Episode 307 - How Much Life Insurance Do You Need?

21:04Like I've seen some of my physician clients in their 30s and we look at their insurance needs. I'm like, yeah, you need 12 million bucks. And they're like, what do you mean I need$12 million? It's like, well, you earn a half million dollars and your spouse earns 300 ,000 and you need a lot of insurance to cover off the total amount of income and expenses that you're going to face over your lifetime. But again, how many people have you seen that have smaller policies, like a few hundred thousand dollars? Oh, enough to cover off my mortgage or whatever. And they haven't thought through the income replacement, let alone the retirement replacement.

21:32It almost feels like it's just enough to get the sale closed by the agent. I know that's a pessimistic view, but in many cases, that's what it feels like. I saw it yesterday with one of my newer clients and we were looking at it and he has, I think, a million and a half dollars of insurance. And I ran an analysis using the financial planning software that I use for him. And I'm like, you need about 5.85 million. That's the number that I'm coming up with. So you're underinsured by 75%. Now, if we make these tweaks, if you were to pass away and your spouse is willing to downsize the home, free up a ton of capital there, cut their expenses by 40%, cut their retirement expenses by 40%, then you're still short, but only a million dollars short.

22:12So this goes back to that spectrum of risk and what sacrifices you're willing to make or not make when talking about your family's goals. We just went like the full meal deal. And Cameron, like you said, it's cheap enough. Like why not just get the coverage? You can always cancel this or amend it later. Like you can always get a new policy or just cancel it outright when you've built up the savings and your net worth is sufficient. There's some free online tools that are pretty good, I find as well. So I've always used, it's a calculator called InsureRite by Manulife. It's just a free tool online that people can use.

22:38It's just a little bit more detailed, I find, than some of the other free ones. The nice thing is it will show you also disability insurance and it will give you kind of a ballpark quote or estimate for what the insurance might cost, given what the inputs that you've used. So I find that's a handy way to do it. If you're working with an insurance agent, like ask for a full, we call it an insurance needs analysis. So make sure you're getting an insurance needs analysis and not just back of the napkin type of calculation. And then, yeah, I think the last point is that like I just mentioned, you can cancel your insurance when you don't need it anymore.

23:07When I wrote this, there were a lot of people saying like, oh, you'll always need insurance. What about this? What about that? I have no interest in a permanent insurance policy for my family. Like if I've gotten to the point where I can cancel my term life insurance, it's because that risk has been taken care of. There's no longer a financial risk to my death and my spouse and kids will be fine and there will likely be something left for them at the end anyway. So I just don't have a need for a permanent policy. Same as me. I bought one once though, sold it to myself when I was an insurance agent.

23:33A permanent policy? Yep. I had to meet a weekly sales target or something. Do you still have it? No, I don't have it anymore. Oh, you don't? You dumped it? I have a very tiny permanent policy I bought ages ago, like$100 ,000. Yeah, I ran the calculation of, am I better off canceling it and taking the hit or continuing to pay? I was way better off taking the hit. Interesting. It's tricky because there's a sunk cost there. And I think a lot of people have difficulty just dealing with that. I talk to people all the time and just like, well, I've lost$14 ,000 to two years of permanent premiums. I'm just going to keep it.

24:07But to your point, you need to calculate that cost and whether it's worth keeping. There's two sides. There's a sunk cost and there's the opportunity cost of future premiums going into the policy and to the opportunity cost of any cash value that may exist in the policy. So I got some small amount of cash value because I'd had the policy for a bit. And then I had whatever, I don't remember what I was paying in premiums, but I can redirect that now to other stuff. But it's interesting because the commission on that policy, you could have thought about it as a discount to the premiums, I guess, which would have changed the math, no?

24:33Would have changed the initial math a bit, yep. But there's some ongoing commissions with permanent insurance on the anniversary date as well. So yeah, but for a policy that size, it would have been nothing, like probably too small for the insurance company to even distribute. Interesting. Just love all these true confessions about life insurance. This is good. I've never bought a permanent insurance policy. I actually just got a quote for a permanent insurance policy for my kids though. I think that's actually a fascinating strategy. Once you've, I think, ticked all the other boxes, like if your RSPs, your TFSAs are maxed, education funds are maxed and funded, permanent insurance on a child's life as a parent actually becomes a really interesting topic because when they become adults, you can transfer the policy to them on a tax-free basis.

25:16And I think there's a number of reasons why that's not a bad thing. So in general, I have a bit of a disdain for permanent insurance, but when it comes to these policies, I'm not yet convinced that they're bad. Skeptical. You've said this to me before, and I've been skeptical and I remain skeptical. You think that the policy growth, because the cash value of the policy is what you care about in that case, you think the cash value growth in the policy will exceed your after-tax rate of return at your tax rate? Potentially. And I think the other interesting component there is just the insurability question.

25:50They at least will have some insurance in place. So if there was something that happened to my kids from a health perspective, they would at least have some kind of form of insurance and they could borrow against it and that type of thing. I just think if you've maxed out everything else, I'm not saying people should just rush out and do this for their kids, but once you've maxed out everything else, I think it becomes an interesting option. I didn't buy it. I got the quotes and I've looked at it. I'm still not convinced, but it's interesting. So they have cash value in a policy. Alternatively, you would have had more money, presumably say it's the same amount of money, but unless they need contractual help in the case of their death, it's life insurance policy.

