My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant and a partner with BDO. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. My posts are blunt, opinionated and even have a twist of humour/sarcasm. You've been warned. Please note the blog posts are time sensitive and subject to changes in legislation or law.

Monday, February 24, 2020

Update on TOSI – Questions Answered and Remaining Ambiguities

My last blog post regarding Tax on Split Income (“TOSI”) was posted back in December of 2018. Since then, some tax practitioners have done their fair share of hair-pulling and sobbing over the TOSI rules now in effect. Some saw these rules get passed into law and decided it was a good time to retire. I refuse to retire before the Maple Leafs win that Stanley Cup, so I’m sticking around and digging into the TOSI rules (although based on the Leafs recent play, I may have to select other retirement criteria).

The main complaint from my tax colleagues and our corporate clients is not the new legislation’s complexity but its perceived vagueness. In an attempt to cover all the bases, the Department of Finance created a piece of legislation that is sometimes unclear – which makes advising clients a bit like throwing darts at a moving target.

(So much so that the upcoming new edition of the Canadian Tax Foundation’s book on the taxation of private corporations includes key TOSI info for the tax community. Shameless plug: BDO is co-writing this much-anticipated publication. The book will be out later this year and we will provide an update when it is available).

To get you updated on TOSI, I invited Robert Wyka to discuss and break down the recent developments. Rob is a senior tax accountant in BDO’s Markham office.
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By Robert Wyka

Over the past year, the CRA has provided some clarifying commentary on issues raised by the tax community. Below we discuss some of the items that the CRA has clarified along with remaining uncertainties. Much of the commentary comes from recent technical interpretations and CRA comments at various tax conferences where the CRA was asked how TOSI applies in a variety of circumstances.

Excluded business – The 20-hour test 


The TOSI excluded business exception can be met if a family member who is 18 or older works in the business on a “regular, continuous and substantial basis” in the current year or any five previous years. The legislation provides a “bright-line” test of 20 hours a week. This means that if your spouse or adult child regularly works at least 20 hours per week the exclusion is met and dividends paid to them would not be considered split income (assuming they are shareholders in the corporation).

On the surface, this appeared to be a straightforward test to meet. However, as people are starting to apply these rules to their own situations, some interesting questions arise:
  1. What if my business is seasonal and only operates for part of the year?
  2. What if the nature of the business does not require that many hours? For example, if the husband and wife are the only employees and can run the business with 30 hours of work a week total.
  3. What if I worked for more than 20 hours a week consistently but took a period of time off for maternity leave?
  4. Do the previous five years have to be consecutive?
  5. I married an ex-employee who worked for me several years ago - would they meet this exclusion?
It is important to remember that the 20-hour test is not in-and-of-itself the rule, but rather a tool to assist in determining whether you meet the excluded business criteria – if you work 20 hours a week, you will automatically qualify for this exclusion. The CRA has also confirmed that the requirement to be involved in the business on a “regular, continuous and substantial basis” can be met despite working fewer than 20 hours per week or taking a period of time off. The CRA warns, however, that this depends on the facts of your particular case and highlights the importance of proper recordkeeping. Finally, the 20-hour requirement applies to the portion of the year in which the business operates. If a business is seasonal, one can still meet the exception if at least 20 hours are worked per week when the business is operational.

The CRA has also confirmed that years for the “previous 5 years test” do not have to be consecutive.

Finally, if you marry an ex-employee who subsequently acquires shares of your corporation, those years they worked when not married to you still count for this test. HR types typically advise people not to date co-workers and subordinates, but it appears that, from a tax planning perspective, it just may pay dividends. 

Dividends


It is interesting to note that despite there being strict “reasonability” rules regarding paying related individuals’ salaries, the same may not be true for dividends. At the 2019 STEP conference, CRA was asked to comment on the “excluded business” test using the following fact pattern:
  • Individual X owns and operates a professional corporation, Xco.
  • Spouse Y owns shares of Xco and works as a receptionist for 20 hours a week, thus meeting the bright-line test.
  • Typically, a part-time receptionist working these hours would earn $18,000 per annum. However, because Y is a shareholder, Y receives a dividend of $150,000 each year.
The CRA confirmed that the $150,000 dividend would not be subject to TOSI, as the excluded business exception applies. This may be useful to keep in mind when contemplating remuneration strategies.

If you want to rely on this exclusion, thorough payroll records to support hours worked in the business will need to be available. 

TOSI after death


The death of a taxpayer triggers several serious tax consequences. Some of the most impactful tax planning we do as tax practitioners involves structuring people’s affairs in a way to minimize tax consequences as a result of death.

TOSI is no exception. Thankfully, there is relief for taxpayers who receive shares from spouses upon death. These “piggy-back” tax rules require you to look at how the income would have been treated in the original spouse’s hands. If the income would have been excluded from TOSI if earned by the deceased spouse, the same treatment will apply to the surviving spouse. However, what happens when both spouses die and shares are passed down to surviving children?

