Penalties, the part about the penalty for an error or omission applies to people who, knowingly or under circumstances amounting to gross negligence can get the penalty of the greater of $24,000 and 5% of the false statement or omission. So in all fairness this part would not cover an honest mistake. However, the detail requirements of the form and the penalty for not filing it are still very excessive in my opinion.

Penalty For Missing T slips:

T slips include things like T3's, T4's T5's etc. These are prepared by employers, corporations, institutions etc. and are filed with the government, usually electronically. CRA normally cross references these with personal tax returns and automatically picks up missing slips. Usually a few months after the filing deadline. So if one is missed by a taxpayer, it will eventually get picked up and the return corrected by CRA. In the past this has worked quite well and is good, as let's face it, most people are not as organized as they could be and there are numerous ways that a slip can be lost, misplaced or just not make it to the taxpayer. However, now rather than just fixing the error and maybe charging a little interest, CRA has implemented penalties for missing slips if you do not report them to them before they pick it up. Now there are thresholds so you will not get a penalty the first time or if you have not missed a slip in the last three years. Still, many, maybe most people can be missing slips and not know it. It is not uncommon for slips to show up late or not at all, and since CRA gets copies and will ultimately make the correction, I do not see how this is anything more than an unreasonable revenue grab that punishes honest law abiding citizens.

Schedule 88 Internet business activities:

This one I find to be just unbelievable. Someone has way too much time on their hands, but not the accountants and their clients, at least not any more. Here is a link to a pdf of the form.. This form for 2013 and later tax years is required if your corporation earned income from one or more webpages or websites. Sounds simple enough until you read on to the explanation of what it means to have income from a website. The first item is simple, if you sell goods or services from your web site and process transactions. But then (in summary) it adds the following:

1: If a customer can call, complete and submit a form or email a purchase, order, booking.
2: You sell on auction, marketplace or similar sites.
3: You earn income from selling advertising, income programs or traffic generators.
4: Then it goes on to say that if you do not have a website but have created a profile or other page describing your business on blogs, auction markets, or other portal or directory websites from which you earn income.

To complete the form you must enter:

A: How many Internet webpages or websites you earn income from.
B: Provide the URL (web address) of the 5 pages that generate the most revenue.
C: Indicate the percentage of income generated.

In our case, we do not do business on the internet, so I guess we do not have to complete the form. But wait: Isn't a website effectively an advertisement. From time to time people contact us regarding our services after finding our web page. Maybe we qualify under item 1 above, as a customer can call us and hire us? Or what about our profile on Industry Canada's site, what about a Face Book page, for that matter maybe I should include Google's search engine.

I do not think Heinze Group companies need to complete this form, but then maybe we need to, I wonder what the penalty is if we do not complete it and I am wrong. And, when we do, there are about 70 webpages on our website, anyone of which could lead a new client to us. I wonder which 5 produce the most income. As for percentage of revenue, I don't have any idea, probably zero. What was that definition again?

Once all is said and done, what has been accomplished? Is this a make work program or just an excuse for government employees to spend their work day surfing the net. I have said it before (See my February 18, 2014 post; I am Sorry Mr. President but I did build that!). "We did NOT build our businesses because of the government, we build them in spite of the government."

Update November 7, 2014: While it is difficult to find, and searching Schedule 88 takes you to the schedule, not this page, there is a page on Canada Revenue Agency's web site that has some (albeit not a lot) more detailed explanation. The page is titled Reporting Internet business activities. I would like to thank our friends at Video Tax News for providing this link.

Personal Service Corporations.

This has been an area of contention for a long time. The problem arises when Canada Revenue Agency deems that a contractor who is hired through their company would effectively be an employee if it were not for the existence of the corporation in which case their corporation is deemed to be a Personal Service Corporation (PSC). When it does than certain expenses are not deductible (essentially those that a normal employee could not deduct) and a special added tax is applied so that the PSC pays more taxes than it would if they were not a PSC.

