Does Money bring Happiness?

I find the psychological aspects of money fascinating and in July, I wrote a blog called How we look at Money. Today, I want to discuss a post on the Psyblog (written by Jeremy Dean, a researcher at University College of London working towards his PhD) called The 3 Reasons Money Brings Satisfaction But Not Happiness.

Jeremy puts forth the following three reasons why money doesn't make us happy:

It's relative income that's important

Jeremy says money is relative. He says “we don't mind so much about our actual level of income, so long as we're earning more than other people around us. Unfortunately as we earn more money we're likely to be surrounded by richer people so we often end up failing to take advantage of the positive comparison.”

I would be interested in knowing if there is a correlation between increasing income and the importance of relative income; or is relative income as an important measure at lower income levels as it is at higher income levels? One would think meeting basic needs would be far more important the lower your income level, but maybe not. As for those with a higher income, I think we all know someone who needs to earn more than their friends and the people they grew up with, but as they earn more, they essentially social climb into another strata and, as Jeremy says, become surrounded by richer people, requiring them to climb another social strata in a never-ending loop.

Material goods don't make us happy

Jeremy says “acquiring things like houses and cars only have a transient effect on happiness.” Jeremy even states that materialism makes us less happy.

I think we can all somewhat relate to this comment. We often strive for a material item and sometimes, after achieving it, there is almost a letdown as the journey was more exciting than reaching the mountaintop. However, let’s say you love to jet-ski; the acquisition of the sea-doo would seem to have a lasting effect on happiness, so I am not sure I am 100% in agreement on this one.

People don't shift to enjoyable activities when they are rich

Jeremy says “people who earn more money don't spend their time enjoying themselves, they spend their time at work, in activities likely to cause them more stress and tension….In fact, to earn the money, they have to spend more time at work, and commuting to and from work.”

Although true in some cases, I certainly observe many people golfing 3-4 times a week or hanging out at their cottage in the summer enjoying themselves and their financial wealth.

Finally, Jeremy in his blog notes that Nobel-prize winning psychologist Daniel Kahneman says “the idea that the reason people continue to think money makes them happier is that chasing it leads to conventional achievements. Conventional achievements include things like getting that coveted promotion or being able to afford that big house - in other words things that say loud and clear: here I am and this is what I can do.”

Jeremy concludes that “in fact, people with more money and status are just more satisfied with their lives, not happier”.

Jeremy asks an interesting question in his blog posting and I will conclude this posting with the same question, “before you scoff at this think about whether you'd rather be satisfied or happy?”

Employment Insurance Refund Claims- The Unexpected Income Tax Implications

You have probably heard one of the radio advertisements from companies asserting that they can get your business or company a refund if you have paid Employment Insurance (EI) premiums on behalf of your family members. These advertisements can be misleading and they have led some people to believe that EI premiums are not required when remuneration is paid to a spouse, siblings, children or parents employed in a family controlled business. This assumption is incorrect, and in some cases, companies that have not remitted EI have been subject to interest and penalties upon a reassessment.

As if the criteria to determine whether EI must be submitted in the first place on behalf of family members are not confusing enough, there is an insidious income tax issue associated with requesting an EI refund. If you make a claim, you are in many cases essentially telling the Canada Revenue Agency (“CRA”) that the wages you paid to your family are unreasonable.

So let’s try to deconstruct this issue.

The CRA’s position is that EI premiums are required on salaries paid to family members unless the conditions of employment are not similar to conditions that would be enjoyed by an arm’s length individual in similar circumstances (EI is not applicable in the first place if the family member owns more than 40% of the corporations voting shares). This position means for example, that if a family member employee is paid a higher salary or wage than the employer would normally pay to an arm’s length person who had the same or similar responsibilities, EI premiums may not be required. It would also apply to situations where the family member employee is required to work fewer hours or is entitled to more vacation time than what would be offered to an arm’s length employee in a similar position. As the above criteria are somewhat subjective, the answer to whether a company should be paying EI on behalf of family members is not necessarily clear cut. A company can request an EI ruling from the government to determine whether the family member's employment is considered "non-arm's length" and therefore can stop deducting and remitting EI premiums and possibly receive a refund of premiums paid in the current and three prior years.