The CRA was asked to contemplate the following scenario:
  • Mr. and Mrs. A own all the shares of Opco, which operates a services business.
  • Mrs. A has been actively engaged in the business for at least five years, whereas Mr. A has not been actively engaged in the business.
  • Mrs. A passes away and all her shares are gifted through her will to Mr. A.
  • Subsequent distributions from Opco to Mr. A would not be split income as Opco would be deemed to be an excluded business in respect of Mr. A.
  • How will the deeming rules apply if Mr. A subsequently dies and those shares are gifted to the children as a consequence of his death?
The CRA’s response confirmed that in this situation the attributes of the original deceased parent – Mrs. A – would be transferred down to the next generation when Mr. A ultimately dies and his surviving children inherit the shares of Opco. Thus, Mrs. A’s “good attributes” could ultimately extend to the surviving children after Mr. A passes away, and thus TOSI would not apply to any dividends paid on such inherited shares. 

Multiple businesses


As if the TOSI legislation weren’t complicated enough, the CRA has made it clear that in situations where a corporation operates multiple “businesses,” certain amounts may have to be separately tracked on a business-by-business basis.

Let me illustrate this with an example:
  • Mr. A owns and operates a business through a corporation, BuildCo. His business specializes in two areas: construction, and property management.
  • Mrs. A works 40 hours a week handling the property management side of the business.
At first glance, it appears that Mrs. A meets the “excluded business” exception as she works, on average, over 20 hours per week. Unfortunately, it is the CRA’s position that the construction and property management endeavors represent two separate businesses. Each business is to be evaluated separately for the purposes of TOSI.

In the above scenario, Mrs. A would meet the excluded business criteria only for income derived from the property management business and NOT the construction business. This of course requires businesses to separately track the income and subsequent distributions for each business. 

Corporations that provide services


Typically, if the corporation is not a professional corporation, earns income from unrelated sources, and the specified individual owns directly 10% or more of the votes and value of the corporation, income distributions will not be subject to TOSI. However, an issue arises if the corporation provides “services.” As a condition for the excluded shares exception, the corporation must have less than 90% of its business income from the provision of services; otherwise, TOSI applies (unless another exclusion can be met).

There was some confusion regarding what “business income” meant for purposes of TOSI, as it is undefined. The CRA has clarified that they interpret it to mean gross business income, not net income. Some ambiguity remains for those business owners whose corporation earns service and non-service revenue. In certain circumstances, it may be difficult to determine what is and is not a service, or if the services provided are incidental to the activities generating the non-service revenue.

Consider, for example, a business that sells, installs, and repairs washing and drying machines in condominiums. The sale of the machines is not a service. What about the installation and repair? One can argue that the installation is merely incidental to the non-service item – the sale of the machine. Repair is more ambiguous. Are you repairing machines you previously sold, or are these machines purchased somewhere else but just need repair?

Depending on the facts of your situation, it may not be clear what is, and is not, a service. If you feel that your company may be approaching that 90% threshold, it would be prudent to do a more detailed analysis. The CRA has provided additional guidance and examples here.

Just as with the excluded business exception, the CRA recognizes and expects that taxpayers will have a greater compliance burden as they will now have to track specific revenue streams to ensure they are on side. If your corporation has multiple businesses or a mix of service and non-service revenue sources, speak with your accountant. Your bookkeeping may have to be modified in order to appropriately track these items. 

TOSI in retirement


A common retirement strategy for successful business owners is to sell their business and use the proceeds to purchase an investment portfolio to fund their retirement. This can take either of these forms:
  1. The corporation sells all of its assets and closes down the business. The resulting proceeds are used to purchase an investment portfolio. The corporation now no longer operates the original business but is simply used as a vehicle to hold the investment portfolio.
  2. A holding company is incorporated, which in turn sells the shares of the operating company. The holding company then uses the sale proceeds to purchase investments.
Let us consider scenario #1 for a moment using the following facts. Assume that when WidgetCo was operational, it was an excluded business for Mr. A. Dividends could be paid to Mr. A without triggering TOSI, because he was actively engaged in the business. Fast-forward to today, when there is no Widget business, just the investment portfolio. Can Mr. A still rely on the excluded business exception when receiving dividends from accumulated earnings (i.e., a dividend paid out of historical earnings, not from income derived from the investment portfolio) once that excluded business no longer exists? Based on an August 2019 Technical Interpretation, the answer would be no.

The dividend income will not be subject to the TOSI rules when it is received by “an individual who has attained the age of 17 before a particular taxation year, [and] if it is derived directly or indirectly from an excluded business of the individual for the year." 

The CRA’s position is that although the dividend income in scenario #1 is derived directly or indirectly from an excluded business, it would not be considered derived from an excluded business of Mr. A “for the year." Because WidgetCo’s business was no longer operating in the year the dividend was received, the income cannot be considered to be derived from that business for the year.

Scenario #2 has an analogous analysis and conclusion. 

What about the excluded share exception?


In a June 2019 Technical Interpretation, the CRA was asked to analyze a situation that resembles scenario #2 outlined previously. In this case, the CRA was asked if a taxpayer could rely on the excluded share exemption.

One of the requirements to meet the definition of “excluded shares” is that “all or substantially all of the income of the corporation for the [previous] taxation year … is income that is not derived, directly or indirectly, from one or more related businesses … other than a business of the corporation.”

This criterion creates an issue in Holdco-Opco structures. If Holdco’s only income is from Opco (a related business), being dividends or a capital gain on the sale of Opco, then shares of Holdco are not “excluded shares.” If the proceeds of Opco’s sale are reinvested by purchasing publicly traded securities, at what point does the CRA consider the funds held in Holdco not to be “derived directly or indirectly from a related business” (Opco)?