26:26Like if it's a$50 ,000 policy, you could just give them the$50 ,000 as the helpful parent later. Or if they needed to borrow against the policy, you would have had more money that you could help them with later once you're an adult. Maybe. Yeah, maybe. If you're worried about your ability to give them the cash value of the permanent insurance policy in the future, I don't know, man. So there's a couple other things. Life insurance is far more creditor-proof than other asset classes, even like RSPs and stuff. If I get sued for something later on, that money is still theirs and still goes to them and that would be protected.

26:59I like that. you're going to smack me for this, but I almost think of whole life as a separate asset class. And this is partially your fault because of the permanent insurance paper you did, because when I think of permanent insurance and the dividends and the cash value are a function of not the performance of the underlying investments of the whole life policy, but a function of the performance of the block of underlying insured versus their expectations. And I wonder if that's a distinct and uncorrelated asset class to say Marcus. So it is for me, I don't know, is it diversification? I'm kind of convincing myself of it here.

27:33It's going to depend on the insurer's claims experience versus their expected experience, partially, and also on the realized versus actual performance of the participating account, which will be affected by market outcomes. So it's not going to be totally uncorrelated, but the claims experience piece is going to be uncorrelated. I don't know if I'd call it an uncorrelated asset class. It's also smooth. The insurance company smooths the policy dividends over time. If they have a really good year in the market, they're not going to distribute a much larger dividend. They're going to smooth it out over time.

28:05But that's a feature, not a bug. Yeah, I don't know. I think it's the same kind of smoothing you get in private asset classes. Private equity looks uncorrelated, but is it? I don't know. I think it's probably somewhat similar with insurance, except for the claims experience piece. There are some sources of policy dividends that are not going to be correlated with financial markets for sure. But is that enough to make it interesting? I don't know. Is insurance also a tax diversification tool? We've been talking about capital gains taxes and the increase in capital gains taxes. Yes, there's a big threshold for that right now.

28:35But if capital gains taxes went up on every dollar to 75 % in the future, the marginal decision of whole life versus a non-registered account, I think becomes a lot more interesting. We talked about tax diversification on the webinar we did yesterday. So I think when you look at the creditor protection, the ability to transfer it to a child tax-free, the potential for diversification through the claims experience of the company, the insurability of the child being intact because at least they have some kind of policy. And again, after you've maxed out things like education funds, tax-free savings accounts, I think it does become an interesting tool to at least look at.

29:09I haven't bought it yet. If you're doing a participating policy, which is what we're talking about with the policy dividends, you're paying a lot more for that. Unless you're going to keep the policy for a very long time and have very favorable assumptions about the future policy dividend rate, you could buy a guaranteed policy that has, I don't know, for the same amount of premium. I don't want to say the number. I haven't run the numbers in a while, but a much larger guaranteed policy. Like a non-participating whole life policy. Correct. You could buy a much larger policy for that to the extent that the participating policy, there's a decent chance that it will never reach the guaranteed cash values of a much larger policy.

29:52Of course. Well, and that depends on the dividend scale, I guess, right? Totally. So when you see like an illustration of, look, you can buy this participating policy, but look at the future cash value, look how high it's going to be. I always want to see the illustration at at least current dividend scale minus 1%. And I usually want to look at it at current dividend scale minus 2%. And when you run those comparisons beside a guaranteed whole life policy, the cash value of the participating don't look so attractive. So you end up paying much higher premiums for the same amount of coverage with potentially more to show for it if policy dividends are great, but they're not by any means guaranteed.

30:28So you could end up being like, well, I should have just bought the guaranteed policy. Oh, well. But what if dividends go up then? What What if it's plus two? There's risk there, obviously. I would rather not take that risk. If I wanted higher expected returns, I would buy the guaranteed whole life policy for the child if I wanted to do this, and then invest the difference in stocks. Interesting. If you hadn't thought about the non-participating policy, I didn't get a quote for that. I like the arguments about there's a little bit of legal diversification in there, creditor protection, whatever you want to call it.

31:01And tax diversification is a real thing, because life insurance does get different tax treatment than other assets. So that's a legitimate argument. I feel validated. Thank you. I am going to buy it now, now that you've rubber stamped it for me. Thanks, Ben. That was the entire purpose of this episode. I just wanted to get Ben's opinion live so that when I buy it, he can't make fun of me later. I still wouldn't do it. Remember episode 307, Ben? You told me to do it. Topic number two. So the principal residence exemption. I bought two rentals. There was a point in my life where I thought I was going to be like a real estate emperor of some kind.

31:35You read these books about the returns on real estate and all this kind of stuff. I was like, yeah, I'm going to build this real estate empire. Because you can touch the walls and the bricks and stuff. It's tangible. Tangible. It's a real asset. And I would go every week and I would just pet the walls of my rental and I would say, there you are. And this is before the Rational Reminder, of course, and before I smartened up. But it was too late by then. I'd already bought two. they were pre-sale. One was a condo and one was a townhouse. One was a pre-sale condo in Vancouver and one was a townhouse here in Squamish.