While I believe their concern is way over blown, CRA does have a couple of legitimate concerns. Mainly that a corporation should not be used to give an employee extra deductible expenses or for someone who is effectively an employee to be able to split their salary with a spouse by giving them dividends. While these may be fair concerns, determining if a company is a PSC or not is by necessity anything but clear and more often than not a matter of opinion that can come back to haunt a taxpayer when CRA staff and their accountant legitimately disagree.

This extra tax on Personal Service Corporations is draconian and often unfairly applied to small micro (often 1 person) businesses that play an important role in running an efficient business economy. I am sure there are abuses; probably the biggest abuse is contractors working for the Federal Government. However, in the business world, there are many contractors, often professionals, who go from client to client, contract to contract who do not have the luxuries of employment as they really are independent contractors. These contractors, by the way provide a labor mobility that improves the efficiency of other usually larger companies by providing them with extra temporary help when they need it without having to make long term commitments. It is unfair to hold this Personal Service Corporation extra tax threat over their heads because some auditor might think a contract went too long, or the client provided too much equipment, a work space, wanted to ensure who was working for them, or some other excuse.

There are better ways to deal with this. The best way is to flatten the tax rates or allow income splitting, but that is a discussion for another day. In the meantime, it can be difficult to make the determination if a company should be a Personal Service Corporation or not, that is probably just a fact of life. However, instead of disallowing specified expenses and assessing an extra tax, maybe the rules should be rewritten, still disallowing the specified expenses but removing the extra tax on PSC's and deeming that all dividends from a PSC be taxed in the hands of the person doing the work.

I think that is a reasonable compromise that most of us would be comfortable with.

T183:

CRA wants accountants to electronically file Tax returns by the deadline, but requires us to have a signed T183 on file before electronically filing them. This may sound reasonable, and we prefer to have the form signed and in hand, but in the real world, it can be a problem and is sometimes impossible, leaving two options, file late or file without the signed form. The latter is not an option for many of us as we are expected to have the signed form before filing or at least a copy, faxed or otherwise. The problem has two parts: First, the form has personal information on it and therefore we will not fax it or email it, we will only transmit it encrypted through a secured server. Then we advise our clients to return it the same way, but they do not always listen. So Canada Revenue Agency, who claim and I believe them that security of information is their top priority, unwittingly contributes to the unsecure transmission of personal data. The second part is despite what Canada Revenue Agency might like to believe, most taxpayers lives and businesses do not revolve around April 30th and they may not be available the last few days or more of April either personally or electronically.

In the past in a crunch we dealt with this issue by filing an unsigned paper return, and if CRA wanted it signed they could get it signed later, but in my experience they never did ask for a signature, so I guess they did not really need the signature that badly. Now they are discouraging paper filing and charging a penalty to professionals for filing paper returns.

This could be simplified by requiring professional accountants to have engagement letters or a preapproval by specified form or to document verbal approval or something to that effect that would authorize the filing of the return. But then that might make compliance too easy, or am I getting sarcastic?

Tax Preparation Fees:

Tax Preparation fees on personal tax returns without business income is not deductible. Some twenty or more years ago I had a computer guy explain to me that pretty soon our services would be obsolete as computer software would make it so no one needed us to do their taxes. If only that were so. I did not believe it then as I always maintained that tax preparation was a small part of our service, but it should be clear by now that completing one's own tax return can be a scary proposition. Getting the tax right is the least of your worries and when there is an error, it can usually be easily fixed. The problem is the penalties for missing a form like T1135 can be excessive, even if there is no tax implication. For many people, even those without business income, doing their own taxes is not a reasonable option. This is not their fault, but they need professional help due to both the complexities of the tax act and CRA's excessive reporting requirements. It seems only reasonable, especially in light of Canada Revenue Agency's apparent addiction to penalty income that the fees they pay should be tax deductible.

CRA Wants to Approve Tax Preparers

Is there no end? I am not going into this here; see my March 23, 2014 post Canada Revenue Agency's Power Grab.