The CRA explained its position as follows:
  • Year of sale – Holdco shares would not be eligible for excluded share treatment. Holdco’s income from the prior year (or current year if this is the first year of Holdco’s incorporation) was derived from a related business (dividends from Opco and/or the capital gain on sale).
  • One year after sale – Holdco shares would not be eligible for excluded share treatment. Holdco’s income from the prior year is derived from the capital gain on sale of Opco, and any dividends paid prior to the sale.
  • Two or more years after sale – Holdco shares would be eligible for the excluded share exception (assuming all other conditions are met). None of its income from the prior year was derived directly, or indirectly, from Opco.
The different treatment of excluded business and excluded shares is important to consider when planning for retirement or a corporate reorganization. Whether or not a TOSI exclusion applies may change after a restructuring or business sale. 

What is a business?


For adults, TOSI only applies to amounts received from a “related business.” However, when considering the aforementioned retirement scenarios, is sitting on a beach drinking mojitos and collecting dividends really a “business”? After all, how is this any different from holding the investment portfolio in an RRSP or a TFSA? One would think that if no business is present, TOSI should not apply.

The CRA has illustrated a few examples that seem similar to the retirement scenarios I outlined above and did not analyze whether a business even exists. When pressed for more information, the CRA responded that for the purposes of those illustrations, they assumed there was a sufficient level of activity to consider the income derived from a business. It remains unclear how these passive investment corporations will be treated, but it appears the threshold level for considering them to be a business is quite low.

Reading this may frustrate those readers who have incorporated and own rental properties. Rental income is generally taxed as investment income as opposed to income from an active business because of its passive nature (unless you have five or more employees). This results in these corporations not being able to use the more favourable small business tax rates. It seems contradictory that the CRA in one circumstance sees your rental business as passive and thus not privy to lower corporate tax rates but, for purposes of TOSI, sees it as a business from which certain income may be subject to the TOSI rules. 

Reasonable return


If you are not able to fall into the more clearly defined exclusions, one last hope is the “reasonable return” exclusion for individuals 25 years of age or older (there is a more restrictive reasonable return test for individuals aged 18 to 24). However, this exclusion has probably the vaguest criteria to satisfy.

The legislation stipulates that you meet this exclusion if the income received is “reasonable” when regarding factors such as:
  1. Work performed
  2. Property contributed
  3. Risks assumed
  4. Total amounts paid/payable
  5. Other relevant factors
What is reasonable is incredibly subjective. The CRA has provided some basic guidance on their website. The guidance provided is useful in determining whether or not the individual should be receiving income at all. However, as soon as you answer in the affirmative, the question of “how much?” remains unanswered. How much work or risk is required per dollar of remuneration? If you are planning remuneration in advance, how confident can you be that the income you want to pay would meet this exception? Is $100,000 too high, or could you have paid more?

It is very difficult based on a vague set of factors to quantify what level of income is acceptable. It would be wise to try to meet one of the other exclusions and not rely on this one. 

TOSI story – Chapters remain to be written


If you have managed to read this far, you likely have realized TOSI is still very complex - even with the various clarifying statements and Rob's explanations. In all honesty, I had to ask Rob to clarify for me certain parts of his discussion.

TOSI's application is also very case-specific, and it requires a thorough understanding of your business and the role certain individuals play within it. It has become more important than ever to speak with your tax advisor. With proper planning, a good tax practitioner will ensure that your corporate structure and remuneration planning is done properly to reduce any potential TOSI impact.

I anticipate that we will write another TOSI update article in the future to discuss how the CRA is enforcing these rules. This will start to become clear once the CRA begins to issue reassessments, and taxpayers go to court to challenge those reassessments.

Due to the complexity of the TOSI rules, we won’t address any specific questions on this blog post in the comments section. You need to speak with your accountant who is aware of your specific fact situation. In the meantime, make sure you are keeping proper records.

BDO Canada LLP senior tax accountant Robert Wyka is based in Markham and can be reached at rwyka@bdo.ca.

The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

Please note the blog posts are time sensitive and subject to changes in legislation.

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.

Monday, February 10, 2020

Why Can’t People Get Their Financial Affairs in Order?

Over the last year I have met several potential client's for BDO’s Wealth Advisory Services (from both inside and outside BDO). In two specific cases, the meetings went well, and as I often do; I undertook some initial basic discovery about the prospective client’s financial affairs and personal objectives, among other things.

In both these cases, the individuals were either in the midst of selling a business or had sold their business for millions. I thus suggested they may wish to update their wills to reflect their change (or upcoming change) in financial circumstances.

I was shocked that each of the potential clients sheepishly answered they did not have wills to update. I was astonished that these highly sophisticated business people did not have wills. (I know what you’re thinking: Mark, you’ve written on this issue numerous times, like this post on Canadians not writing wills and this one on famous people who had no will, why can't you give this a break. But let just say I sometimes figure if I keep hoping, things will change - sort of like the Maple Leafs prolonged Cup drought).

The excuses


I asked the two individuals, why they had no will. One said it has been on their to-do list for several years and with the sale about to happen it will now move up the list. The other answer had something to do with bad karma in writing a will.

