Why Investing Gets Complicated for Corporation Owners | Ep.57

Investing gets more complicated once you move beyond RRSPs, TFSAs and simple registered accounts. For Canadian corporation owners, incorporated professionals, and investors with taxable accounts, the type of income your investments generate can matter almost as much as the return itself.

In this episode of the Plain English Finance Podcast, Tré and Sierra discuss three core investment concepts that help explain how financial planning, tax planning and portfolio construction fit together for corporation owners. The episode focuses on investment income types, how to think about risk, and why a consistent investment philosophy matters when taxes and corporate accounts are involved.

In this episode, we discuss:

•  Why investing becomes more complicated in non-registered and corporate accounts 
•  The three main types of investment income: interest, capital gains and dividends 
•  Why GICs, bonds and fixed income create interest income 
•  Why capital gains are treated differently from interest income 
•  Why Canadian dividends can have a different tax profile 
•  Why RRSPs change the tax treatment of investment income 
•  Why asset location matters across RRSPs, personal taxable accounts and corporations 
•  Why “risk” should not only mean volatility 
•  Why fixed income may become riskier over long timeframes 
•  Why market ups and downs are a feature, not a flaw 
•  Why low-cost, globally diversified investments can simplify planning 
•  Why turnover matters in taxable accounts 
•  How active management can create unexpected taxable capital gains 
•  Why corporate investment decisions should be made with tax drag in mind

Learn more about working with Tré Bynoe, CFP®, CIM®:
 https://trebynoe.ca

This podcast is provided as a general source of information and should not be considered personal investment, tax or legal advice. Consult your financial, legal and tax professionals before making changes to your financial plan.

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Transcript

Tre 0:00

There's so much to learn about wealth management that it can seem overwhelming. In this episode, we're gonna talk about the three main things that might need to know in order to better work with somebody like me and understand the basics of what we're doing and why. So what we're gonna talk about is, yeah, three things I kind of try to whittle, whittle the world out there, the wealth management world, the financial planning world, the investment world, into three main concepts that people would need to understand if you are corporation owner. In order to understand 80% of what we're doing and why we're doing it. Okay.

Sierra 0:43

Okay.

Tre 0:43

Um, oftentimes when it comes to type decisions about who work with, but what type of strategies to use, things like that. It can be very overwhelming, be even overwhelming for me, let alone... and I live and breathe stuff. Mm-hmm. So it would be very overwhelming for the average person.

Sierra 1:05

Yeah.

Tre 1:06

I often describe financial planning and investment management and things like that as that cog, which actually I bought a toy to illustrate this. And I,

Sierra 1:15

I think knows what you're, yeah, I think everyone, everyone knows what you're talking about, but yes, as soon as you said that, I was like, where did that thing go?

Tre 1:22

Yeah, I bought it so I could use it and twiddle the toy. I don't I'll find it back. I think I know where it is. But anyway, as as you, when you move one thing, like some gears, everything else adjusts accordingly.

Sierra 1:35

Mm-hmm.

Tre 1:35

So when it comes to the that I approach financial planning, There are some gears that I have stuck. to they don't move, they're not gonna move positions. And that allows me to move other areas around that.

Sierra 1:52

Okay. Yep.

Tre 1:53

So instead of

Sierra 1:54

Probably like the toy, most of the time there's ones that are stuck in place.

Tre 1:58

Yeah. That you're not gonna move. And those, so we are gonna talk about some of those items that,

Sierra 2:04

So those are the three?

Tre 2:05

That don't, not quite, but they help explain why my process is the way that it is. A lot of people, they... I think customization sounds good. Mm-hmm. To a lot of people. Until you realize in this world how deep rabbit hole goes if you truly, truly try to customize everything. So there are some key things that I do the same way and they're kind big pillars. Okay. So first concept that you need to understand is. Sorry, did I mention who this is for?

Sierra 2:42

Corporation owners?