32:03The condo I never lived in was purely a rental the whole time. Interestingly enough, that one just never really went up in value. We bought it in 2016. I sold it in 2023. So call it seven years and I made basically nothing on it. Really? Yeah. We had rents of course, but the value didn't really increase. In Squamish? No, in Vancouver. Vancouver? Yeah, one bedroom condo in Vancouver, East Vancouver. How did you find the one condo in Vancouver that didn't go up in value? I was going to say. Well, it's funny because when you look at all the private real estate funds, they seem to only find the ones that go up in value and not go down in value.

32:37And I seem to at least find the one that doesn't go up in value. So somebody's got to be buying the ones that I bought, I guess. That's wild. Classic. It did go up a little bit, but it was basically a wash after the GST. In BC, you have to pay GST on new purchases. So you had to pay GST. you factor in realtor commissions and stuff. And it was basically a wash. It's kind of like the private credit funds. They also only find loans that increase in value over time. It's interesting how private funds tend to find those. Fascinating. Those deals. Very impressive. I'm the opposite. I can only find the ones that now having said that the one in Squamish did really, really well, purely by dumb luck.

33:13COVID had a lot to do with that. I think because here in Squamish, a lot of people left Vancouver during COVID to work from home. And I think a lot of people that wanted to live here who couldn't because of the commute or chose not to because of the commute. Now that they were working from home, they came to Squamish. And so we saw a really, really big increase in real estate prices. So given that the condo in Vancouver was a wash, we'll just talk about the townhouse. So we bought the presale in 2016, late 2016, and it completed in early 2019. And technically when you buy a presale, you don't actually own the property until it's completed.

33:43It's kind of like a call option. There's features of a call option in there, I would say. You have the right to buy it when it's complete. It's a little bit harder to sell than a call option would be, but you basically are buying the right to move into it when it's done. That's right. It's not yours until closing. Basically. So for the purpose of calculating the principal residence exemption and ownership, you don't really own it until 2019, even though you've technically bought it in 2016 in my case. So it was complete in 2019. And when it completed, we moved into it. So February 2019, we moved into the townhouse.

34:11And we did this just to kind of test if we liked Squamish because we were moving from Vancouver. and we decided we wanted to stay. So in April of 2020, about 14 months later, we bought a home here for ourselves in Squamish, but we kept the townhouse as a rental. So April 2020, we turned it into a rental until we sold it in the summer of last year, 2023. Did you do an appraisal when you turned it into a rental? No. And so this was a really interesting topic that came out of some of the discussions when I wrote this on Twitter. In hindsight, I think I kind of lucked out because what you can do is you can appraise it and then you can submit it like a change of use.

34:46And you can kind of basically tell CRA, I'm turning this into a rental now. So then I think you lose the ability to claim the principal residence exemption the same way. And I can only claim it for those two calendar years that I lived in at 2019 and 2020. It's only those two years that I can eliminate in terms of the growth of the property. But a lot of the growth of the property happened after it turned into a rental, like from 2020 to 2023 is where a lot of the growth was. And so thankfully, I didn't submit a change of use for that property. And as a result, it worked out in my favor, even better.

35:15But to your point, you can do that, you can get an appraisal, just gonna make up numbers here, let's say I bought it for 600 ,000 in 2019, and it went up to 700 ,000 in 2020, you can submit a change of use, that$100 ,000 is exempt from tax, because it's your principal residence for those two calendar years. And then from 2021 onwards, it would all be taxable. When you do that, you're not able to kind of average out the total growth of the property over the years you owned it. Because you're basically saying it's these two years of gains that I'm claiming as the principal residence exemption. The way we did it was a little bit different.

35:46Because I didn't do that, and I'll get into the details, but because I didn't do that, when we sold it in 2023, we owned it for five calendar years. 2019, 2020, 2021, 2022, and 2023. We lived in them for two calendar years, 2019 and 2022. But the way the principal residence exemption is calculated is they give you what I call the plus one. So if you actually look at the formula, there's a plus one in the formula. So the actual formula is the number of years it was your principal residence plus one divided by the number of years you owned the home times the capital gain. That's how much you are exempt for the capital gains.

36:24So in my case, I lived in it for two calendar years out of five that I owned it, but I get to add plus one to those two calendar years. I lived in it for two calendar years. I get to add plus one. So three calendar years divided by the five years that I owned it is 60%. That's how much of the capital gains exempt. And the reason for the plus one is to account for the fact that people own two principal residences in a single year when they move. In my case, we owned that home in 2020, plus the home we live in now in 2020. So they give you the plus one as a way to account for those calendar years where you own two homes as a principal residence.

36:56It's just fascinating the way it worked out where it exempted 60 % of the capital gain. What's even better though, is I didn't lose any of the capital gains or the principal residence exemption on my current house. Because even though I've already claimed 2020, I've already claimed that townhouse as my principal residence for 2020. When I go to sell this place, 2020 is off the docket. I can't use 2020 against this house. I can only use 2021 and onward. But because of the plus one, I can basically recapture the calendar year of 2020. And so if I sell it, say 10 years from now, I get nine years where I I can claim it as my principal residence.

37:28Can't use 2020 anymore. But because of the plus one, you get it back. I get to 10 years divided by the number of years I owned it, which is 10. So it'll be 100 % exempt from tax. That's cool. Yeah, it's just a really interesting outcome, I guess. And then we used RSPs and both my spouse and I owned that property. And because she has no income, half the capital gain was hers. So the way it all worked out is net as a family, we ended up with about a$3 ,000 tax refund last year, even though that property went up by quite a bit. Super interesting. So the key is the change of use notification. That would have locked in the gains at that point in time.