Remedies:

I would be remiss if I did not point out that there are several remedies in place to deal and often reverse unfairly applied penalties. And yes, we all know that the IRS in the United States is much worse. However, first, the remedies can take a long time, be costly (professional fees) and the results are after the fact and never certain. Secondly, saying that the IRS is worse is not good enough. That is kind of like a rapist telling a judge that he is not as bad as the other guys, as they rape and murder, so he is okay. We expect better in Canada, as we are after all "Proud to be Canadian."

Final Note on Details

It is worth noting that some of the items above are moving targets and the exact details are not always clear so some of the detail may not be quite right. However, I think I have made my point which is what I set out to do.

CRA Staff:

To end on a high note: As in any organization, there are bad apples, however, we have had many good relationships with many of CRA's line staff who for the most part are just trying to do their job and want to do it well. The concerns noted above have more to do with policy and an overall agency direction that needs to change.

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Canada Revenue Agency's Power Grab

March 23, 2014

If you will allow me to indulge myself, let's take a minute and consider: What if you were accused of a crime. Maybe you are guilty, maybe not, or maybe it is just a matter of how you interpret the law versus how the prosecutors interpret the law. It does not matter. You are entitled to choose a defense lawyer and defend yourself. Unlike some places, in Canada that is your right. But what if you were to lose that right. What if upon being charged the prosecution handed you a list of their approved lawyers. The ones who behave and interpret the law in a manner that suits them. Would you be okay with that? Well, in the area of taxes, in Canada, I fear we are moving in that direction.

While I believe it was not the intention the stage was set years ago by Canada Revenue Agency (formally Revenue Canada) controlling which Tax Preparers can electronically file tax returns. In fairness, there may be or may have been some valid reasons for this and I am not aware of this control ever being abused by Canada Revenue Agency (CRA). However, starting with 2013 returns, for Tax Preparers who file over 10 returns a year, Canada Revenue Agency added a penalty of $25 per return for personal tax returns ($100 for corporate) that could have been electronically filed but were not. Again, in fairness, if a preparer is barred from filing electronically, then I believe the penalties are waved. This all took place with little or no objection, perhaps because we did not see what was coming next.

Currently, Canada Revenue Agency is investigating the option of keeping a list of Approved Professional Tax Preparers. This is not just a list of who they like; it would be a list of who you can hire to prepare your tax returns. Kind of like, if you like your accountant, and we like your accountant, then you can keep your accountant. In discussions with the profession, they have also presented the option of going into the Preparers offices and reviewing their procedures and ensuring that certain steps are followed like getting proper authorizations from clients etc. Then they could take corrective action where they deem it necessary. While this may still seem innocent, it leaves the door wide open to Canada Revenue Agency approving or rather not approving a tax preparer because they think that preparer applies the rules too aggressively, files too many objections, makes complaints to their Member of Parliament, fights them in tax court, or, well, for just about any reason that suits them.

Now you might be thinking that there needs to be some controls over who can do what, and for the most part I agree. However, it is my understanding that in Canada regulating the professions and trades is a Provincial jurisdiction, not a Federal one and each Province can regulate its professions and trades as it sees fit. Where there is a genuine need to protect the public, it makes sense to have rules about who can provide certain services, procedures or even products. However, the job of controlling the professions and trades should always be separate from the enforcement branches, prosecutors, police and in this case Canada Revenue Agency.

Whether there should be controls over who can prepare tax returns is open for discussion. Personally I think it should be left up to the customers. Individuals and companies should promote their qualifications etc. and then the customer should be free to decide who they want to hire. Just to be clear, regulating tax preparers would probably benefit my business by decreasing competition, but that is not the point. In my opinion it is an overreach that will ultimately decrease competition, increase cost and in some cases send some Preparers underground, especially the smaller Preparers in remote areas who do mainly simple returns.

In any case, in my opinion, it is not clear if Canada Revenue Agency has the right to regulate Tax Professionals, and even if they do, in a free society, they definitely should not be involved in this process.

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I am Sorry Mr. President but I did build that!

February 18, 2014

Like many small business people: NEVER, in my life have I been so insulted as when I listened to the President of the United States during the 2012 election campaign tell me and millions of other business people that we didn't build our business and that we only succeeded because of the government. Well let's be clear, we did NOT build our businesses because of the government, we built them in spite of the government.