Tre 2:43

Yeah. So you're, you've basically, you're at the point where you have a fair amount of complexity your financial life. You're likely investing in non-registered taxable accounts. You likely have a corporation and you are. Your life's a little bit more complicated than the average person, okay? Mm-hmm. So, 'cause the average person you can of walk into anywhere, and the investment thesis doesn't really matter if it lines up with financial planning and tax approach and things like that, because there's a lot of tax sheltered stuff that the government gives you order to try to navigate these. waters pretty easily.

Sierra 3:22

Mm-hmm.

Tre 3:23

As soon as you are now investing in non-registered accounts and things that, suddenly it's a big switch that happens that you from this really simple approach to, okay, now I have learn so much, or you think you have to learn so much because.

Sierra 3:39

So things change.

Tre 3:41

Things change, right?

Sierra 3:42

Yeah.

Tre 3:42

But it goes a level one complexity to like a level seven so quickly just by now investing, non-registered. And it seems like such small step, but that is a big, It's a big change on how now approach, approach some of theses finances. So,

Sierra 3:57

So this is only for corporation owners, or is this non-registered is complicated for everybody.

Tre 4:02

Non-registered is more complicated for everybody. Corporation owners, there's two tax codes to abide by. So it's exponentially more complicated because of that.

Sierra 4:12

Yeah. Yeah

Tre 4:13

so yeah, so first concept is three main types of investment income. Do you what those types are?

Sierra 4:21

Investment income is, not interest. Is that that episode? Yeah. Is that referencing that episode? Okay. Let me like find it in my memory log. Dividends

Tre 4:34

is one. Yeah.

Sierra 4:37

And what? I can't remember the names.

Tre 4:39

Capital gains.

Sierra 4:40

Oh, capital gains. Yeah.

Tre 4:41

And then other incomes. So that includes interest,

Sierra 4:43

capital gains. I don't know why that one. I can never remember. Like dividends or salary. That's because that's what I always link. That was a different episode. Yeah. Yeah, that's what I always link to anyway... Sorry.

Tre 4:53

So interest, what do you get interest from?

Sierra 4:59

From. The bank.

Tre 5:03

Okay. You get interest from fixed income. So like GICs, bonds. Anytime you're lending money to somebody else for a fixed return,

Sierra 5:11

yeah,

Tre 5:12

it's gonna be interesting income. Then you have capital gains. When get a capital gain?

Sierra 5:18

Sorry, what do you mean? When do you get a capital gain?

Tre 5:20

Yeah. What do you get capital gains from? What's a capital gain?

Sierra 5:22

Like from your investments,

Tre 5:24

But why would you get a captital gain?

Sierra 5:26

Because you've gained on your capital. That's literally, I'm like,

Tre 5:31

so it's when something increases in value.

Sierra 5:33

Yeah. You've gained on ca, you put the capital in. The capital has gained, that's your capital gain.

Tre 5:39

So when you sell something for more than you paid for it. Yes. That is a capital gain.

Sierra 5:44

We're saying the same

Tre 5:45

No, we're not because that capital could gain from interest. Gosh, that capital could gain from the, like your,

Sierra 5:52

so it's when you sell. When you sell, right?

Tre 5:55

Yes. That that needs to be just

Sierra 5:56

because your investments have grown. That's not the capital gain yet. until you sell it. Like if you go into your portfolio and you're like, oh,

Tre 6:06

you don't,

Sierra 6:07

would you call it

Tre 6:08

Kind of you, you don't realize the capital gain until it's sold. Or a disposition, But it's still a capital gain. It's just a difference between what something you paid for and what it's worth today.

Sierra 6:20

Right.

Tre 6:21

Okay. And then there's dividends, which is what? Oh gosh. Okay. It's dividends is where you pulling, where you own like a stock you own a company and it's distributing some of of its, some its cash to shareholders.

Sierra 6:40

Yeah.

Tre 6:41

Okay. So the three, the three main different types. So. To review quickly. for interest income, uh, we're gonna just use the top marginal tax rate, so how much you would pay in the highest tax bracket. You'll be paying 47.5% of it to taxes. Yikes. If that money is a corporate corporation, you're paying 52.7% to taxes.

Sierra 7:07

Wow.