Various EI refund companies have stepped into this void and may charge a fee of up to 30% for any EI they recover on your behalf. As one can fairly easily file an EI ruling and make their own refund claim, it is a question or your time and sophistication as to whether to hire an EI refund company to make your company's/business's claim.

While there is no doubt that a refund of EI premiums is available in some circumstances, you must be understand that when you claim a refund for EI, you are admitting to the CRA that a salary paid to a family member may have not been what you would have paid to a non-related employee, and, as such, was not reasonable. The Income Tax Act specifically prohibits a deduction for unreasonable salaries. Thus, you may accidentally be providing the CRA a trail to unreasonable salary paid in the past that could be denied by CRA for corporate or self-employment business tax purposes. This has been confirmed by the CRA in a past tax pronouncement I note below: (Since it is not my intention to cause my readers unnecessary audit anxiety, I must note that I have not seen the CRA aggressively use EI refund and ruling information in assessing taxpayers. I am just pointing out a risk associated with ruling requests and refund claims.)

“(the Income Tax Act) will operate to disallow any portion of the salary which is not reasonable in the circumstances…. the conditions of employment being enjoyed by the employee are dissimilar to the conditions which would be enjoyed by an arm’s length employee suggests that some portion of the salary being paid to the employed (family member) may be in excess of a reasonable amount. To what extent the salary is in excess of a reasonable amount can only be determined after a review of all of the facts of the case.”

A simple example illustrates the potential costs if a family member’s salary is denied as a tax deductible expense. Say a small business owner pays his or her spouse $50,000 for administrative services he or she performs in the office. In 2012, the combined employer and employee EI premiums that could be saved or recovered would be approximately $2,000. The additional corporate income taxes that would result if $30,000 of the $50,000 salary expense is denied because it is deemed to be unreasonable would be approximately $4,700 plus potential penalties (unlikely in this situation) and interest. If the entire salary was disallowed, the income tax cost would be approximately $7,800, plus potential penalties and interest. This is a current cost analysis, however, once on CRA's radar, it would be prudent to restrict the future salary to family members, thereby costing you future income splitting income tax savings.

One should also bear in mind that EI protection will cease for family members if EI premiums are recovered or simply not remitted. This should be of particular concern for anyone counting on EI benefits in the future, especially during a parental leave. However, we have seen the government deny EI benefits even when EI premiums have been deducted and made consistently in respect of salary paid to a family member. Thus, if you employ family members you may want to request a ruling from the CRA to determine whether or not the salary paid to a family member is insurable in the first place, however, that then brings the reasonable salary issue back into play.

Although it is true that a refund of EI premiums may be available under certain circumstances, in some cases the potential risk for the non-deductibility of the salary may outweigh the potential recovery, especially where very unreasonable salaries have been paid to family members. I would suggest before moving forward with an EI claim, you discuss the issue with your accountant to best quantify the risk if any.

Sibling Rivalry-Parents Beware, it is not only a Childhood Issue

This past summer, while driving to a golf course 30 minutes outside of Toronto, my friend and I played a game of high school geography. After playing the game for a few minutes, he asked me if I had heard what had happened to Tiny and his younger brother Tim. I said no, and my friend then related this tragic story.

As part of a family business succession plan, Tiny and Tim were given control of Papahasdough Co. This succession plan was well-founded as both Tiny and Tim had worked in the business for years and were ready to take the business to a new level. Although the brothers were given equal shares of Papahasdough Co., Tiny assumed the role as CEO and Tim was named CFO. However, Tiny, as he had all his life, acted as Tim’s older brother/boss and not his equal. Tim, who had resented Tiny since childhood for acting superior, rebelled. The brothers had a severe falling out and lawsuits followed. The story gets far uglier, but I’ll spare you the gory details.

In this sad saga, sibling rivalry moved from childhood to adulthood. One may think this uncommon; however, according to a 2004 article by Offra Gerstein Ph.D, titled How to deal with Adult Sibling Rivalry, sibling rivalry can significantly impact relationships between adult siblings.