38:03Yes, exactly. So had I submitted a change in use instead, 2019 and 2020 would have been exempt from tax. 2021 to 2023 would not have. But because most of the growth happened in 2021 to 2023, I would have got pinched. Exactly. You would have locked in the starting point. For the big growth years, yeah. Yeah. And I think there's a really interesting four-year look-back rule, which always confuses me. I don't know if you guys have heard of this, but if you move out of your home and turn it into a rental and you later sell it, you can actually go back four years and claim it as your principal residence, even though it wasn't your principal residence and you turned it into a rental.

38:40Now, you would lose the principal residence exemption on the current home you live in. And so for me, I didn't want to do that. That didn't make sense. But even if you turn it into a rental, you get like this four-year window where you can still claim it as a principal residence. I might have that wrong. So somebody will probably correct me on the forums, which they like to do lately, apparently. Hey, Ben. Just a little bit. You ruffled feathers with some of your physician-related content. The headlines specifically. So do we want to take a stab at this next question? Yeah. I mean, my answer to this question is super simple, but let's do it.

39:12I think all of ours will be pretty simple and nobody will be surprised. So Ben, how would you invest$1 billion today? I would put all of it in DFA 607, which is Dimensional's Canadian global equity portfolio. Basically, global market cap weights with a Canadian home bias with a small cap in value tilt across all stocks in the world. That's how I invest my money now, and I would do the exact same thing. Lump sum, no dollar cost average. Love sum. Check comes in today, order goes in tomorrow for the full billion. See you later. place the trade. I mean, a billion is so much that you could live with volatility, especially the spending habits that the three of us have.

39:54I thought I'd do 70-30, but the number is so big. I'd do something either 607 or whatever the 70-30 code is, something like that, and be done with it. I have no interest in doing private equity or finding other fancy investments to real estate. Simple man, it's just a thing of beauty to me. Mark, it's work. I remember your tweet, Mark, where you said something like, if I had$1 ,000, how would I invest? If I had 10 ,000, and you scaled it up, and it was the same answer all the way along, globally diversified index type portfolio. I completely agree with that, especially this philosophy. It's all about the fact that markets work, and the markets are so much bigger than if any one of us had a billion dollars.

40:30So why not? Well, that's the question, right? Is a billion enough to move prices? But if you're handing it over to an institutional manager, I guess they've got a lot easier ways to enter. But if you're buying a single stock with a billion dollars, that can move the price. So what would you do? The whole thing, whole life policies for my kids. No, I would be half whole life and half Bitcoin actually. But no, I don't know. It's interesting, Cameron, what you just said is that you can just accept the volatility when you have that much money, depending on how you spend. But I think there's also the question of, do you need to take that kind of risk as well?

40:59And if you define risk as volatility, which I know most of us don't, but could you look at your statement and see negative 200 million on the statement over a few month period? I wouldn't look at it. Fair enough. Don't look at it now. I've looked at my accounts and I don't know when the last time I looked was. I don't even know how much is in there. same i know how much i put in there every year i don't know how much is in there though honestly couldn't tell you probably couldn't tell you within tens of thousands of dollars at least so you're doing your own homemade volatility laundering basically yeah exactly basically only reason i have an idea is because i had to take money out for this landscape project but it was the first time i checked in a long time and it was much higher than i thought it would be because i hadn't checked in a long time the market's been pretty good i was like oh but the problem with that is when the landscaper started going like oh do you want this do you want this do you want this and the bill started going up i was like yeah i can afford that because i saw my portfolio and things are going well or they kind of reframed my decision to spend more on this project it's interesting for very wealthy people somebody who's just ended the billion dollars in their lap their capacity to take risk goes up exponentially but their need to take risk goes down exponentially so i wonder if that decision comes down to tolerance for risk more than anything else willingness to take it on as larry swedrill would say how willing are you exactly my answer just the same as you guys.

42:12And I don't want listeners to actually think I would buy whole life in Bitcoin. It would be DFA 607 as well. Just globally diversified index fund portfolio of some kind. Dimensional funds, obviously we have the factor tells. Okay, Ben, why don't you queue up the next question? The would you rather game? Yeah. The first one is the question that I thought of when I thought of this segment for the podcast. I sent it to Mark in a message. What do you think of this? Would you rather game for the podcast? And then I suggested a couple of questions. So this was one of them. Mark thought it was pretty good.

42:40Love it. I'm going to ask the question you guys have to answer, would you rather? Would you rather have only life insurance or only disability insurance? All day long, disability insurance, just based on stats. I couldn't find the stats for the chance of a 58-year-old becoming disabled, but one third of people will have a disability lasting greater than 90 days before they reach age 65, whereas I have a 1 % chance of dying this year. So especially the younger you are, disability all day long. Mark? Younger you are, I think, is the key here, right? So situational. The probability of getting disabled is obviously much higher, but the financial impact is going to be dependent on your age and your current financial situation, everything else, right?

43:21I think disability insurance, wouldn't say that answer applies to everybody, but I will say it applies to me. And I thought of the question, I should have looked at the statistics, but I would need the statistics not just on disability. Disability lasting more than 90 days could mean a lot of different things. And we all work professional services jobs where, and I know Cameron, you gave this example earlier that I could always go to my computer or whatever, but I would want to see statistics on the proportion of people that are disabled to the extent that they can no longer work like a desk job.