Tre 7:08

For a capital gain if you are personal, non-registered account, so most you'd pay personally is 23.75%.

Sierra 7:17

Okay. That's a big drop.

Tre 7:19

Big drop. And in a corporation, 26.3%.

Sierra 7:22

Mm-hmm. Okay. Okay. It's better than the personal.

Tre 7:25

Yeah. Well, no. 23% personal. 26%.

Sierra 7:29

Oh, sorry.

Tre 7:29

Corporation. Dividends is 29.6 for both. Canadian dividends.

Sierra 7:36

Okay.

Tre 7:36

Canadian dividends only. We're not gonna touch on the other stuff. What about a RSP? This a slightly different concept, I guess.

Sierra 7:46

Yeah, like

Tre 7:47

With a RSP, when you pull out, you pay tax on the full amount.

Sierra 7:53

Yeah.

Tre 7:53

So the marginal tax rate that you would pay, doesn't matter what type of income it is.

Sierra 8:01

Okay.

Tre 8:01

So you would want your most expensive type of income to be earned within RSPs.

Sierra 8:11

Okay,

Tre 8:12

so what would your most expensive type of income be?

Sierra 8:14

Fixed income,

Tre 8:15

Correct. So you'd want your interest income to be earned inside of RSPs. You would want any capital gains earning investments to be held personally and inside a corporation. And same with Canadian dividends. Foreign dividends is a different case. We're not gonna get into that. Okay. That's,

Sierra 8:37

please don't

Tre 8:38

it. I'm trying to keep it simple for, for this one. Yeah. Okay. So that's, that's the first that you have to understand. Different types of investments earn different types of income, and you can tell what type of income a, an investment gonna earn by the way that that money is invested. So very, it's very seldom a surprise that

Sierra 8:57

yeah

Tre 8:57

the money is suddenly earning interest. It's like, no, it's of course it's gonna be interest income, it's GICs. That's all they do is interest income.

Sierra 9:04

Yeah.

Tre 9:05

Um, It is predictable. It's something that you can plan for and you can plan around and control. Okay? So the the first you have to to understand. Second thing you have to understand is that risk is, in my industry, is not the same as what people think about risk. A 100% fully diversified portfolio. What risk level do you think that is?

Sierra 9:27

A 100% fully diverse.

Tre 9:29

Sorry, Sorry. 100% equity, so stocks.

Sierra 9:32

Yeah.

Tre 9:33

Fully diversified portfolio. What do you think it is? Like global index?

Sierra 9:37

What would the risk level be?

Tre 9:38

Yeah,

Sierra 9:39

I would say they'd probably put it at high risk.

Tre 9:42

You'd think. So, it's medium.

Sierra 9:44

Okay.

Tre 9:45

Right.

Sierra 9:45

But like I would say it's, yeah. I feel like the risk thing... that's why we did the risk episode however long ago, 'cause it's, like, how would you, how do you just put a label on it?

Tre 9:55

Well, they needed to find some measure. So they use volatility, right, the ups and downs. The,

Sierra 10:00

It's just hard when it's like this is medium risk. Like

Tre 10:04

exactly.

Sierra 10:05

weird.

Tre 10:05

So the way that I prefer prefer to explain or for somebody to understand it, is that the, the more that can go wrong, the higher the risk mm-hmm. Is the way that you should think about it. So for example, while a 100% fully diversified portfolio, globally diversified portfolio might be medium risk, a 100%. Natural resources fund in Canada. You're now now looking at high, medium to high, right? Like you significantly jumped in to risk

Sierra 10:41

Because you've like narrowed it down a bit.

Tre 10:43

Yeah, yeah, exactly. So when you're looking at the type of risk to take, I challenge people not to think of it as percentages of, so the amount of fixed income compared the amount of equity. To think about truly what could go wrong, especially what could go wrong in my timeframe of investing. Mm-hmm. And you're kind of picking the lowest risk investments that, by lowest risk, the lowest risk of a bad outcome. Investments that you can across all timeframes. And that means that fixed income gets more risky the longer you hold it.

