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The Fine Art of Setting Prices
You went into business to make money and the concept of 7. Size up competition. It’s not enough just to match or
chalking up profits is fairly simple: your company has to take in
undercut the competition. Buy their products and use
more than it spends.
them. Size up their customer relations. You may have
competitive advantages that allow you to charge more.
And your prices play a large role in that. In fact, your price
Price isn’t always the first thing on a customer’s mind.
tags have a big job -- they must be attractive enough to retain
customers, lure new business and at the same time cover costs 8. Move inventory. Beating the competition isn’t your sole
and generate profits.
pricing strategy. Your inventory needs to move and
your prices should be set as high as possible while still
It’s part art and part science: The fundamental trick is knowing
accomplishing this goal.
how much you need to make to exceed what you spend. So
step back and review what you’ve been doing, and follow these 9. Review periodically. You may find that you set your prices
nine basic principles of what prices must do:
too high or low or that economic conditions have changed
or that you miscalculated demand.
1. Cover costs. Even if you love what you do, it’s a hobby unless
you make money. Figure out how much you need to make If you follow these principles when mapping out your pricing
to keep the business afloat after paying yourself, your staff strategy -- and making alterations -- you’re on the path to a
and all expenses. Calculate how much you spend making consistently healthy bottom line.
your product and you have a solid base figure to start with.
2. Include “added value.” Think about what makes your goods
and services worth more than their costs. Ask yourself
what’s special about what you do or the way you run
your business. For example, you can charge more if you
guarantee delivery on a fixed schedule or make a product
that’s healthier or easier to use than your competitors.
Added value also includes your time, talent, investment
and risk. Don’t give them away.
Setting the right price is a crucial step toward
acheiving profit. Speak with your RSW Advisor
to see how they can assist you with setting the
correct price strategy for your business.
3. Reflect the market. The sticker you put on your product
takes into account demand, customer needs, changes
in customer tastes, the life span of the item, and how it’s
going to be used.
4. Maintain your margins. When you make long-term price
cuts, you must also lower costs to maintain your profit
margins. Remember the simple formula: Prices equal costs
plus profit margins.
5. Meet your business goals. Occasionally you need to adjust
prices to get new business or improve your cash flow. For
example, you might offer discounts during the off season.
Perhaps you have lower prices for customers who pay their
bills quickly or buy in bulk. Or maybe you have a policy
of matching your competitors’ prices. These procedures
are fine, but have a firm floor figure in mind when you cut
prices and stick with it.
6. Gauge what customers will pay. You may be making the
world’s best mousetrap, but if the price is too high, no one’s
going to buy it. On the other hand, don’t charge less than
consumers are willing to pay.
"Customers will go out of their way to buy a
superior product ... and you can charge them
a toll for the trip."
- Frank Perdue
June 2014
In this issue:
Tying the knot this summer? Secure your assets first
Hire your kids this summer, it’s good business
The fine art of setting prices
Tying the Knot This Summer? Secure Your Assets First
Things to consider
Believe it or not, summer will soon
be here, bringing with it a flurry of These five steps can help when you discuss your prenup and
weddings.
estate plan:
1. Discuss your desires with your spouse-to-be or partner.
If you are in the midst of planning
Make a list of assets you each bring into the marriage
a wedding, your nerves may
or cohabitation as well and those obtained later. The
be frayed and your spare time
agreement should answer the following questions:
precious, but take some time
• How you want the assets distributed after your death?
out to discuss with your partner
• How will you ensure children from a prior marriage are
the need for a prenuptial or
cared for?
cohabitation agreement.
• Will you each make your own provisions or will you consider
all of the children jointly?
It may seem uncomfortable; not
• Does a divorce decree have provisions that should be in
the least bit romantic and even
your estate plan?
pessimistic, but it protects both bride and groom. One way
to ease any tension about having the discussion and signing
2. Consider whether you need trusts to protect your children’s
the agreement is to say that your accountant or legal counsel inheritance. When assets are left directly to your spouse or
insists you have a prenup or cohabitation agreement as part of partner, that person controls how assets are distributed. A
your financial and estate plan.
qualified terminable interest property trust (QTIP) can help
protect your children’s interests. Assets are placed in this trust
A prenup is a legal agreement that specifies how you will divide and income is distributed to your spouse. After your spouse’s
assets in the event of a divorce. A cohabitation accord is similar death, the principal is distributed to the children.