43:50Probably I would rather have disability. I would want to dig into the statistics on that more. And the duration of the disability is important too, right? A disability can be wrong, but temporary. It could be two or three years. bend this out. I think you'd have to look at a lot of stuff, but off the cuff. And the cost of disability could be a lot higher too. Very high. If you're unable to work or the cost of care might even be higher, where the need for total capital could be a lot larger than what it would be for life insurance. Possibly. I've seen those situations before. Disability insurance is expensive and it's also much harder to get these days too.

44:24You guys don't do insurance and I don't do it anymore either, but even last year, I was finding a lot of difficulty getting disability insurance approved for clients. And when it was approved, it was really expensive, which makes sense from the insurance company standpoint. But as the end user of the product, it's tough. It is expensive. My disability policy, which is a very, very good policy, but it costs almost the same as all of my life insurance. Okay. You guys good to go to the after show? Let's do it. For the three of us to stick around. Are we just doing one would you rather question? I think one per episode is good.

44:56We don't want to burn them all out in the first like four episodes and then have no inspiration or ideas for other ones. Okay. I got a topic for the after show. You and I talked about this this week or last week, Ben, but just the learning and the improved help in making financial decisions that happened by you going through this capital gains thinking with software working with Braden. I thought that was so interesting. I mean, it's still ongoing. That's why I didn't prepare for this episode because that's all I've been thinking about. But Mark Soth too, the MoneyScope co-host, that's all he's been thinking about too.

45:28We've been exchanging notes and experiences as we go through the analysis and it's complicated, man. It's really complicated. It's a lot to try and model. Right now, we do have a functioning web application internally. I don't know if we're going to release this one to the public, honestly, because it's so complex. I'm a little bit worried about model risk. If someone puts a set of inputs in that don't agree with how the model was set up or something and they get a weird output, I don't want people to make bad decisions based on that. on that. So whereas an advisor would be more likely to be able to spot like, oh, that doesn't seem right.

45:59We still have to make that decision. We have not even released it internally yet. We've shown it to the advisors. We've gotten feedback and stuff like that, but it's been an interesting process to think through it for sure. We will do a money scope on this. Mark and I are recording on Monday. So does it boil down to any rules of thumb might be too light a term, but any sort of general guidance, and I'm not asking for the guidance, but just having ground through these details for what, a few weeks now, does it come down to a few key points or is it just so complicated you need some sort of model to operate?

46:32There's some stuff you can kind of start to build intuition around. So just to be clear for listeners, we're talking about realizing capital gains in a corporation, the individual one for just your individual personal assets. We built that calculator within a week of the budget coming out. Four days. Yeah. That's been available to the public for a while. The one for corporations is a lot more complicated because it interacts with spending and income. If you have a corporation that you're running a business through, you have revenue coming in, you're paying yourself through salary and dividends.

47:01That makes the decision of whether or not to realize the capital gain in the corporation a lot more complicated to think through. There are a whole bunch of different trade-offs. I don't want to turn this into a money scope episode, but basically if you realize the capital gain in a corporation, it creates capital dividend account, which can come out tax-free to a shareholder. You can end up deferring a bunch of personal tax by paying yourself with capital dividends for a period of time, depending on how large the capital gain was. That's good because it defers personal tax. But there's also a trade-off there where if you're deferring personal tax by living off capital dividends, it means you're not paying yourself salary, which ends up reducing your lifetime RRSP room.

47:37And so one of the things that both Mark and I are finding is that actually is detrimental. CPP as well, no? Yeah, you're missing out on CPP. I don't have CPP in my model. Mark does, but he treats it as an asset with a 2 % expected real return. So it's not perfect. My model excludes it, which basically just assumed it's a wash. I'd like to build it in eventually, but just haven't had time to do that. But yes, if CPP is not a wash, which is what my model assumes, then yes, you're missing out on that too. I don't think it is a wash. It is a positive expected return asset, especially if you live to age 95 or whatever.

48:07You miss out on RSP room, potential IPP room as well. You miss out on CPP contributions. You defer personal tax, which is cool. The other thing that happens is that, and again, and I don't want to turn this into a money scope episode, but when you realize a large capital gain in your corporation, it adds to your adjusted aggregate investment income and adjusted aggregate investment income reduces your small business deduction. And basically for people who aren't familiar with Canadian corporate taxation, which is probably most people, it basically means that you can end up paying more corporate taxes.

48:38So if you have a lot of adjusted aggregate investment income in a previous year, that reduces the limit that you have to pay tax at a low rate in your corporation the following year. So you can pay a bunch more personal tax. The knock-on effect of that is that it actually lets you pay dividends to yourself more tax efficiently. It lets you pay eligible dividends to yourself, which you pay less personal tax on. In Ontario specifically, there's a funny anomaly where the province of Ontario does not recognize the reduction in the small business deduction due to adjusted aggregate investment income.

49:08And so you can actually end up in a situation where that's advantageous. New Brunswick is the same. So one of the things we have noticed is that in Ontario and New Brunswick, realizing a capital gain in the corporation is more advantageous, all else equal compared to say BC or Alberta. So you see why I asked the question? Big question, eh? There's a lot in there. I don't know. It's a complex decision. And we're getting a lot of questions from clients about this. I think there are some cases where it's much more obvious, like if someone has a large known expense in the next couple of years, then realizing again, to pull out the capital dividend account is much more likely to make sense.