Sierra 11:21

Okay,

Tre 11:21

So you do not want to holding fixed income for long timeframes.

Sierra 11:26

Hmm.

Tre 11:26

Because fixed income is based very heavily on interest rates.

Sierra 11:30

Yeah,

Tre 11:30

and I can tell you. There's very few people that can predict interest rates over a 30 year timeframe. It's just, I have no idea. Uh, but we can predict the fact that humans will likely progress, we'll likely build stuff, we'll likely make new technologies over that same 30 year timeframe. Mm-hmm. So if we're gonna pick one. Which one has a lower risk of a bad outcome. Okay. So that's way, the lens, that I try to encourage people to look, at risk through.

Sierra 12:00

Yeah. I love the pessimism. I feel like it's actually like I actually do. I say that in a jokey way, but like Yeah, it's thinking, thinking like what's the, I feel like a lot of people catastrophize things in general instead of just focusing on what is the absolute worst case scenario here. And then focus on that. Okay... then you can make your decisions around

Tre 12:23

It's 'cause people don't know, right?

Sierra 12:25

Don't know what the worst case is?

Tre 12:27

No, you are, when you think of like, there's. 15,000 odd different mutual funds stuff like, it's very overwhelming 'cause there's so many different options. So most people can't tell the difference between two. Mm-hmm. So when you can't the difference, you paint them all with same brush and you might have have heard of a friend or something like that, or coworker, whatever, that lost a bunch of money investing and you think, oh, investing that means. Investing versus, okay, what, what were they, what were they actually doing? Right,

Sierra 13:00

and what, and like, did they just pull out at a bad time as well? Because

Tre 13:04

Right.

Sierra 13:04

I've heard a few people Say stuff like that, and I know full well. It was them who was the problem. So

Tre 13:13

it's like the markets and the markets, the markets, the markets going up and down are not a, it not a problem to solve.

Sierra 13:20

Yeah.

Tre 13:20

It's feature of the markets. That's how they work.

Sierra 13:23

Yeah.

Tre 13:24

It's up to you then choose to navigate that properly. right? Yeah. It's going on a river and complaining that there's rapids. It's like, well. That's the river that, that's how it works. Yeah. Now you have to make sure you're prepared. Prepared for that.

Sierra 13:38

Yeah.

Tre 13:39

And when it comes to people and their ability to handle the ups and downs of the market, I'd liken it to like the first you ever drove. A car uh, the first time you get in a car, it is terrifying. It feels like everything's so big. The car's big. Every like, and as, the more you do it, the more comfortable you get. And you go on the highway and it's so fast, everything's so fast, cars are are coming left, right, and center. It's what it feels like. Yeah.

Sierra 14:04

Yeah.

Tre 14:05

then you do it for a while and you realize, okay, this isn't actually. As bad as, as, as what I think, And it's very similar with the markets where. Yeah. The, the thought of your finances or your, the money that you've put there, going up down 2... 3... 4% a day, dropping 15% a week, coming back up 10. But like the, the thought of that is a lot scarier when you're new to it. Yeah. But it is really important like with driving that you still take that step and get used to it.

Sierra 14:38

Yeah,

Tre 14:38

and most people... they're, they're.. Where people screw up is trying to avoid those ups and downs and introducing new risks are a lot scarier in order to avoid something that is. Just a feature.

Sierra 14:55

Mm-hmm.

Tre 14:55

Does that make sense?

Sierra 14:56

Yep. Completely. I had a lot of thoughts running through my mind, like just the fact that a lot of people wanna play it safe. In that sense, like fixed income sounds safe, but it's like you said, there's just different risks. Like if you choose never to drive or like you're never driving on the highway, it's not like you're eliminating every risk of driving or you're not eliminating every risk that involves vehicles or whatever. You know what I mean? It's like,

Tre 15:24

But the, pros of driving the highway and being able to travel are a lot higher than

Sierra 15:29

Yes.

Tre 15:30

The downsides, right? Like, yes

Sierra 15:32

and it's like you just prepare appropriately and Yeah.

Tre 15:35

you wear your seatbelt.