to a prenup but for are for I individuals who live together
but aren’t married. If you do marry, you can convert the
3. Review the beneficiaries and amount of your life insurance
cohabitation accord to a prenup. If you are already re-married policy. As your marriage progresses and you have children,
and didn’t sign a prenuptial agreement you may be able to sign remember to update the beneficiaries of the policy as well as
a postnuptial agreement to accomplish the same goals.
retirement accounts. These assets will be distributed only to
your named beneficiaries, regardless of the terms of your estate
Why a prenup or cohabitation accord is important
planning documents. Coordinate these designations with your
• Even if you have a will, your spouse or partner may
estate plans. Review how much life insurance you hold. Do you
be able to override the terms and choose to receive a
need more to ensure that all your children are treated fairly and
statutory percentage of your estate. This is why you need equally?
a prenuptial or cohabitation agreement, specifying how
assets will be divided after death.
4. Check property titles. Jointly owned property automatically
• In the case of children from a previous marriage, a prenup passes to the co-owner. You cannot change this distribution
will help ensure that everyone is treated fairly. Let’s say
through a will.
you are getting married and have children from a previous
marriage. Your spouse-to-be also has children and is
5. Discuss the plans with your family. If you and your spouse or
financially secure. You may want to change your will to
partner are stepparents, discuss plans for your estate with one
leave the bulk of your estate to you children and perhaps a another and your stepchildren. You don’t want your children to
small amount to your new spouse.
think that your spouse has unfairly influenced you or that you
• Without proper planning, it is possible that a family home don’t care about them. Be open and honest about your estate
or family business could pass to your new spouse and
plans to prevent disagreements and misunderstandings after
eventually to his or her children, rather than your own.
your death.
A properly drafted prenuptial agreement, along with a change
in your will, may help to fulfill your wishes.
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Hire Your Kids This Summer, It’s Good Business
Smmer school break starts soon, and it makes business sense
to hire your kids to work for the summer and even part time
during the school year. They get life and work experience -- as
well as a salary -- and you get tax and other financial benefits.
Consider that by hiring the kids, you:
• Lower taxes by redistributing income;
• Teach your kids money-management lessons; and
• Work with them toward paying the costs of higher
education and avoiding heavy student debt loads.
The Ruling: The judge decided that the payments for
the services
the children
performed
were not taxdeductible and
were “motivated
in part by the
perceived tax
advantage” to
White. The judge
also concluded
that the amounts
paid were not unlike children’s personal allowances rather
than wages for services rendered.
The strategy that accomplishes all of this is income splitting transferring assets from a high earner (you) to lower earners
(the kids). You not only shift income from your business tax
return to theirs, your organization gets business deductions
for the salaries it pays them.
General Guideline: Pay your children (or your spouse or
common-law partner) the same amount you would pay any
Redistributing Income
other employees for the same job with the same level of
The strategy that accomplishes all of this is income splitting - experience. If you pay more, be prepared for the CRA to request
transferring assets from a high earner (you) to lower earners justification. Don’t forget to withhold income tax, pension plan
(the kids).
contributions and provincial payroll taxes, if they apply.
When you place your child on the payroll your corporation
receives a deduction and thus pay less tax. Your child includes
his salary in his income tax return and pays taxes on it according
to the marginal tax rates. Essentially you shift the income from
your business tax return to your kids.
Create a Paper Trail
Hiring your kids does require some additional expenses and
paperwork. Make sure your company keeps good records
of both the services performed and the time worked. While
it may seem like a nuisance to keep track of everything, it is
critical that you leave a paper trail.
Income splitting works with any business organization. It
doesn’t matter whether you operate as a sole proprietor, a Each child must be properly listed on the payroll, with salary
corporation or a spousal partnership. All three business forms deductions. Keep attendance records to prove they were
can pay wages to children.
on the job when you say they were. Among the most critical
elements of the paper trail are:
Cautions
• A contract specifying the work to be done, the rate of
There are, however, a few catches:
remuneration, hours, conditions of employment and
1. The kids must actually perform work,
benefits.
2. The jobs must be legitimate, and
• Social Insurance numbers for each child.
3. You must pay them a reasonable salary for their duties.
• Tax Credit returns for each child.
• Canada/Quebec Pension Plan (CPP/QPP) and
The reasonable salary is particularly important. One Tax Court
Employment Insurance (EI) premiums paid for children
Case illustrates the stand Canada Revenue Agency (CRA) and
over the age of 18. Those children may also contribute to
the courts take on this issue.
the pension plans.