49:44The other big thing that I've noticed is that all of this is super sensitive to optimal compensation. We did a couple of MoneyScope episodes on how to pay yourself from a corporation. This decision of whether to realize the capital gain or not is largely dependent on your ability to implement the right sequence of future compensation after realizing the capital gain. So if you realize the capital gain in your corporation, then continue paying yourself salary and you realize the gain for no reason other than to realize the gain before June 25th, that's almost certainly going to make you worse off.

50:18Whereas if you do the right sequence of eligible dividends, non-eligible dividends, capital dividends over the few years after realizing the gain, then it can make things look a lot better. A big portion of the tax when you realize the gain is refundable, but to get that tax refund in the corporation, you have to pay yourself a non-eligible dividend. So if you just keep paying yourself a salary, it's no good. But if you get the sequence of future dividends stream right, then it can start to look more advantageous. But again, it's super situation dependent. The other big thing is the size of the gain relative to your personal spending needs.

50:53If it's a huge gain and you have low personal spending needs, realizing the whole gain is probably not going to make sense. If you have a huge gain and really, really high spending, it can start to look more attractive. Maybe there is no intuition. It's just really complicated. Do you think in general, the awareness around all these notional accounts and the intricacies of tax planning corporations has increased due to this? Do you have any general observations? I don't know if it's increased due to this, but I think when Mark and I did those two episodes on optimal compensation from a corporation, I think that was a big light bulb moment for a lot of people.

51:24I've heard from a ton of people who were just like, wow, I had no idea about any of this. Yeah. So I think at least people who are listening to MoneyScope are becoming aware of this. I think it is really important. It makes a big difference in the long run. So the proposed tax changes may have been an accelerator. To make people think about it? I don't know. People who haven't been listening to MoneyScope probably still wouldn't be thinking about this. I had advisors reaching out to see if they were allowed to attend the webinar that we put on yesterday on optimal compensation. This is totally anecdotal, but there's obviously interest in this concept amongst at least some advisors.

51:57To your point, it's so complex. And there's probably very few people in the country besides you and Dr. Soth that understand it to that degree. Giving all this research to the public for free, I think, is for a lot of advisors, they're like, oh, there's this whole thing I hadn't really considered. And I just thought it was the domain of accountants. Obviously, we need the accountants to help us with this, but you're projecting 30, 40, 50 years of optimal compensation versus non-optimal compensation. The difference in outcomes is just huge. It's encouraging to see at least that other people are interested.

52:25Yeah. And the webinar was a great success. You had almost 300 people, which is amazing. That was crazy. So I basically just did the opening remarks and Brady Plunkett, our colleague, he's a portfolio manager and financial planner and Spencer Brooks, who's a tax partner at Hendry Warren, who's an accounting firm out of Ontario that we work very, very closely with. They did most of the heavy lifting for the content of the webinar and they just crushed it. It was really, really good. I was trying to monitor the chat and answer as many questions as I could and I couldn't even keep up. There were so many people asking great questions in the chat and I was trying to get as many answers in there as I could.

52:57But yeah, I think we peaked at 270 attendees. Again, lots of great questions, lots of great engagement. Should be available on YouTube, I guess, once it's uploaded. And I don't know when that's going to be, but. You talked about IPP. So I know Brady's had a few people reach out to talk about that since the webinar. Yeah, it was great. They did a really, really good job. I told Brady I nominate him for the position of chief webinar architect going forward. Just crushed it. He brings the energy, that's for sure. Sure does. Once we're done with this corporation realizing the gain or not modeling.

53:28I think we're going to be able to use the model that we build for that to build an optimal compensation calculator application, whatever you want to call it. So people will be able to put in their notional accounts, their portfolio balance and all that kind of stuff. And it would spit out. Mark South already has this on his website, to be clear. So we're not reinventing the wheel here. He's got something very similar. But the idea is that you put in all of your information and then it spits out how you should pay yourself in this year. And that's a request we've had from advisors internally to help them give advice to clients.

54:00The capital gains calculator for non-corporations is available on our website. It includes AMT, which we talked about in a past episode, I think. Alternative minimum tax, yeah. Mark, do you want to read out the first review we got? Sure. Yeah. So this is from DH at Winnipeg. Great for self-directed investors. Always interesting content. I've been fascinated by the parallels between medicine and finance. Some professionals in each sphere trying to make the optimal decisions for clients using a body of evidence that has limitations and caveats. Others making unsubstantiated claims of getting better than average results with more expensive products.

54:36Love it. Such a good analogy. Yeah, you want to take the next one? I'll do the next one. I had someone tell me a while ago that their physician, the episode that we did with Dr. Wendell Mascarenhas, where he talked about the evidence pyramid and talked about the analogies between medicine and investing. Someone told me that that was a huge light bulb moment for them, which is really hammered home the idea that there are for sure limitations with what we can do with evidence and how certain we can be about anything in financial economics and portfolio management. But there are at least parallels.

55:06That comment touched on that, where in both cases, there's uncertainty. And in both cases, there's competing evidence. And all you can do is use the evidence to try and make the best decisions possible. I think probably the big difference still between financial services and I mean, even just financial services, asset management, all that kind of stuff. The big difference between that and medicine is that in the case of financial services, a lot of people just aren't using the evidence at all. It's funny. I had a client of mine. I called her a scientist, basically. She's a physician. So I was talking about the science of investing and I thought she'd appreciate that.

