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. 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, September 20, 2021

The Basics and Uses of Term and Permanent Life Insurance

I am back after a summer of R&R, which proved more golf does not mean you will play better golf. 😊 I hope everyone had a good summer and had a chance to decompress from the stress of the last year and a half.

With the ability to finally get together with friends and family (socially distanced) this summer, there was lots to catch-up on and discuss. I guess because of COVID contemplation, the topic of insurance surprisingly came up a couple times during these get togethers and I noted some confusion on the topic.

So, I thought today, I would post on the basics and uses of insurance and discuss the two main types of insurance: term insurance and permanent insurance.

Term Insurance

In its most basic form, term insurance covers you if you die during the term of the insurance; but there is no cash value, guarantee or payment if you die once your term insurance has lapsed. Term insurance is often limited to a certain age (75-85) and becomes very expensive as you age (for example, my term insurance increased substantially when it renewed at the end of the 10-year term when I turned 60 years old). Thus, many term policies are either cancelled as your need for term insurance diminishes (see discussion below) or people allow them to lapse due to the age/premium cost constraints. It should be noted there are variations on term insurance and certain polices allow you to convert the term policy to permanent insurance.

On an overly simplistic level, term insurance can be compared to renting versus buying a home. When you pay rent on your apartment, condominium, or home, you have a place to live, but the rent paid does not build any equity and the monthly rent paid is cash forgone. The same holds with term insurance. If you are healthy throughout the term of the policy, you do not build any cash value/equity and the monthly insurance cost paid is forgone (although obviously, if you die while owing term insurance, your estate is paid the insurance).

As term insurance is temporary and has no cash value, it is the most cost-effective type of insurance available and is generally used to insure a specific need or a couple needs, such as one or two of the following:

1. Income replacement – term insurance can be used as a "replacement" of income for the deceased person. This is particularly important where one spouse/partner is the breadwinner, but is still often, a very good idea even when both spouses work. The objective of the term insurance in this situation is to allow your family to live in the manner they are accustomed to even if you or your spouse/partner passes away.


2. Financial security for dependents – this is really just a subset of #1, but term insurance ensures your spouse/partner is taken care of the rest of their life, and your dependents are financially covered until they are ready to join the workforce.

3. Debt and Mortgage protection - insurance can be used to pay off debt, typically the mortgage on your home when you pass away so that your family is relived of the debt burden.

4. Funding of University - many parents want to ensure their children are educated and use insurance to backstop that goal in case they were to pass away.

Permanent Insurance


The two main types of permanent insurance (although there are several variations and permutations) are:

1. Whole Life

2. Universal Life (“UL”)

These policies provide insurance coverage for life, so your estate is guaranteed an insurance payout of some quantum. I provide some brief comments on whole and UL insurance below:

Whole Life


With a whole life policy, the risk is typically shared between you and the insurance company. The insurance payments are generally fixed, have a cash surrender value (that can be borrowed against during the life of the policy or withdrawn if the policy is surrendered) but the premiums growth of the cash and death benefit can be affected by a calculation called the dividend scale. If the dividend scale drops too low, there will be less cash value and potentially require further premium payments by the policyholder to ensure the policy does not lapse. So, when looking at a whole life policy, you should ensure your advisor provides different dividend scale scenarios in their proposals, so you have an expected scenario and a worse case scenario to compare.

Universal Life


The premiums for a UL policy are typically more flexible and generally do not provide a significant cash surrender value and the risk of the policy typically falls to the insurance company. There is an insurance component and a tax sheltered “savings” component.

There are various opinions on whether whole life or UL are better choices, but really, they are dependent upon your personal risk and insurance needs. In all honesty, both whole life and UL are complex to understand. I plan in the future, to have a guest post to discuss in greater detail the differences, advantages and disadvantages of whole life and UL.