The government might have put an infrastructure in place that made life easier for all of us, business and non business people alike, but let us be clear, they did it with our money. Let us also be clear, that governments at all levels are constantly putting up road blocks and bureaucracies that make it very difficult for businesses to survive let alone succeed. That is something they do excel at.

Yes, lots of people work hard and are smart. However, they do not take the risks that the owner operators take. If the government has a cash flow problem, you, Mr. President, still get paid, you do not have to mortgage your own home and personal assets to keep things going. However, the vast majority of those who have built a business will be able to tell you about the times when they not only did not get paid, but drained their personal bank accounts and put up their home and/or other assets as collateral so that their employees could be paid and they laid awake at night wondering if they would lose it all. And, the statistics will show that many of them did lose it all. So Mr. President, there is a difference, not to mention that in my experience the definition of working hard for the average gainfully employed person is somewhat different then the definition of working hard for the self employed.

So Mr. President, those who built their businesses in spite of the government deserve your respect, not your patronizing attitude. Perhaps if you had ever really built something, or done something outside of government and academia, you would understand that.

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Seeing Can Be Misleading

This was published in Financial Insight in 2012. However, I am including it here, as we are constantly being shown charts that claim to make a point on all sorts of topics. While there is the obvious concern over the accuracy of the data, there is also the concern that how it is presented can also be very misleading. Therefore, a healthy degree of skepticism is always in order.

Published: 2012

There is an old Accountants/Auditors joke. I first remember hearing it in 1978 when I was a young Auditor with the Office of Auditor General of Canada. It goes something like this:

People are being interviewed for a job. The first one is asked the question "What is one plus one." The applicant frets over it a minute, it must be a trick question. But finally answers."Two." The second applicant is also asked "What is one plus one." This applicant also frets over it a minute, it must be a trick question. But finally answers."Two." The final applicant is an Auditor and is asked "What is one plus one." The Auditor thinks a minute, then thoughtfully answers. "What would you like it to equal?"

There is the old adage that numbers do not lie. Maybe not, but they can certainly be misleading. The same goes for statistics, charts, models and rules, if they are not applied correctly. In this case I am going to discuss charts.

Following are a number of charts showing investment returns. Take a minute and have a look. Which ones do you like?

Group of 4 Charts

So which ones look good? At first glance, would you say that Chart B (top left hand) looks like a pretty smooth but only slightly upward return, Chart D (top right hand) is downward, while Chart A (bottom left hand) goes up but is very volatile and that Chart C (bottom right hand) has a nice steady upward trend?

Now look more closely. Would it surprise you to know that all of these charts represent the return of my personal portfolio? That's right, these are all different representations of the same portfolio, yet at first glance they each seem to tell a different story. All I did was play with the scales and the time frame. Which one someone shows you might depend on what message they want to convey.

Chart B is a log chart of January 1 1998 to December 31, 2011 (14 years). Normally I like log charts, as they make a straight line a straight line. That is they adjust the scale as the values increase which removes the distortion of an investment with a steady return taking off. Let me explain. On a normal chart, a 10% return on $1,000 is $100 while on $10,000 it is $1,000. Therefore, a constant 10% return looks steeper as the value increases. So on a regular chart the current returns can look better or more volatile than older ones only because they are on a larger scale. On a growing portfolio, a logarithmic chart removes this distortion and can be more meaningful. Chart A (below chart B), is the exact same data, but on a normal chart. The problem with Chart B is that because scale is so large it has flattened out everything and is hard to decipher. The problem with Chart A is that the more current numbers look more volatile because for example a 25% drop on $3,000 is 3 times larger than a 25% drop on $1,000. Below I will show a better logarithmic chart but for now let us move on to Charts D and C.

If you look closely at chart D you will note that it goes for the relatively short period of May 2007 to February 2009 while Chart C goes from a little longer period of May 2003 to September 2007. If I want to brag, I would show you chart C, steady growth with minimum dips. If I want to scare you I would show you chart D and tell you how the stock market is for losers.