55:38She told me, she's like, oh, you'd be surprised how little science there is in medicine. She didn't elaborate. this was years and years ago and i still remember that comment it's really really fascinating your point i think there's other parallels you made a diagram once on the parallels between the diagnostic process that physicians use in the financial planning process even down to like referring out to specialists and monitoring the health outcomes of patients there's a lot of analogs i think between the two practices all right next comment from randall in the united States, exceptional evidence-based show.

56:10The rational reminder is an exception. I think they made exceptional, an exceptional evidence-based show in a field filled with self-interest and strong opinions that lack what we were just talking about, that lack the necessary depth of understanding. I am American, so not sure everything directly applies to my situation, but this might be the comment that I was thinking about when I said the thing earlier. I'm American, so not sure everything directly applies to my situation, but the logic and reasoning behind the decision-making is often useful regardless. For example, tax diversification is a concept that absolutely applies with 401k and social security or TFSA and Canada Pension Plan.

56:42Very nice. And then a common friend of all of ours with a great first name, Cameron, reached out to me. I think it was a bit of a sympathy note that sent me on LinkedIn, but it was very kind to hear from him. Great guy, great advisor. Since you didn't get any LinkedIn reach outs on the last episode, private credit, I thought I'd send you one for the next. Lots of chatter around the show being mandatory listening for new advisors, but I would argue it's even more important for existing ones. Timeless advice and both you and Ben's ability to distill seemingly complex topics down into easy to understand language can't be celebrated enough.

57:17Thank you for all that you guys do for our industry. Mark has been a great addition and I look forward to the show every week. So Cameron, thank you very much. Very kind of you. That reminded me that I did get a comment on LinkedIn on the private credit episode. So this is from someone who they're currently an advisor, but they worked in finance, but not as an advisor previously. So they said that they used to structure private credit investments on behalf of life insurance clients. So like institutional clients at a previous firm. So they said that the private credit episode hit close to home.

57:49And then they gave me some anecdotal observations based on their experience creating private credit investments for institutional investors. So they said that oftentimes the financial covenants negotiated in private credit transactions are weaker than they would be in a public bond deal. And that's to give the borrower financial flexibility in order to make payments. There's also a huge amount of concentration risk since the firm that's underwriting the private credit transaction usually wants to take a big chunk of the deal for themselves because they're doing most of the heavy lifting on the analysis.

58:18And so that means that if a deal does go self, they will have a bad time. They might not be able to unload it to someone else. And they're obviously concentrated in the investment. The funds may have multiple transactions in each fund that gives the illusion of diversification. But his suggestion is that in a lot of cases, they probably own a big chunk of each transaction, which makes them pretty illiquid and risky. And he said that life insurance companies and others, we talked about this briefly in the private credit episode about internal valuations as well. Internal valuations from the fund itself, they're allowed to provide internal ratings and internal prices on most of the transactions.

58:57And so that lets them give a credit rating of whatever they want and evaluation of kind of whatever they want that may be misleading, smoothing to a point where it's misleading. We talked about that in the private credit episode too. Anyway, so really interesting. He told me all that and I just said, what did you think in general about the accuracy of the episode based on your experience? And he said that it was great. It hit the nail on the head in terms of what's really going on under the hood in that asset class. That's awesome. That was good to hear. Not every day you get to hear from someone who's like been in the trenches doing something like that, give their thoughts on it.

59:29I have a story for you guys. My daughter and her boyfriend leased a new car this week. So I went for the quote meeting. Incredible how you can have such a shady experience in such a big brand name, incredible industry. I'm not that demanding, but I'd like to know some details. All she got until I pushed for it was written down what the monthly payment would be. And I'm like, well, it's based on how much down, what's the residual, what's the interest rate. I get it's kind of mathy and we might be skewed that way. My daughter's not a math person. That's not her gift to the world. So she gets this number.

1:00:05So that's affordable. And so we have no idea what's in there, including a trade-in. She was trading in her old car, which is paid for. That payment plus your car is what you're paying for this. Okay. So she just started thinking about what the total cost of ownership is for the time of the lease. But to throw a chicken scratch number that your monthly payment is across the table. I said, well, I want the details. Well, I'll have to do up a bill of sale. I'm like, well, we don't want to buy. We should just show me the numbers. So you have to wait 20 minutes. They go back to some manager's office to come back with this bill of sale that they forced me to take a picture with on my phone because they wouldn't give me the piece of paper because it's a contract.

1:00:41That's wild. I couldn't believe it. Wow. I just did that too, actually. I also forgot I wanted to talk about this in an episode. Maybe I can mention that. I also leased a vehicle recently. My experience was not like that at all. I got an extremely clear sheet that showed the sale value of the vehicle, the residual value, the interest rate and the financing on a lease. I leased my vehicles. I'll talk about that. People are always interested to hear this. That experience was fine. I was just thinking about leasing versus buying a vehicle when I went to do this. When you lease a new vehicle or buy a new vehicle, the biggest cost is depreciation.

