Sequence-of-Returns and Behavioral Benefits of CPP

Business owners often have reservations about paying into the Canada Pension Plan (CPP). Many think they're getting a bad deal by paying both the employer and the employee portion of the contribution, but can they do better by paying themselves dividends? In the last two episodes, we did an extensive review of how you can compensate yourself as a business owner through a private corporation. Today, we take a deeper look at two of the payroll expense aspects that often come up in discussions with financial planners: CPP and Employment Insurance (EI). If you are self-employed, there are a few things you need to consider, including your decision to pay yourself a salary or take dividends. We discuss that in this episode, as well as whether self-employed business owners are really getting the short end of the stick when it comes to CPP and EI contributions. Tuning in today, you'll learn about some of the unique features of CPP, how it's calculated, and the three major risks it offers protection against, plus we walk you through various models to illustrate the consequences of paying yourself dividends versus salary. We also delve into EI for self-employed business owners, the special benefits thereof, models that consider different amounts of income and consumption, and much more. For a comprehensive guide to CPP and EI for self-employed business owners, don't miss this episode of Money Scope with Benjamin Felix and Dr. Mark Soth!

Key Points From This Episode:

(0:00:20) Reasons that today's topic on CPP and EI is so complex.

(0:04:04) How CPP is calculated: an overview of what you pay and what you receive.

(0:05:59) Whether or not business owners get a bad deal with CPP.

(0:11:34) Viewing CPP as a tax and when paying dividends versus salary is favourable.

(0:17:33) The unique features and benefits of CPP and the risk protection it offers.

(0:25:15) Assessing the value creation and performance of a pension fund like CPP.

(0:30:42) Crunching numbers to calculate a combined CPP benefit for a household.

(0:33:52) Making the comparison between paying CPP and investing in a corporation.

(0:37:23) Tax planning consequences of paying dividends to avoid paying into CPP.

(0:41:16) Various models to illustrate many of the scenarios we covered in this episode.

(0:48:36) Why paying into CPP and dying early results in a bad financial outcome.

(0:51:36) Comparing CPP with other corporate and personal investment options.

(0:59:54) Key takeaways on CPP; a chance to buy into a truly inflation-indexed annuity.

(1:01:48) An overview of employment insurance (EI) for self-employed individuals.

(1:05:38) EI special benefits that self-employed business owners can access.

(1:13:55) Insight into EI for incorporated versus non-incorporated business owners.

(1:23:43) Our post-op debrief of today's episode on CPP and EI!

Links From Today's Episode:

Dr. Mark Soth (The Loonie Doctor) — looniedoctor.ca

Dr. Mark on X — twitter.com/LoonieDoctor

Benjamin Felix — pwlcapital.com/author/benjamin-felix

Benjamin on X — twitter.com/benjaminwfelix

Benjamin on LinkedIn — inkedin.com/in/benjaminwfelix

Aravind Sithamparapillai — ironwoodcanada.com/aravind-sithamparapillai

Sebastien Betermier — sbetermier.com

Papers Mentioned:

'Five Examples of Direct Value Creation and Capture in the Pension Fund Industry' – papers.ssrn.com/sol3/papers.cfm?abstract_id=4616266