Now for emphasis below is Chart D&M. It is really the same as Chart A but with a whole lot of trend lines drawn through it. As you can see, by carefully picking the period, I can really change the story.

Normal Chart

Of course charts can be helpful. Below is Chart E, the one I like. It covers the whole 14 year period, but it is a logarithmic chart and of a useful scale.

Better View

This is a much more representative chart. The period is long enough to be meaningful, the scale is such that you can see what happened and the later ups and downs can more easily be compared to the earlier ones. You might say that it shows a pretty good long term trend where losses happen but are made back and then new gains are made. You could also say "you can run, but you cannot hide." That is to say, the overall trend is good but while the volatility is not distorted to look greater than it is, it is also there and clear to see.

Charts and graphs are used in many disciplines and are a valuable tool that helps us to interpret data. I use them all the time. However, whenever you look at one, whether it is financial, statistical, a voter poll, weather, climate or anything else for that matter, you need to look at it with a degree of skepticisms. What are the scales, should it be logarithmic, what is the range, what is the margin of error, are you looking at the right or relevant information, how can this be misleading and finally, of course, how can this be helpful in decision making while not being misleading.

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Comment to my Member of Parliament on Crown Corporations

The following is copy of an email I sent to The Hon. Ted Menzies, who was my MP at the time.

May 8, 2013

Hi Ted,

I just caught a few minutes of Question Period on Sun News.

I could not believe that the Leader of the Opposition thinks Crown Corporations are independent of Parliament!

I own shares of several corporations. If I heard that the Management of one of my companies, thought it was or was acting as if it was independent of the Board of Directors, and therefore the shareholders, as the Board is their representative, I would want that management fired. Or if a Board member thought that Management was independent, then they should be removed from the board.

Likewise, Crown Corporations are owned by Canadians. That makes them my companies. Parliamentarians are my representatives and accountable to me and all other Canadians. The management of these companies, my companies are accountable to my Representatives. If either one do not agree, they should be replaced.

Dave

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Letter to My Member of Parliament.
On Corporate Taxes, Profits and the Economy

The following is copy of an email I sent to The Hon. Ted Menzies, who was my MP at the time. Ted did respond thanking me for my well thought out analysis and indicating that he might quote me in Parliament. I have no idea if he ever did.

October 18, 2011

Hi Ted,

> I notice that the Opposition love to comment on how many companies are saving their profits and not reinvesting and hiring. During the election, my sister wrote me asking me how important are the Corporate Tax cuts. Below is my response. Maybe some of this will prove useful when countering the claims:

Below is my original reply:

Anyway, the Tax Cut. I can explain that without getting mad.

Keeping in mind that everything is a huge over simplification. And so is this, despite the length.

I love how we play with numbers. I believe the cut is only about 1 billion per year, (unless the economy grows, in which case they will get more corporate taxes in total but the cut will cost more in theory). The 5 B number is over 5 years. I am surprised that they don't call it 100 B over 100 years). Also it does not kick in to 2012 or 2013.

The amount is not that significant, either way, but a stable tax system is very important to industry. You will often here from industry that if you just tell us what the rules are, are going to be and apply them fairly, we can work with that. It is the not knowing that is worse. Less stable countries need very high and quick returns as business knows you have to get your money out before the local government changes its mind. Capital is very mobile, just look at your portfolio and where most of the companies do business. When you start changing the rules by increasing taxes or expected tax rates you increase the perception of instability.

Also, a quick note on corporate tax rates. Yes we have the lowest rates of the G8. This is good. We also have the best economy BTW. However, we are only average for the G20 or when you consider all the industrialized countries around the world. (I am not sure if we are average for all or the G20.) Reality 1: We have to compete with all the countries around the world, including the developing ones, not just the G8. Reality 2: It is not good enough to be good now. The world is a competitive place, our competition keeps getting better, so we must be proactive to stay in front. BTW, this is a good thing. As we all get better, we pull each other up and more people around the world enjoy a better standard of living, and despite all that is happening, overall more people are beginning to enjoy a better life. I could go on about the global benefits of cheap energy and more efficient agriculture, etc. but that is for another time.