1:01:17You're eating a whole bunch of depreciation early on, and that's never fun. You can reduce the depreciation cost of vehicle ownership by buying used vehicles because a lot of that depreciation has already been paid for by somebody else. Depending on the brand. Sure. In general, any vehicle after the first two years is going to have a lot of its depreciation already gone down. But for sure, you can look for vehicles that hold their value better. And the other ones are financing costs and you pay a financing cost no matter what. Whether you lease, finance, like borrow or pay cash, you're paying a financing rate.

1:01:50If you pay cash, it's the opportunity cost. It would have otherwise done with the cash. If you borrow, it's the borrowing rate. And if you lease, it's also the borrowing rate. So the big difference is really depreciation, the depreciation cost. Why'd you lease instead of buy? I don't like owning vehicles. when I'm done with it. I don't like to have to deal with negotiating a sale price and all that stuff. You're taking some price risk too. I mean, during COVID, I think used vehicle prices were super strong. Still looking for that sweet spot of interest rates and higher residuals in your world.

1:02:21After having talked to a number of dealerships, they kind of look at me like I've got three heads. I'm like, don't you get what I'm talking about? Where's that sweet spot? Because you get a newer car, it's got a higher residual, which might lower your payment depending on the interest rate or other incentives. Am I weird for thinking this way? Like this seems so logical once you understand how a lease actually works. The other thing, the reason that we did this, so this is before our lease term was supposed to end. What happened was we moved out to the country early on in this lease. We are on pace to quite meaningfully go over our allotted kilometers.

1:02:53Oh, I see. If we kept up the same pace of driving, the penalty would have been about $5 ,000 when we returned the lease, which is obviously no joke. We negotiated that down to $2 ,500 and we were able to roll that into the lease and the lease rates 3.99%. It was a cost of capital. I thought that was pretty reasonable instead of giving them cash to cover that penalty cost. Buying a car is just not an experience I want to go through again anytime soon. Do you buy at least? I used to buy used vehicles. I know less about cars than probably anybody you know. Cars have just never been my thing. I don't understand them.

1:03:31And so I'm obviously ripe for being taken advantage of when it comes to these transactions, which is also why I try to avoid them as much as possible. I just don't like cars all that much. So I used to buy used cars. And then when I finally got my first big boy job a while back, I think it was when my wife got a significant promotion or there was some sort of financial event in our life. we should buy our first new car. So we bought, I think it was a 2018 Mazda and it was just no upgrades, nothing like the absolute base model. They tried to upsell us on every single thing and maintenance packages and everything else.

1:04:03And like what I thought was going to be a relatively pain, because we knew exactly what we wanted, the color and everything. And it took hours and hours and hours to just get out of there with the car that we wanted. And I just felt really like I needed to take a shower after. And I decided like, I'm never going to go into a dealership and buy a new car again, even if I now know what to expect from the sales pressure, I just don't want to experience it again. And so even though I kind of want a new car at some point in the next couple of years, we don't need one. We don't drive very much. We just have the one car between us.

1:04:31That experience alone is sticking in the back of my throat and I just don't want to deal with it. I agree with all of that. I think that's one of the reasons I like leasing is that information asymmetry, you can't get taken advantage of beyond the potential that the residual value is taking advantage of you in some way. You know exactly what the car is going to be worth when you return it. You're pre-agreeing on the depreciation. Depending on your usage, my last lease, I was way, way under mileage. So how much equity do you get? So I ended up buying out my car because I was 40 ,000 kilometers under the usage.

1:05:01Well, if I rolled into another lease, that equity would have been largely vaporized. Is that negotiable? You can try, but they told me that I might have a few thousand dollars of equity in there. But I mean, is the number of kilometers that limit on your driving? Is that negotiable? It's not negotiable, but you can pay for a higher limit. It's negotiable to an extent. I mean, everything's negotiable. The interest rate's negotiable. The price is negotiable. Every single piece of the transaction is negotiable, which is the worst part about buying a vehicle. So when you buy a vehicle, you have the salesperson, the business manager who limits what the salesperson can negotiate.

1:05:37And then you have the finance manager that you have to talk to about if you're going to lease or finance the vehicle. And so the sales person was talking to the business manager and he goes back and I'm going to go and try and get you the best price. He comes back and shows me the quote or whatever, which was super detailed and clear and made sense. So I called my wife and explained to her what was going on. And she was like, it seems like they can do better than that. Like, I don't know. And I was like, I mean, I don't know. Like I asked the guy to give me the best deal. I don't know what you're going to do.

1:06:04And I walked over to the business manager who's like in a separate area. And I don't think he was expecting me to come talk to him because he's supposed to talk to the sales guys. And I was like, excuse me, would you talk to my wife? He was like, uh, he said no. And I was like, please, can you just talk to her? And he's like, okay, super awkward. And I gave him the phone. I don't know what they talked about. They were on the phone for like 15 minutes, came away from that conversation with another, I think$1 ,500 knocked off a couple of other things. That was also interesting. also drives me nuts though that it's such a negotiation i know just give me the bottom price just be done with it i don't want to deal with the back and forth like let's just settle on the price but you have to negotiate because you know to your point or at least your wife's point that there's usually room to go lower that's six thousand dollars an hour she just saved you not bad send her in that's the thing though she's now accepted the position of leasing the next car for your family that's what the sales guy said he was like wow does your wife want a job nice she's something all right good to bring this in for a landing yeah i think so everybody thanks for listening thanks