Sierra 15:35

Yeah.

Tre 15:36

Make sure your cars in repair. You,

Sierra 15:38

We love a a good metaphor. Sorry, we, I feel like we would just keep climbing on that, so let's keep going.

Tre 15:45

Yeah. Okay. And then the third one is. Investment philosophy. So I have a very strict investment philosophy of the, the data shows that low cost, globally diversified index funds and things like that are going to be the right way for the majority of people, and that's because cost of missing out is significantly worse than the cost going through the ups and the downs. Okay. When I'm planning everything else to do with the planning, when I build my systems and processes. It is based on the predictability of the types of income, for instance, that a passive type investment will generate compared to an active manager. So you're like, what the heck are you talking

Sierra 16:42

Yeah. I'm lost

Tre 16:42

So with a, with a passive type investment philosophy, there is very little, what we call turnover. So turnover is when a stock, or an investment within an investment vehicle is bought and sold by the manager. Okay. So not by you doing it, but by the manager making that decision.

Sierra 17:03

Yeah.

Tre 17:03

You still capital gains though, on that manager buying or selling. Just you didn't buy or sell the fund or ETF, whatever, doesn't mean that you don't now have capital gains. Which makes it very unpredictable when it comes to investing because when you are, you are, you're, when you have that complication increase. There is something that we call tax track, and that's how much tax are you paying to own this portfolio? The lower the tax the better because that means that there's more left inside of the investment to grow. Makes, makes sense?

Sierra 17:40

Mm-hmm.

Tre 17:41

But up until that point, it doesn't matter because if you're investing inside of TFSAs, RSPs, like that, there is no tax track. It's, it's completely irrelevant. If that active manager chooses to sell 90% of his portfolio and repurchase something.

Sierra 17:58

Mm-hmm.

Tre 17:59

It's completely irrelevant. But as soon as you're in taxable accounts,

Sierra 18:03

the non-registered ones,

Tre 18:04

non-registered accounts, if you have a million dollars and the managers are decide to sell three quarters of it to buy new stuff and there's 50% capital gains on it, suddenly you have a 120.. 150,000 dollar tax bill. For nothing. Right,

Sierra 18:22

right.

Tre 18:23

So,

Sierra 18:24

But, well, not for nothing like if they. If the active manager wants to, they're putting them into something else.

Tre 18:30

Yeah. They're buying a different company or whatever. Something like

Sierra 18:33

that, because they're like, oh, this is a good idea, or whatever.

Tre 18:35

Mm-hmm.

Sierra 18:35

But it is, it's like something to consider.

Tre 18:38

Yeah. And. When don't have control, you're always at risk of something just being done to you, I guess.

Sierra 18:47

Mm-hmm.

Tre 18:47

And when you combine the fact that not in control of the taxable dispositions and stuff, and you combine that with the fact that the the vast, vast, vast, vast, vast majority of active managers underperform their benchmarks. It makes it very compelling to then use strategy that is not going to underperform by the nature of the strategy, and one that you can then the tax side so that you can optimize other things, for sure.

Sierra 19:20

Mm-hmm.

Tre 19:20

Right. It's much better that if I can say, okay, I can earn an extra 1% by paying less tax every single year. On my portfolio, or my investments, and I, I know if I do this, it's as close to guaranteed as you get, as in like you're not, now I'm not betting on what the markets are doing. I am just optimizing where the location is and things like that, just so. It better conforms with the tax code, right? Like it's not,

Sierra 19:48

yeah,

Tre 19:48

it's not, you know, you're taking away the, the, the unknowns as much as possible.

Sierra 19:55

Yeah.

Tre 19:56

Does that make sense?

Sierra 19:57

I think so.

Tre 19:58

Yeah.

Sierra 19:58

Yep. I think so.

Tre 19:59

So that's why when I'm reviewing these three these things are very core to recommendations make.

Sierra 20:08

Okay. So repeat the three, like in a recap quickly.

Tre 20:12

So. Different types of investments and different types of income, and it's predictable and you can plan around that.

Sierra 20:19

Okay.