It seems to me that Canadians do not make wills for the following reasons (there are far more, but I will stick with five):
  1. We love to procrastinate
  2. It is a bad omen to make a will
  3. “I am young, so I don’t need to”
  4. People aren’t sure how they wish to distribute their estate
  5. Some people are oblivious about the impact on their family (dying without a will leaves a mess for the surviving spouse, children, and executors to clean up an estate)

Has your business advisor harassed you to draft a will?


I remember thinking how Prince’s team of advisors could ever have allowed him to not have a will when I wrote the post on famous people dying without a will. When meeting the two people above, I wondered: had their advisors not spoken to them about this topic?

I think many advisors do ask their clients about their personal affairs, including their wills, but may give up when no action is taken or just keep reminding and harassing them to no avail. But I also think many advisors get caught up assisting their clients with their business affairs and often do not connect the business and personal sides. This is why I really like my wealth advisory gig: I get to connect these two aspects and integrate a client’s business, personal, retirement and estate planning into one.

I know many advisors read this blog, so advisors, at your next meeting with any client, circle back on what happens if they die (if you do not have an advisor, have this conversation with yourself :). Make sure they have these basics covered:
  1. Will and a secondary will for their corporate interests if their province allows
  2. Power of attorney for finances
  3. Power of attorney for personal care (medical)
  4. Insurance in case of death

I am not letting you off easy


If you are reading this and don’t have a will, powers of attorney or life insurance on your life to support your family if you pass away, you need to get over whichever one of the five hang-ups you have for not dealing with these matters and consider the mess you will leave your family without a will or any of the other key items. Do it for them—today, this week or this month; not “sometime before year-end."

The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

Please note the blog posts are time sensitive and subject to changes in legislation.

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.

Monday, January 27, 2020

My child is engaged. Do I pay for the wedding?

Late last year my colleague Carmen McHale popped by The Blunt Bean Counter to answer a question we hear a lot: Should I pay for my child’s university education?

This week I asked Carmen to come back and share her thoughts on whether parents should pay for a child’s wedding. Paying for a wedding brings up different questions from those parents ask about paying for university. But the two topics share a core theme: when parents need to cut the financial cord with their kids.

Almost everyone who has children tackles the issue at one point or another. Carmen deals with it here and wraps up with some final thoughts on teaching your children about financial responsibility.
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By Carmen McHale

Weddings challenge parents to make a bunch of difficult decisions in advance of the happy occasion. One of them is finances.

Many cannot fathom not paying for their child’s wedding, at least in part. But a wedding can easily cost upwards of $50,000, so paying for even half of that can set your retirement back a year or two.

Let’s say you agree to pay half the cost – $25,000. What does that do to your retirement? If you could invest that $25,000 at 4.5% over 20 years, you will lose $60,000 in retirement savings. (This is assuming after-tax dollars.) If you are struggling to save for retirement like most Canadians, that $60,000 pays for one year of retirement. By covering half of your child’s wedding, you may have to retire a year later. Now consider that for two, three or four children – the costs begin to add up.

In practice, parents generally follow one of these courses of action, moving from covering no costs of the wedding to covering the entire cost. Parents:
  • Do not cover any costs, because they believe their children should stand on their own two feet
  • Do not cover any costs, because the wedding does not fit their budget
  • Assist child with the costs
  • Pay the full cost of the wedding and then ask their child to repay some of the outlay using wedding gifts
  • Pay the full cost of the wedding because their bank account can foot the bill
  • Pay the full cost of the wedding, even though it stretches their finances, because we love our children and want to help them in any way we can. (Just remember that this may affect your retirement.)
Deciding whether to pay for a wedding brings a host of financial complications that don’t stay in the family. If parents do pay – which set of parents should pay? And how should they divide the cost? What if one set of parents doesn’t have the same financial means as the other, or has completely different views about paying? These matrimonial nuances have spurred the imaginations of sitcom writers and generated a range of formulas to divide the financial hurt.

In the end, while easier said than done, parents need to do their best to separate their emotional concerns and love for their children, from their financial concerns when paying for a wedding; or else, the financial pain may be felt in retirement.    

Teaching financial independence to your children


My husband and I are blessed with a 13-year-old daughter, and she has been learning how to manage her money since she was six (that’s what happens when your mom is a financial advisor).

We used to give her a weekly allowance in loonies and toonies so she could learn how much a dollar would buy. She has now graduated to having her own bank account and has developed the skills to save for larger items, like a new headboard for her bedroom (the proudest moment for her mom).

It is important to teach children to make their way in the world – after all, that is what we are tasked with as parents. Part of this teaching should include finance, and it should start at a young age. Make children responsible for something – their allowance is just one example.

To help older children become financially literate, first come up with a budget and make them responsible for it. If that doesn’t work for them, help them understand they have two options: spend less or earn more. Either way, the bank of Mom and Dad is closed. This lesson in financial responsibility will hopefully keep them from a lifetime of dependence.

The decision of whether or not to pay for a wedding finds its roots in habits modeled and learned in childhood. If you plan ahead, the conversation about finances with your newly engaged child will be just one in a chain of chats – and if you have taught them how money works, they likely have thought about this already. This will help avoid the surprise that can add strain to the parent-child relationship.

BDO Canada LLP senior wealth advisor Carmen McHale is based in Calgary and helps entrepreneurs and professionals create comprehensive wealth plans.

The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

Please note the blog posts are time sensitive and subject to changes in legislation.

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.