Where to use Permanent Insurance


Whether you purchase whole or UL, permanent insurance usually makes sense for the following situations: It should be noted that because insurance proceeds are credited to the capital dividend account (see this prior blog post on the capital dividend account) permanent insurance if very often used by corporations, which can make the policies tax effective.

Uses of Permanent Insurance


As noted previously, unlike term insurance which typically covers temporary needs, permanent insurance if often used for longer term needs, such as the following:

1. Estate planning – Upon death, your estate will be allocated in some combination to the CRA in taxes, your family or charity. Permanent insurance can be used to provide the liquidity for paying your estate tax liability (typically in a much more tax effective manner than self-funding), estate equalization with your family or even estate growth/maximization by leaving a larger estate to your family from the insurance pay-out.

2. Business or partnership agreements – Permanent insurance can be a very tax effective way to buy out a deceased partner or shareholder under the terms of a partnership or shareholder agreement. As noted above, permanent insurance if very often utilized where corporations are involved because of the capital dividend account.

3. Passive Income rules- Permanent insurance can shelter income tax free within a policy, which effectively reduces taxable passive income for a corporation and therefore can potentially reduce the small business claw back for corporations.

4. Charitable – You can name a charity as beneficiary of a policy or make a bequest of the death benefit from a permanent policy to a charity of your choice and your estate will receive a charitable tax credit upon your death. You can also purchase or transfer a policy (this may result in a taxable deemed disposition, so speak to your accountant first) to a charity and you would receive a tax credit on the yearly premium payments.

5. Alternative for Fixed Income – I have seen some sophisticated investors use a permanent insurance policy to replace the fixed income component of their portfolio, as even when you factor in the cost of insurance, the return of a permanent policy may exceed the return from fixed income investments.

When you use the word insurance most people wince and only focus on the premium costs. But as discussed above, insurance can protect you short-term or be used to assist with longer term business and estate planning needs. In addition, with permanent insurance, the after- tax returns of an insurance policy versus alternative investments are often higher even after accounting for paying the insurance premiums.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.

Monday, June 28, 2021

Gone golfing for the summer—Plus sign up for newsletter

This summer, as usual, I will take a break from the blog and spend some time golfing and enjoying the good weather—I hope with family and friends. I will likely post a couple Best of The Blunt Bean Counter posts during this time.

I will also use my time this summer for some life contemplation, including where and how the blog fits into the picture as I wind down to my retirement.

I wish my readers a great summer and ensure you take some time off; you deserve it after the last 16 months or so.

With my summer break approaching, it’s a great time to sign up for BDO’s newsletter. It goes out every two weeks and gives great business insights on a variety of timely and critical business topics. I often link to them in my posts.







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, June 14, 2021

Let me tell you! William Bengen knows how to define success

Today I bring back my old “Let me tell you!” series, where I delve into topics that are more philosophical than financial. In this blog post, I discuss the three life questions financial guru William Bengen asks himself each night before he goes to sleep.

Mr. Bengen is a bit of legend in financial circles. He created the ubiquitous 4% retirement rule: that people can withdraw 4% of their savings every year in retirement and still support themselves financially. I have written about this rule several times in my “How much do you need to retire” posts. The last time was in February.

But Mr. Bengen also has some interesting thoughts beyond finances. In February he joined the Rational Reminder Podcast to discuss retirement planning, and also shared his thoughts on success in general. (By the way, I was also interviewed for this podcast last year.)

Bengen defines success  


Podcast hosts Benjamin Felix and Cameron Passmore typically ask all guests the same last question: “How do you define success in your life?” I found Mr. Bengen’s answer fascinating.

“That's a wonderful question for everyone, I guess," he said. "Before I go to bed each night, I've done this for a number of years, I ask myself three questions.

"And the first question is, today, did I learn anything new, or did I create something? The second question is, did I do anything to help anybody, particularly people I love, but even if for a stranger, maybe helping an old lady across the street, or helping a child understand a math problem? And the last point is, have I given proper attention to this, the mystery and wonder of the world in the universe, and being alive and being able to experience all this? If I can answer yes to all those three questions during the day, I felt I've had a successful day.”