Facts of the Case: Robin White and his wife operated an
Amway business during 1995 and 1996. White paid his 7- and
9-year-old sons, a total of $4,600 in 1995 and $4,800 in 1996.
He did not keep time records of the hours the children worked
and the kids kept and did not cash the cheques that were
issued to them. If they needed money to buy something, they
would ask a parent to endorse a cheque.
Consult with your accountant: Income splitting can be
complex and some techniques may be restricted by corporate
attribution rules.
Money Management Lessons
Pay your kids by cheques deposited directly into their bank
accounts to show they have control over the money. If you
pay “in kind,” the payments are considered taxable “non-cash
Canada Revenue Agency (CRA) challenged the wages, benefits.” The fair market value of the payment must still be
claiming they were “not reasonable in the circumstances.”
included in the child’s tax return.
White argued that he hired the two boys as subcontractors to
answer the phone and take messages, help with pick-up and
delivery of business materials and clean the part of the house
used for business. The children also helped take care of the
children of clients and associates at the house conducting
business.
Once your kids file a tax return, even if they don’t owe taxes,
they can open a Registered Retirement Savings Plan (RRSP)
and start building contribution room. If they start putting
money into the plan, they will eventually be eligible for the
Home Buyers’ Plan that allows them to withdraw as much as
$25,000 from their RRSP to purchase a house.
(...continedon next page)
Those under 18 can also contribute to a Registered Education
Savings Plan (RESP), assuming you have opened one for
them. Of course, you and others may also contribute to the
plan. They will receive a federal grant equal to 20 per cent of
the annual contributions, or a $500 maximum a year ($1,000
in CESG if there is unused grant room from a previous year),
and a lifetime limit of $7,200.
If you are taking care of all the RESP contributions, the
children can put earnings aside for their education to help
avoid graduating from college or university with massive
amounts of student debt. And to add to their moneymanagement education, it won’t hurt to teach them how
to budget and let them start paying for their own haircuts,
clothes, MP3 players, smart phones and other discretionary
items.
And there is an added bonus: If your kids use their earnings
to pay for college or university, their tuition and other tax
credits will help offset any taxable earnings. If they don’t use
all their credits, they can carry them forward indefinitely to
use when they are working full time, earning more money and
confronting larger tax bills, or they can transfer them to their
spouses or to you.
For more information about your situation, consult with
your advisor.
Tying the Knot This Summer........continued
6. Bank accounts. While you and your spouse or partner are
preparing a prenuptial agreement, it is the perfect time to
discuss bank accounts. You want to set them up in a way that
makes daily spending and saving easier and clearer to both
parties. Even if you decide to maintain separate accounts, it
is helpful to have at least one joint account. That can come
handy when you share the costs of a mortgage or car, rent,
household expenses and childcare. This account is meant
strictly for household needs and it allows you both to keep
track of how you are spending money.
A joint account can also help avoid trouble in the event of the
death of one of you. When a spouse or common law partner
dies and there are separate accounts, the survivor will be
excluded from the other separate account if the estate goes
into probate. That could take months.
3. There must be full disclosure. A prenup should generally
list both parties’ assets as of the date of the marriage. If one
party doesn’t make an adequate disclosure, the agreement is
likely to be disregarded.
4. Both parties should be represented by their own
attorneys. Virtually anything can go into a prenup but the
basic structure is yours-mine-ours. In other words, each
spouse or partner keeps the assets he or she brings into the
marriage while both own assets accumulated during the
marriage. Be certain to contact a lawyer or financial adviser to
ensure your documents are binding and conform to provincial
laws.
7. Employer- sponsored retirement plan. Your spouse or
partner is entitled to be the beneficiary of your employersponsored retirement plans. Only a spouse or partner
can waive that right if you plan to designate a child from a
previous marriage as a retirement plan beneficiary. Such a
waiver cannot be legally included in a prenuptial agreement.
It must be handled separately.
8. Timing. Consider telling your partner that a prenuptial
agreement -- also called a premarital agreement or marriage
contract -- needs to be signed before the marriage or before
you move in together
Simple Steps to Follow
This list can help you through the process forming a prenup or
a cohabitation accord. These factors are necessary to ensure
that a prenup is valid and enforceable:
1. It must be in writing and signed by both parties.
2. There should be no pressure. The prenuptial agreement
should be given to the other party well in advance of the
wedding.
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