Monday, January 13, 2020

My latest podcast interview – The Rational Reminder Podcast

I was recently interviewed by Ben Felix and Cameron Passmore, portfolio managers at PWL Capital, for their Rational Reminder Podcast. I thank Ben and Cameron for the interview. It was fun and they had some great questions.

Here’s a link to the podcast.

On the podcast we discuss a bunch of really interesting topics. Here are some highlights:
  • Why it is important to ensure that both spouses are relatively financially literate
  • When it makes sense to hire a corporate executor
  • Why you should involve your adult children in financial conversations
  • Why you may want to consolidate your investment holdings
  • How to deal with potential uneven distribution in an estate
  • Why success is not always linked to money
  • How I define my own personal success

The last question, about my own personal success, was a surprising question from Ben and Cameron. I was expecting to only discuss and provide advice on getting your financial affairs in order, not my personal successes. Afterwards, I thought about that question and my answers and was a bit surprised where I went with my answers, especially my comment on jealousy. I became so introspective on that answer that during the holiday break I wrote a blog post on that topic and will publish it in a couple months.

Anyways, I think this podcast is worth a listen and you may also want to check out some of the other interesting podcasts Ben and Cameron have made.

The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

Please note the blog posts are time sensitive and subject to changes in legislation.

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.

Monday, December 23, 2019

2019 Year-End Financial Clean-Up

This is my last post for 2019 and I wish you and your family a Merry Christmas or Happy Holidays and a Happy New Year.

As in many prior years, my last post of the year is about undertaking a "financial clean-up" over the holiday season. I feel this clean-up is a vital component to maintain your financial health. For full transparency, much of this post is similar to last year's, except for the portfolio review section.

So, what is a financial clean-up? In the Blunt Bean Counter’s household, it entails the following in between eating and the 2020 IHF World Junior Championship.

Yearly Spending Summary


I use Quicken to reconcile my bank and track my spending during the year. If I am not too hazy on New Year’s Day, I print out a summary of my spending by category for the year. This exercise usually provides some eye opening and sometimes depressing data, and often is the catalyst for me to dip back into the spiked eggnog

But seriously, the information is invaluable. It provides the basis for yearly budgeting, income tax information (see below), and among other uses, provides a starting point for determining your cash requirements in retirement.

Portfolio Review


The holidays or early in the new year is a great time to review your investment portfolio, annual rate of return (also 3-, 5- and 10-year returns if you have the information), asset allocation, and to re-balance to your desired allocation and risk tolerance. The million-dollar question is how your portfolio or advisor/investment manager did in comparison to appropriate benchmarks such as the S&P 500, TSX Composite, an international index and a bond index. This exercise is not necessarily easy (although some advisors and almost all investment managers provide benchmarks, they measure their returns against). The Internet has many model portfolio's you can use to create your own benchmark if you are a do-it-yourself investor.

While 2019 has been a great year in the markets, I would not skip reviewing your investment portfolio because your returns were strong. I say this for the following two reasons:

1. Your returns should still be measured against the appropriate benchmark as noted above. That is how you should compare your returns on a yearly and multi-year basis. So even if your return is good, you may have still under-performed your benchmark last year or over a 3-, 5- or 10-year comparative basis.

2. We are usually concerned with ensuring our returns are not worse than a benchmark. However, what if your returns were way higher than the benchmark? This can also be a concern that your manager is over-reaching their mandate. For example, say your manager way outperformed in 2019. I would ask them why they so outperformed. Assuming their answer is not just that they are awesome and that is why you use them, dig into their reason. Make sure it is just that they were lucky or skillful in 2019 and outperformed within their mandate—and that they did not take more risk than the mandate you provided them.

For example (this is a real case, but I am changing the facts and situation a little to protect the innocent), I was in a meeting where the investment advisor way outperformed in 2019. I asked them why they so outperformed in 2019 and got a somewhat satisfactory answer. However, I also found out they had sold off over 25% of the equity position in late November as they felt they had got their returns and the market was frothy. I nearly fell out of my seat. The investment advisor undertook a massive reallocation which he did not discuss fully with the client, and his actions clearly reflected a market timing mentality that should raise significant red flags despite the great 2019 returns. So sometimes, "too good" returns should be reviewed as intently as poor returns.

Tax Items


As noted above, I use my yearly Quicken report for tax purposes. I print out the details of donations and medical receipts (acts as checklist of the receipts I should have or will receive) and summaries of expenses that may be deductible for tax purposes, such as auto expenses. If you use your home office for business or employment purposes (remember, you need a T2200 from your employer), you should print out a summary of your home-related expenses.

Where you claim auto expenses, you should get in the habit of checking your odometer reading on the first day of January each year. This allows you to quantify how many kilometres you drive in any given year, which is often helpful in determining the percentage of employment or business use of your car (since, if you are like most people, you probably do not keep the detailed daily mileage log the CRA requires). 

The CRA recently reviewed or audited multiple clients of mine on their auto expense claims, and not having logs has been problematic. Thus, I would suggest if you are not going to keep an annual log, you should at minimum keep a log for a month or two each year.

Medical/Dental Insurance Claims


As I have a health insurance plan at work, I also start to assemble the receipts for my final insurance claim for the calendar year. I find if I don’t deal with this early in the year, I tend to get busy and forget about it.