While the above quote has nothing to do with Mr. Bengen’s brilliant financial planning, it shows a truly insightful mind that looks at success as more than just fame and financial success. As I wrote two fairly popular blog posts on money and success in 2012 (see here and here), his comments intrigued me. Today I break down his thoughts.

"Did I learn anything new ... or did I create something?"


Wow, did this answer strike a chord. In 2018 I wrote a post making the case that if you are not learning, you are forgetting. My father-in-law has espoused this mantra all his life, and his children and grandchildren live by it. A hunger for learning has so many positive aspects. It keeps your mind active, allows you to pass knowledge down to your family and friends, helps you in your day-to-day business interactions and opens your mind to concepts and thoughts you may have previously dismissed. I do not want to dismiss the second part of Mr. Bengen’s question - “did I create something” - but that would be a more limited question in most cases.

"Did I do anything to help anybody today?"


While Mr. Bengen initially spoke about helping family, he expanded that to helping anyone. As I think most of us tend to help our family as a given, I will veer off into the topic of helping anyone.

While helping an old person across the street or holding a door open is quick and simple (is it me, or is holding the door open a lost courtesy? I do this all the time but constantly have doors slammed in my face when walking behind other people), I personally appreciate those who give time to causes.

Time is precious and to give to others is incredibly special. I have a good volunteering track record compared to the average person: being a Big Brother, granting wishes under the Make-A-Wish Foundation framework, and sitting on a couple charity boards. But when I see how much more others do, I am often humbled. Coming out of COVID, I suggest you consider giving of yourself whenever and wherever.

One can also help financially. One can argue this is an easy way out, but I disagree. Organizations need volunteers, but they also need money. I recently wrote a post explaining why donating marketable securities provides an altruistic benefit and a tax benefit.

"Have I given proper attention to this, the mystery and wonder of the world in the universe?"


I really like this last question. We are often startled by nature and the general wonders of the world; however, I would suggest this happens far too little. My only comment here is that COVID took many of us to negative places, mentally and physically (offset by some heroic front line and other efforts by special people). It would probably do us some good as we start moving back to a “new normal” to appreciate some of the mystery and wonders of the world, to recharge our positive selves.

My concern with any of my “Let me tell you!” posts is they become preachy. But I hope today’s post on Mr. Bengen’s nighttime routine provides you some helpful thoughts for reflection.

Note on new email system


For those of you who are subscribers and received this post via email, you may have noticed a small difference in the email notification. I have changed to follow.it as my email provider, part of my ongoing efforts to use the most up-to-date technology. If you would like to subscribe to the blog, enter your email in the box at the top right corner of this page.

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, May 31, 2021

“My Kids Will Never Fight Over My Estate”

In December 2019, I reviewed the book “Bobby Gets Bubkes: Navigating the Sibling Estate Fight.” In that book, estate lawyer Charles Ticker attempts to explain how to avoid, or at least limit, sibling estate fights when drafting your will. In the comments section to that post, Michael James, who writes the excellent finance blog Michael James on Money, made the following remark:
Sounds like an interesting book. Sadly, I'm guessing most people incorrectly think that their own kids would never squabble in these ways, so they think they don't need to follow the book's advice.
Michael’s “guess” is very perceptive. Based on my experiences over 35 years as an accountant, many parents look at their children and their sibling relationships with rose-coloured glasses or, in some cases, with blinders. As a consequence, they ignore clear warning signals that their children have significant sibling rivalry issues and don’t work well together. In some cases, you can almost predict a sibling estate fight.

Let me be clear. I am not saying every estate has a sibling fight. Many families settle and distribute the estate in accordance with the will and their parent’s wishes with little acrimony. However, this is far from the case in many estates, as human nature can turn ugly when there is money and sentimental items at stake, especially where sibling issues have reared their heads during the parents’ lifetimes.