Anyway, stability is probably the most important issue, but here is the rest of the argument.

The opposition are exactly wrong when they say giving the cuts to those who need it least, but it is a great sound bite. First lets remember Dad's line. "Corporations do not pay taxes, people do." To explain this, I like to ask: What is a word that describes a company whose customers do not cover all their expenses including taxes? The word is Bankrupt. Maybe not immediately, but eventually.

Now, cutting tax rates puts more money in the hands of the successful businesses. The more successful they are, the more money they will have and the more taxes they will pay. So the question is, what happens to the money?

Some would have you believe that it goes into a deep dark hole and straight to hell. I obviously disagree. When companies have more money they normally do one or more of the following.

    Grow their business and hire more people. This is good, more people are working and have more to spend that also helps the economy. This also helps the government. First because these people pay more taxes. Secondly, there is less demand for government social programs. So the government gets some money and saves some too.

    Give staff raises. Again, they have more to spend and pay more taxes.

    Pay off debt. The effect here is less direct but still positive. Less demand for credit, lowers everyone's interest rates including the governments.

    Leave the money in the bank. This happens less, but it does happen. However, that increases the amount of Capital available. Banks make money by borrowing from party A and loaning it to party B. So, savings increases the available funds and makes getting credit easier. And, since, in the end supply and demand rule, interest rates are lower. Again, even for government.

    Pay dividends to their shareholders. This also is good. The shareholders pay tax on the dividend and reinvest or spend the rest, starting the positive cycles all over again. BTW, it is worth noting that most companies only pay out a small portion of their profits to shareholders. The largest portion is reinvested to grow the business (see item 1). This is especially true of the petroleum industry.

So, it is fair to say that the corporate tax cut is good in a number of ways. It stimulates the economy and in the end, $1 billion tax cut does not cause $1 Billion, as some will be taxed back in other ways and it will decrease the need for social programs like welfare, thus reducing government spending.

The exact benefit of a cut cannot ever be determined. We can create computer models with lots of assumptions and include some but not all factors, as we do not know all the factors or their real effect. Since there is only one Canada and one planet earth, in one universe, at least that we know off, it is impossible to run a real controlled sample with a bunch of real comparisons, with only one or more different variables.

However, I believe the following is approximately what most of the things I read come up with.

The cost to the economy of $1.00 increase in taxes or alternatively, benefit of $1.00 tax cut:

GST: $1.10
Personal Taxes: $1.40
Corporate Taxes: $1.80

Put another way, a corporate tax cut of $1 creates $1.80 more wealth overall.

So in answer to the Question. It is not a significant amount and by the time it takes effect the economy should be well into recovery. So financially it is not a big deal to either business or the government. But the message it sends is important. Maybe the right question is: Do we want to be seen as a leading stable competitive country to invest in, or as one of the other guys? Because, this is a part, albeit a small part, of that equation.

BTW, The Frasier Institute publishes a lot of great research reports. Their Frasier Form Magazine has good articles summarizing many of them. I get it mailed to me since I am a contributor, but you can find it online for free here.

On another interesting note. One of the past articles in Fraser Form Mag., concluded something like "this is the largest recession since the great depression, but only if you do not measure it. If you actually measure it, there have been several worse ones."

A Further Comment:

This was not in my original response to my sister, but I would like to add that sound business and a stable banking system are the backbone of a solid long term recovery. While we all want to see companies invest for the future and hire more people, if they do it too soon, before there is enough demand for their goods and services, or the Government spends too much trying to fill the temporary gap, in the long run they may well weaken things and do more harm then good. Further, while we all want to see the banks actively loaning money and consequently stimulating the economy, if they loan money to those who cannot afford to repay the loans, they will wind up doing more harm than good, and everyone will pay for that. As an accountant, I can tell you that more than once I have witnessed those terrible bankers saving their clients from themselves.

Of course, the clients never appreciate it!

Dave

Related Post:

See also my July 23, 2015 post: Corporate Profits, Critical to Your Canada Pension Plan

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