To facilitate the claim, I ask certain health providers to issue yearly payment summaries. This ensures I have not missed any receipts and assists in claiming my medical expenses on my income tax return. You can do this for among others: physiotherapists, massage therapists, chiropractors, and orthodontists—even some drug stores provide yearly prescription summaries. This also condenses a file of 50 receipts into four or five summary receipts.

Year-end financial clean-ups are not much fun and are somewhat time consuming. But they ensure you get all the money owing back to you from your insurer and ensure you pay the least amount of taxes to the CRA. In addition, a critical review of your portfolio or investment advisor could be the most important thing you do financially in 2020.

Book Giveaway


The three winners of  the Charles B. Ticker book giveaway, “Bobby Gets Bubkes: Navigating the Sibling Estate Fight” were:

Mike P.
Elaine B.
Kim H.

The winners have been notified.

The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

Please note the blog posts are time sensitive and subject to changes in legislation.

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.

Monday, December 9, 2019

Navigating the Sibling Estate Fight – Plus a Book Giveaway

I recently read the book “Bobby Gets Bubkes: Navigating the Sibling Estate Fight” (bubkes is Yiddish, meaning nothing, nada, zip, zilch), by Charles B. Ticker, which explains how to navigate a sibling estate fight. Charles, who is a mediator and estate litigation lawyer, previously contributed a guest post to this blog on The Top Five Areas of Estate Litigation.

As an accountant who has dealt with families for many years and has written on various sibling issues (such as Sibling Rivalry – Parents Beware, it is not only a Childhood Isssue and Is Your Estate Planning Horizontally Challenged?, where I discuss how parents need to consider their children’s sibling relationships when drafting a will), I found this book very interesting.

Today I am going to highlight a few of the issues and points made in the book that caught my attention (Note: I am not reviewing each chapter, so I jump between chapters in my post below).

In addition, Charles has graciously provided three free copies of his book to give away to readers of the blog. Please see the details at the end of the post.

Mom always liked you best


In his book, Charles states that many sibling estate fights have deep roots that can go back 50 or more years. In the first chapter he notes the most famous line from the Smothers Brothers Comedy Hour, a classic TV show from the late sixties, where Tommy Smothers would complain to his brother, Dick, “Mom always liked you best.” Charles recounts how Tommy said the audience went wild the first time he came out with that line and that it resonated because everyone could relate to the experience.

The issues siblings have do sometimes stem from perceived favouritism by mom, but more likely they come from an event or events that occurred in childhood, such as letting a pet get loose or “killing the pet through neglect,” taking a hockey card collection or injuries from roughhousing. Charles notes that once the parental referees are out of the picture, the gloves come off.

Charles sums up this topic by saying, “My clients constantly refer to negative childhood episodes involving a sibling with whom they are engaged in a legal dispute over the parent’s estate. Even though what happened when they were kids has nothing to do with the lawsuit, the painful memories of those negative experiences fuel the estate dispute between them as adults.”

It’s not fair!


In his second chapter, Charles notes a very common refrain from his clients: the will is not fair. But Charles states that it is a common misconception that a will has to be fair. He notes that “while wills are often challenged because they appear to be unfair, a successful challenge in most jurisdictions is not based on the issues of fairness but rather the issue of whether the parent understood what he or she was doing when the alleged unfair distribution of the estate was made.” This is a shock to most people

The concept of fairness is a tricky one. Is a will unfair if there are unequal gifts? Is the will unfair when there are equal gifts, but one child took mom into her home the last 10 years of the mother’s life and fed her and looked after her?

Charles concludes the second chapter by saying that perceived unfairness – regardless if the children are treated equally or unequally – may contribute to an estate fight.

Why it’s important to visit your parents


Many children are cut out of a will or left a smaller inheritance than their siblings because they had a diminished relationship or no relationship with their parents. Charles makes an interesting comment on this issue when he says, “This may seem like a cruel remark, but the bottom line is that an adult child should not expect to receive a bequest from a parent’s estate if he or she did not have an ongoing relationship with that parent.”

While this would seem obvious, apparently it is surprising to many of Charles’ clients.

Parents: Have that discussion


Readers of my blog will know that I am a huge proponent of discussing your will to some extent with your family and explaining your intentions. Charles seems to agree with me. He states that choosing not to talk to your children is a big mistake, “as leaving questions unanswered can create these difficult disputes.”

The child as a caregiver


I commented above on whether it is fair to have equal gifts where one child has looked after a parent for years. This has become more common the past few years, whether the care is in the home of the child or in the parent’s home or a nursing home. Very often one child becomes the primary caregiver - through desire, geographic location, job demands, whatever.

Charles notes that in Ontario the caregiver child may be able to claim for more of the estate based on the care they provided to their parents. They do this by claiming compensation for services rendered to the parent based on a doctrine called quantum meruit. Of course, this all presumes there was no formal contract between the parent and the child.

Broken promises


In Chapter 4, Charles discusses the common complaint from a child that a parent had promised a particular asset or gift to the child and that “promise” was not in the actual will. Charles notes a recent Ontario case on the issue, where a farmer broke his promise to leave the family farm to his son. Fourteen years after the farmer passed away and enormous amounts of money were expended in legal fees, the Ontario Superior Court awarded the farm to the son but ordered him to pay $1.325 million to his sister.

The moral of the story is: parents, if you promise your child something, ensure it is reflected in your will or don’t make the promise in the first place.