Today, I am going to list factors in no particular order that can cause siblings to squabble over an estate.

Why siblings squabble over an estate


  • Greed – Very simply, money causes some people to lose their minds and perspective. This can destroy sibling relationships.
  • Grabbers – I have seen this many times. One child “grabs,” or takes, items before the will is considered, or even ignores the wishes of the will, which starts a spiral of hurt and mistrust among the siblings.
  • Sentimental items – Children often fight over these items. In many cases, this issue can be avoided if the parent simply provides a specific item-by-item allocation in their wills of sentimental items such as jewelry. Parents can also cause huge sibling issues when they promise or tell a child they will receive a certain item and then do not specifically allocate that item to the child in their will—or worse yet, allocate the item to another child. Parents: always make your will consistent with what you have told your children, or communicate the change to them.
  • Grandchildren – There is no right or wrong answer here, but parents really need to think through how to allocate their estate when one of their children does not have children of their own or each family has a different number of grandchildren. Is the estate split equally by family? And if giving money directly to grandchildren—does each grandchild receive the same amount, or is the allocation equal by family and a grandchild with no siblings receives more than a grandchild with siblings?
  • Business assets – When parents leave a business to one sibling and equalize other siblings in cash or investments of equal value, one would think they have accomplished peak fairness. Yet some businesses explode after the parents die, making the child that took over the business very wealthy. Alternatively, the business may stumble or even fail, leaving that child in far worse financial situation than their siblings. Either way, the disparity in financial position creates acrimony. And it’s just one specific nuance of conflict in family business succession.
  • Asset in one child’s name – Parents often put assets in a child’s name for probate or tax planning purposes. But as the saying goes, ownership is nine-tenths of the law. Some siblings may depart from the parents’ assumption that they will act just as trustees of that asset for their siblings. They make think of themselves as the actual owner of the asset.
  • No parents, no buffers - One comment from Charles’ book I found truly relevant was “that once the parental referees are out of the picture, the gloves come off.” I have seen this so often. Parents really do act as buffers and referees for their children. Without a referee, disagreements can break out.
  • Spouses and in-laws – Spouses and in-laws in the ear of one child stoking their belief that the parents divided assets unfairly have caused many a sibling fight.

Parents: Have that discussion


Many of the above issues are human nature, which can’t be avoided entirely. But parents need to consider all the above possibilities when drafting a will. Readers of my blog will know that I am a huge proponent of discussing your will to a full or partial extent with your family and explaining your intentions. I think this can sometimes avoid or minimize sibling estate issues.

It is sad that sibling estate fights are even a topic, but they do unfortunately often become an issue. Parents, my suggestion to you is consider these issues, get good estate planning advice, consider a family meeting, and take off your rose-coloured glasses when planning your estate.

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, May 17, 2021

The stunning story of a patient investor who made good

Investment managers and professionals swear by two mantras. The one that gets the most buzz is to understand your risk tolerance. But it’s the other that I want to discuss today: have patience and conviction with your investments. This holds true whether you have hired an investment manager or investment advisor to manage your investments, or are a do-it-yourself investor.

I recently encountered a stunning example of the value of patience in investing. I was preparing a client’s tax return (note: the client has given me permission to discuss this example, without using their name). In preparing her return, I flagged that she may need a T1135 Foreign Income Verification form, which reports foreign holdings. My client had about 2500 shares of Apple stock, and I was unsure whether the shares has an adjusted cost base of more than C$100,000—the threshold to require that form.

The client said no, the original cost was far below the $100,000 threshold. It was just that she had held her Apple shares for around 14 years and not sold them. The client also provided me a summary of her stock purchase history. She had purchased 100 shares of Apple stock in 2008 for around C$16,000 and basically held onto them. She had only sold off a small portion once: in 2012, to help fund a house purchase.