Tre 20:20

Risk is different. Uh, don't look at high equity, meaning more risk. Think of it as, okay, what's the actual risk of a bad outcome and plan accordingly. And then, investment philosophy. Low turnover, very predictable income from the, from the investment.

Sierra 20:44

Yeah.

Tre 20:44

Is a core pillar of everything else I've I plan around.

Sierra 20:49

Okay. That makes

Tre 20:50

Yeah, because if I'm purchasing, let's say I choose, for example, I would pick Canadian equity inside of a corporate account. If suddenly that Canadian equity is creating a ton of tax drag, a ton of passive investment income, and now the now the corporation is having its capital gain, its small business deduction, clawed back and like that. So things that have a a detrimental impact to a business. And you could simply avoided that by holding a Canadian all equity fund that likely would've done just as well. Why would you take the risk?

Sierra 21:30

It just sounds like more work later too. 'cause then you're like scrambling to try to fix it and,

Tre 21:34

You you can't fix can't fix it. It's done, it's done. I can't, it's,

Sierra 21:38

yeah, but you want to change it after you pay once? Or do you

Tre 21:41

Well, the, the issue is you might be, yeah, maybe. Right? But it's a taxable account, so the consequences for changing is

Sierra 21:49

still gonna,

Tre 21:50

could now be huge. Yeah. Right. So you want to pick something that you can stick with for the next 20, 30 years if you have to. Right? And that's why, again, that approach is so important. What if you're in a, let's say we pick. Pick an active manager and we pick Dynamic, I dunno, their a mutual fund company. And then the management team changes and we no longer trust the management team.

Sierra 22:14

Mm-hmm.

Tre 22:14

Or they decide close down fund. Or like, it's so much out of your control that it's like, why? why? Why are we taking risk?

Sierra 22:23

Yeah.

Tre 22:24

When we could earn,

Sierra 22:25

and they're just people, right? It's just like random people. Like I know that maybe that sounds

Tre 22:29

not people

Sierra 22:30

Yes. I know that sounds way more simplified, but realistically it's like you're just, I like this one. With a bunch of random people doing. That's so

Tre 22:39

But they, I mean, they all have very prestigious degrees from very prestigious schools

Sierra 22:44

and all that, that stuff. I just feel like sometimes there's like a, what do they call it? A stereotype. I think I talked about this in another podcast too, of like the finance guy.

Tre 22:52

Yeah.

Sierra 22:54

That's what I imagine those guys are doing. Sorry,

Tre 22:58

and girls. not, let's not.

Sierra 22:59

You're right. You know what? You're right. But it's usually the guys in my head that are like, sketchy and just being weird, sketchy.

Tre 23:07

Okay.

Sierra 23:09

I I don't know. You know, like the, the stereotype of a finance guy.

Tre 23:12

Isn't there a song about that? It's It's

Sierra 23:13

So it's like, I know what you're talking about, but

Tre 23:17

it's like on a TikTok or something.

Sierra 23:18

It's not, it's not the same.

Tre 23:21

Doesn't matter, I dunno. But yeah, are the three things, three concepts that will help you greatly understand what we're doing, why we're doing it for the most part, that will get you 70, 80% of the way.

Sierra 23:34

That makes Yeah, a lot of sense.

Tre 23:36

Okay. that's it.

Sierra 23:38

Cool. Easy.

Tre 23:39

Nice and easy episode.

Sierra 23:41

Perfect.

Tre 23:42

Well, see you guys in the next one.

Sierra 23:43

Bye.

Tre 23:44

Bye. Thanks for listening to this episode of the Plain English Finance Podcast. Trey BYO, certified Financial Planner. Chartered Investment Manager is a financial planner with TC Wealth Management and a Visa wealth. You should always consult with your financial, legal, and tax advisors before making changes. This podcast is provided as a general source of information and should not be considered personal investment advice or solicitation to buy or sell at any securities. The views expressed are those of the individual and are not necessarily those of a Visa Financial Inc. Mutual funds and other securities offered through a Visa wealth, a division of a Visa Financial, Inc.