As I don’t want to give away the whole book, I will stop here. If you would like to order a copy of Charles' book, purchase it here (Canadian link).

Charles Ticker is an estates lawyer based in Toronto who focuses on estate litigation and mediation of estate disputes. More information about him can be found at http://www.tickerlaw.com/. The information in this blog is not intended to be legal advice. Readers should consult their own lawyer, attorney or other professional for advice.

Book giveaway


As noted above, Charles has provided me three books to give away to my readers. If you are interested in a copy of the book, email me at bluntbeancounter@gmail.com by December 16th. I will notify the winners by email on December 20th.

The above blog post is for general information purposes only and does not constitute legal or other professional advice or an opinion of any kind. Readers are advised to seek specific legal advice regarding any specific legal issues.

The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

Please note the blog posts are time sensitive and subject to changes in legislation.

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.

Monday, November 25, 2019

Do You Have To File Taxes for Someone Who Died?

Thinking about taxes on a yearly basis is not fun. When dealing with the death of a loved one, it can make a challenging situation even more of a headache and forces one to face the only real certainties in life; death and taxes. In this blog post, I will walk you through the tax returns an executor needs to file at the time of death, allowing you to ease the stress of an already difficult experience.

Before tackling the filing of the tax returns, make sure that there is a legal representative in place, and that all authorities have been notified. These authorities include the Canada Revenue Agency (CRA), Service Canada, and the deceased person’s financial advisors and institutions. Once those initial steps have been taken, it is time to turn your attention to the tax returns and forms that come into play after a death.

Before I get to the returns that must be filed on death, I would like to thank Christopher Bell of BDO Canada for his assistance with this blog post. A quick backstory. Assisting with this blog post was one of the final things Chris did as a senior tax accountant before he changed career paths from income tax to digital project management. In a related story, I am now persona non grata with our tax department.

Final personal tax return


A final return must be filed for all taxpayers in Canada after they die. This return is a personal tax return (known as the "terminal return") just like in every other year and is filed from January 1st of that year up to and including the date of death, but there are some special rules that need to be followed when filing this return. Please note: that unless otherwise noted, this blog post assumes the tax return is being prepared for a single person who passed away or the last to die spouse.

The first thing to keep in mind is that income paid to the deceased will need to be prorated between the final return and the estate return (discussed below) based on the date of death. For example, some investment income slips such as T5's may be issued for the calendar year, but if the date of death was say July 31st, you need to prorate the income from January 1st to July 31st for the terminal return and from August 1st to December 31st for the estate return. If you are unsure whether the amount was prorated, you should confirm with the issuer of the income slip.

Capital assets


The Income Tax Act deems all capital assets of a taxpayer to be disposed of immediately before the death of a taxpayer and considers the proceeds from selling these items to be received at that time at fair market value (referred to as a deemed disposition). Based on the cost of these assets, this deemed disposition may result in a capital gain or a capital loss. For example, if you own 100 shares of a bank stock that cost $30 and are worth $50 at death, the deemed capital gain is $2,000 ($50 - 30 x 100 shares).

The exception to these rules is when assets are transferred to a surviving spouse or common law partner. The deemed disposition is then deferred to the earliest the surviving spouse sells the shares or dies. In some cases, it may make sense to “elect out” of the automatic tax-free transfer of capital property to the surviving spouse noted above. Tax planning for the death of the first spouse was discussed in greater detail in this blog post along with the related administrative headaches (many of these administrative issues also apply upon the death of the last surviving spouse).

Under this election, it may be tax effective to trigger taxable capital gains on the final return of the deceased spouse, as the election may reduce the amount of tax paid overall. This is usually limited to circumstances where the deceased spouse had a very low tax rate, had unused capital losses carried forward or had alternative minimum tax carryforward, among a few other possibilities. The election is made on a security-by-security basis at the fair market value.

In some circumstances it may make sense to elect to trigger a capital loss or losses at death instead of a capital gain. This would be for example to offset capital gains on the terminal return.

If there are capital losses on the final return, you can go back up to three taxation years prior to the death of the taxpayer and claim them against capital gains that tax would have previously been paid on using Form T1A.

Alternatively, if there is a net capital loss in the year of death, you can apply these losses against other income on the terminal return. You must first reduce the net capital loss by any capital gains deductions the deceased had previously claimed to date, and the remainder can be reported as a negative capital gain on Line 127 of the tax return.

These topics surrounding capital gain and losses are quite complex and are best discussed with a trusted advisor.

Pensions


Where the deceased was single or a surviving spouse, the fair market value of the RRSP or RRIF is deemed to be received immediately before death and is considered income on the terminal return.

Where there is a surviving spouse or common law partner, you can generally avoid these taxes on death by naming the surviving spouse or common law partner of the deceased as the beneficiary of the RRSP/RRIF, and then to file an election for the assets held in the plan to be transferred to the beneficiary’s RRSP or RRIF on a tax-deferred basis.

If the spouse is not named as the beneficiary of the RRSP/RRIF, the estate representatives can generally elect on the final return for the tax-free transfer to still happen as long as the RRSP/RRIF funds are left to the spouse under the terms of the will. Please seek professional advice in this situation.