The summary provided was startling. The 2,500 Apple shares that she owns had a fair market value of $375,000 (as of mid-April). Yet all she did was buy the original 100 shares 13 years ago for $16,000 and wait. Time and stock splits, and Apple’s overall strong performance, took care of the rest. What a textbook case of a patient investor (especially so given Apple’s stock price has been all over the place).

As someone who in shredding my tax returns a couple years ago realized how many flyers I had taken, how many disruptive stocks I had purchased looking for the big winner, I felt really ridiculous. I felt even worse when I realized that my first blog post on The Blunt Bean Counter in Sept 2010 was called Why Didn't You Buy Apple for $25?

In that post I discussed famed money manager Peter Lynch, who among many other suggestions noted that by just paying attention to what is going on around you and having some basic common awareness, both the novice and the sophisticated investor can find growth stocks in their day-to-day lives. I then commented in the 2010 post: “think of how much money any of us could have made paying attention to the iPod fad. Kids were suddenly walking around with white wires hanging out of their ears attached to these newfangled ‘Walkmans.’ In retrospect, how could we have missed this and not bought Apple?”

Why I did not buy Apple after writing that blog post is beyond me—and my clients’ timeline is fairly similar to that initial post.

Apple is just an example. You could have purchased most any Canadian bank in 2008 and had spectacular gains if you held the stock. Maybe not as large as Apple, but still substantial with significant less volatility.

So the moral of the story: Patience and conviction in your investing are especially important. That does not mean once you buy a stock you hold it for life; you still must review whether your original reasoning and thesis for purchasing the stock is still valid and whether the company is still growing. But good companies tend to stay good companies, and flipping from one to another or looking for the next disruptor is not necessarily the best strategy. Take it from me.

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, May 3, 2021

The tax benefits of donating stocks to charities

There were many intriguing issues a couple months ago when the Reddit subgroup WallStreetBets drove the shares of GameStop, BlackBerry, AMC Entertainment, and others skyrocketing. The issues ranged from retail vs institutional investors to the power of social media stock groups to the way the Reddit group used excessive shorting to manipulate the stock price against the shorters themselves.

I will not comment on these issues today. What I want to discuss is the altruism shown by members of the WallStreetBets group. When I logged on to the forum to see what all the fuss was about, I noticed a lot of digital trash. But what I found remarkably interesting was the numbers of posters saying they would contribute x amount of their proceeds to charity and urging others to do the same. What a congruence of capitalism and altruism.

This blog post deals with the tax benefits of charitable giving and, more particularly, donating public stocks with unrealized capital gains to your charity of choice.

The Reddit folks were not the only winners this year. Those lucky enough to have kept their jobs during COVID in many cases built up excess cash reserves as their spending plunged on entertainment, travel and some retail. Many of those people and other Canadians shut in by COVID turned to stock market trading to entertain themselves and make money (as seemingly any number of stocks and sectors produced outsized gains during various periods throughout the fall and into 2021).

So, if you have significant realized or unrealized gains in 2021, how can you help society and improve your tax situation? The answer: donating part of your winnings or shares in public securities with large gains.

I have discussed this topic before, but given the current circumstances, I think it is a good time for a refresher on the tax benefits of making donations, especially as many charitable organizations are hurting due to COVID. Please note I will only discuss the donations of cash and public securities today.

Donation of cash


If you have realized capital gains on stocks in 2021, you can make a cash donation (the same holds for any cash donation whether from a realized stock gain or just excess cash in your bank account). You can claim a donation credit of up to 75% of your net income. Where an individual makes a charitable donation of cash, there is a federal non-refundable tax credit of 15% on the first $200 of donations. For donations in excess of $200, the non-refundable tax credit increases to 29%. In addition, the provinces provide provincial tax credits.

In Ontario, my home province, the actual tax savings for a donation range from approximately 40% (if your net income is around $50,000) to 50% (if you are a high-rate taxpayer) of your actual donation, for any donations in excess of the $200 limit. Thus, from a cash perspective, your donation only costs you 50-60% of what you donate to the charity. A good deal for all parties.