Tips to complete the final personal tax return


  • You can still elect to split pension income on the final tax return, so long as the deceased and their spouse or common law partner previously jointly elected to do so on their tax returns prior to death.
  • All assets held in the name of the deceased are deemed disposed of at death, including personal items such as jewelry, paintings, and boats. There are special rules around these assets that need to be considered and should be discussed with your financial advisor.
  • RRSPs and RRIFs can also be transferred tax free to financially dependent children or grandchildren under 18 in certain circumstances.
  • TFSA accounts are fully tax free to the beneficiaries; however, any income earned between the date of death and the distribution is taxable to the beneficiary.
  • TFSA accounts can also be transferred to the spouse or common law partner of the deceased tax free, and the account will continue to exist. The survivor can also elect to transfer the amount to their TFSA if they prefer to not maintain two accounts, as this is considered a qualifying transfer.
  • Any unpaid amounts (including bonuses, dividends, etc.) must be accrued up to the date of death. This amount can be included either on the final return or on the return for rights or things, which we discuss a little later in the post. There is sometimes a benefit to filing this separate return, but it is circumstantial and should be discussed with a financial advisor.
  • You will need to send a copy of the death certificate in along with the final return, so keep a copy at hand.


Final return due date


The due date of the final return depends on when the person passed away. See the below chart for the due date of the final return.

Date of death
Tax return due
January 1 to October 31
April 30
November 1 to December 31
6 months after the date of death
If the deceased or their spouse/common law partner operated a sole proprietorship in the year of death:
January 1 to December 15
June 15
December 16 to December 31
6 months after the date of death

The surviving spouse’s return will always be due April 30 or June 15 respectively, meaning that no extra time is granted to file their return despite the death of the other person.

Optional returns


You may choose to file optional returns to report income that you would normally report on the final return. The benefit of doing this is that you can reduce the total taxes owing by the deceased by claiming certain tax credits and using lower marginal tax rates. It is best to consult a trusted advisor to discuss this type of planning in detail.

There are three types of optional returns:

Return for rights or things


The return for rights or things covers amounts that were payable to the deceased at the date of death and, had the person not passed away, would have been paid to them and included in their income. This return enables the representative to report the asset values at the time of death. Some examples of assets that would be listed on this return are:
  • Unpaid salary, commissions, and vacation pay
  • Dividends declared prior to death
  • Old Age Security benefits that were payable to the deceased
  • Unmatured bonds coupons and bond interest that was unpaid
  • Work in progress for professionals operating as a sole proprietor
This return is due at the later of 90 days after the CRA sends the notice of assessment or reassessment for the final return and one year after the date of death.

Return for a partner or proprietor


This return is filed for a person who was a sole proprietor or partner of a business prior to death. This return is only filed if:
  • the business’ fiscal year-end does not end on December 31; and
  • the person died after the year-end of the business but before the end of the calendar year.
If this return is filed, it would cover the period from the first day of the business’ new year to the date of death. If a legal representative chooses not to file this return, the business income would instead be reported on the final return. This return is due on the same date as the final return.

Return for income from a graduated rate estate


This return can be filed if the deceased received money from a graduated rate estate (GRE) prior to death. This return is rarely filed, and the income is normally included on the final return. This return is due on the latter of April 30 (or June 15 if the deceased was a sole proprietor) and six months after the date of death. If you want to know more about this, we recommend you refer to a blog we previously posted, written by Howard Kazdan here for some background information, but you should contact your professional advisor for detailed guidance.

Estate Returns (T3 Return)


In addition to the returns noted above, the estate of the deceased must file T3 tax returns each year until the estate is wound up. Typically, the returns are filed based on a year starting from the day after the date of death and ending one year later, although you may elect to have a December 31 year-end for these returns as well. Estate returns and any balance owing are due within 90 days of the year-end of the trust. Winding up an estate could take several years and is a lengthy topic on its own.

Even if the estate is wound up quickly, the executor may file at least one estate return (the “executor’s year”). And there may be tax advantages to filing even when it is not mandatory. One is having income earned in the estate taxed at graduated personal rates (instead of the higher marginal rates of the beneficiaries) – basically, a way to effectively have another return on death for the income earned in the first year of an estate.

When filing the first T3 return after the death, make sure to include a copy of the will.

Clearance certificate (Form TX19)


If you are serving as the legal representative for a deceased taxpayer or trustee of an estate, getting a clearance certificate is advisable prior to distributing any assets from the estate. A clearance certificate is issued by the CRA upon request, and certifies that either the liabilities payable to the CRA have been paid or security has been accepted in place of payment. If a legal representative chooses not to obtain a clearance certificate, they could be held personally liable for the amounts outstanding up to the value of the assets that were paid out. I previously wrote a blog specifically on clearance certificates, which you can read here.

Reduce the stress with a plan


As you can see, there is a lot to do with taxes at the time of a person’s death, and the sooner you begin to organize and plan for it, the smoother the process will go. A lot of the stress that goes along with filing these returns can be mitigated through proper estate planning and having trusted financial advisors in place to guide you and your loved ones through the process. On top of this, having a good plan in place will ensure that you avoid unnecessary probate and income tax, which will save you money.

Plan to Sell Your Business? You may be Interested in this Survey! 


If you’re a financial executive or business owner, here's your chance to share insight on how you plan to sell your business. My colleagues at BDO are conducting a survey in partnership with Financial Executives International Canada. The survey will be open until November 27 and will generate research to be released in 2020. Take the survey here.

The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

Please note the blog posts are time sensitive and subject to changes in legislation.

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.