Donation of public securities


For those of you sitting with large unrealized gains on public securities, a donation of these shares is even more tax effective than a donation of cash from the sale of your shares (this applies to non-registered account donations only, not RRSPs etc.). That is because when you donate public securities listed on a prescribed stock exchange, the taxable portion of the capital gain is eliminated, and the net after-tax cost of the donation is reduced substantially.

For example, if a high-rate Ontario taxpayer sells a stock for a $10,000 gain (say the proceeds were $12,000 and the cost was $2,000), they would owe approximately $2,700 in income tax on the capital gain in the following April. If they donate the gross proceeds of $12,000, the donation would result in income tax savings of approximately $6,000 when they filed their return. The net after-tax cost of the donation is approximately $8,700 ($12,000 + $2,700 tax - $6,000 tax credit).

However, if the taxpayer donated the stock directly to a charity, the organization would receive $12,000, the taxpayer would receive a refund of approximately $6,000, and they would owe no taxes on the capital gain, making the net after-tax donation cost only $6,000.

Clearly, where you have a stock or bond you intend to sell and you plan on donating some or all of the proceeds, a direct contribution of the security to a charity is far more tax efficient. Also note that most charities make the process relatively pain-free.

Donation of securities from a private corporation


Canadian-controlled private corporations (CCPCs) can be taxed in various ways, so I am not going to get into the ins and outs of donating. Speak to your accountant, but it generally won’t matter that much after tax whether you do a personal or corporate donation. When it does matter, the choice of personal vs. corporation depends on your situation.

However, for most CCPCs, they will be able to add 100% of the capital gain ($10,000 in the example above) to their capital dividend account (CDA) and get this money out tax-free (assuming there are no negative attributes to the CDA account). For a detailed discussion of the CDA, see this blog post.

COVID has been far from equal in how it’s impacted different industries and the people working in them. If are one of the lucky ones whose job has not been affected—perhaps it even thrived—and you played the market and had capital gains, you may wish to donate some of your gains to help a good cause. You will help make the world a better place. And as an added bonus, you will reduce your taxes.

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, April 19, 2021

Solving the sibling wealth gap

We Canadians are famous for staying private about money. But finances can undermine family unity in insidious ways. At the top of this list is wealth disparities among siblings.

To help address wealth gaps among siblings, I’ve asked my colleague Jeffrey Smith to share his experiences on this subject when advising high net worth families. Jeff is a Senior Manager in BDO’s Wealth Advisory Services practice, based in Kelowna, BC.
________________

By Jeffrey Smith

As a child, I never really noticed wealth disparities at family gatherings. Everyone seemed to be the same: grandparents, parents, aunts, and uncles. No one had a lake house or cottage, or did multiple family vacations; everyone met Fridays at my grandparents to visit. We were all the same, or so I thought.

Now, many years later, I see these differences within families—in both my own and others. The issue comes up regularly when doing financial and estate planning for families and advising them on how to manage their wealth.

Many families suffer from friction caused by one sibling having more money than the other. Whether this is due to differing lifestyle choices or career impairment due to health, sibling relationships can break down due to income and wealth disparity. Parents can’t solve all these problems for their children—sometimes the biggest challenge is to not intervene—but they can at least avoid increasing the conflict.

Two siblings, two lifestyles


Consider this fictional example with some true-to-life themes.

A large family with many children includes two brothers who have been very close from the time they were toddlers. That all changed when they graduated university. The older one (let’s call him “Dan”) finished his schooling a few years before the younger one (let’s call him “Stewart”). By the time Stewart graduated, Dan had married into a wealthy family. This allowed Dan to live a life of leisure, at least in Stewart's eyes. Meanwhile, Stewart began looking for his first job.

He also began to feel jealous of Dan. For the first 25 years of their lives, they were equals; now Dan leads a privileged life, where money is almost no object. Animosity grew as Dan invited Stewart to expensive events and enjoyed his possessions, which Stewart couldn’t afford. Unfortunately, what was once the closest of childhood relationships deteriorated into occasional chats based more on obligation than brotherly love.

Sibling wealth disparities are so different from other differences in wealth. Comparing yourself to a friend or co-worker, you can internally justify why they may appear to be ahead of you financially. Maybe they inherited a large sum or came from a wealthy family; however, when comparing your financial success to your brother or sister, those justifications sometimes fall. (Though not in Dan and Stewart’s case.)

From the perspective of an outsider, siblings would have had the same advantages and disadvantages growing up, been influenced by the same parents, and had access to the same financial and academic resources. Therefore, when one sibling finds more financial success, people can make assumptions about intelligence and work ethic.

Is that reasonable, though? What if one sibling suffered from a medical impairment or financial hardship early in life? What if finances are different because of divorce or one having more children than the other? What if one married into wealth? What if the wealth variances are solely a reflection of drive, determination and work ethic?  Obviously, a complex and delicate area.

When wealth gaps occur, it can impact the sibling relationship. As wealth is generated, lifestyle changes naturally occurpeople may eat out more or travel more. The experiences and bonds that were created growing up on a level playing field now have unequal pressure. This can harm the relationship, sometimes irrevocably.

The role of planning


While sibling wealth variances based on independent individual circumstances are subject to many variables that cannot be controlled, family related wealth variances can be controlled or minimized in many circumstances. Families need to avoid negative pitfalls from poor planning that may inadvertently lead to significant wealth disparity for the next generation. Let’s consider a situation that is fictional but reflects real-life realities.

A successful farming family plans its family business succession. The parents decide to retire, and help their son continue the farm by giving him the equipment and an equivalent amount of cash to their daughter. The parents decide they wish to retain ownership of the land for retirement income via rent. 

At first glance this all seems fair. The son receives debt-free equipment and the daughter receives cash to do what she pleases. Everyone appears happy, except for one bit of information that is far more important than it seems: What price is the son paying to rent the parents’ land?

The question arises at a client review of their net worth and income. As the family’s advisor, I would ask why the son is paying far less than market value for renting the farm. The answer? Rent was based on the parents’ expected cash needs and did not consider fair market rents.

Here is where wealth disparity is inadvertently created by mom and dad. The son has been operating a farm. Depending on the amount of time, amount of savings, and how one wants to quantify the savings and overall impact on the son’s business, the total benefit could reach millions of dollars. Therefore, the son receives a significant benefit compared to his sister because of his parents’ retirement.

In this example, we can help this fictional family by identifying and quantifying the unintended wealth inequality. They would then be able to equalize it, and likely strengthen the sibling bond in the process. But it does underline that one must look at all factors when transitioning a business. If you don’t consider all related transactions, you too could be creating unintended consequences.

What grandparents can do


It’s not just parents who need to watch for planning missteps on wealth. Grandparents can cause hard feelings and friction when they name grandchildren directly in the will. When a sibling does not have children, they may feel like they’re penalized for not having children.

Depending on the amount of money and number of grandchildren, the estate may erode significantly. Consider whether instead your children should receive equal units and then they control how much is passed on to their children; or you still leave money to grandchildren, but allocate equal amounts to each family regardless of how many children. There is no right answer, but these important planning areas warrant conversation and consideration. There are ways to keep the playing field equal, and in doing so keep the peace within the family.

Managing emotions can be difficult when discussing finances. But money and success should never ruin the foundation of family and relationships. Having good, open conversations, being honest about how you feel, and expressing what is bothering each party can mend the most fragile of family relationships and create stronger bonds.

Jeffrey Smith - CPA, CA, CFP, CLU - is a Senior Manager in BDO’s Wealth Advisory Services practice and can be reached at 250-763-6700 or by email at jrsmith@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.

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