Dr. Gerstein states that “the need to restore one’s worth in one’s eyes may take the form of life long competition. If I “win” and my brother “loses”, then I may prove that my parents were wrong in favoring him. This may not be a conscious thought but the action may reflect this motivation.”

Jane Mersky Leder in her article titled Adult Sibling Rivalry says “Western culture has an obsession with sibling rivalry that began with the story of Cain and Abel and was elaborated by Freud, who labelled and dwelt on the competition between siblings for parental love and attention. It's colored our perception of sibship ever since.”

Sibling rivalry can manifest itself in many ways during adulthood, both financially (the distribution of family assets) and psychologically (perceived favouritism). However, in this blog, I am just going to deal with how sibling rivalry can affect the succession of a family business. The issues of business succession are varied and complex even for families without sibling rivalry baggage.

Family succession issues include: Which child does the parent give the voting shares to? Who is named CEO? If the children do not have the same commitment to the business, should they be given equal shares or equal salaries? These issues are intensified when there is sibling rivalry and I would suggest the parents are ultimately responsible for recognizing that this issue can be divisive and toxic, as in the case of Tiny and Tim.

Even where parents are in a no-win situation, at a minimum they must consider options to mitigate potential issues. Alternatives may include selling the business or giving the shares to one child and equalizing the other child through cash or other means.

A 2001 paper by the National Center for Employee Ownership presented by their research council states “sibling rivalry can pose another obstacle to smooth succession in cases where the retiring owner is transferring company leadership to more than one child. While some rivalries are inevitable, these must be managed so as not to impair business judgement or prevent collaboration from taking place. A wide variety of approaches – such as enlisting one of the retired owner’s trusted advisors or a very senior non-family manager as a mediator – can prove successful in preventing rivalry from becoming destructive.”

Phil Thompson in his paper Succession Planning and the Family Business states that “without careful planning and parenting, including outside counselling, sibling rivalry can wreck a succession plan. Unfortunately, sibling rivalry often stays buried until after the parent is dead. Deal with sibling rivalry right at the beginning, and build a plan that will not fall apart over this issue. Problems can arise either when more than one sibling is involved in the business or when only one of your children is involved. The decision you make with the business can affect how other family assets are considered, including houses and cottages."

Many parent(s) work their entire lives to build a family business with the hope of passing it on to their children. It is very sad that childhood sibling rivalries can be carried into adulthood and it is incumbent upon the parent(s) to recognize this issue and plan to mitigate any potential fallout.

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The Balance between Enjoying your Life and Frugality

As I discussed in my “Old and not Thrifty” post on Monday, I don’t care if I save two dollars shopping at Wal-Mart. That is not to say I do not think about what I spend my money on, but once I decide to spend, I am not frugal.

For those who are frugal, there is no debate from me that you definitely save a greater percentage of your earnings than The Blunt Bean Counter. However, my sermon for today is that your frugality must not be a means to itself, but that the monetary benefits you accumulate by being frugal should at least in part, be utilized to enhance your life experience.

The discussion in this blog post is only relevant to people who have savings and are not frugal out of necessity. For the purposes of this post I am lumping spending avoidance with frugality, although they are not necessarily one in the same. For example, many years ago, at a firm I used to work at, a client’s investment advisor believed in fully leveraging this client's portfolio's so that they had the maximum exposure to the equity markets. The client took this leverage philosophy to the extreme, such that he had no money to spend because his cash flow was restricted as result of his debt obligations. This was not frugality, it was actually stupidity; he was not enjoying his life because he was not spending money because he had to avoid spending.

Whether you are not spending money because of frugality or because you have choked off your cash flow as in the example above, be aware that you are postponing the time to enjoy your life. In the case above, the client’s marriage had tremendous tension as his spouse did not agree with the philosophy of leveraging when it impacted her desire for going out for dinners and travel and enjoyment of her life.

At this point, this blog requires a connector. My personal connector is having a father die in his early fifties. My view on life is always impacted by this event because whenever I say this purchase or that vacation can wait for another day, I stop and say to myself, that that day may not come. I am not being morose or by any means saying overspend today and disregard your future; I aggressively and continuously try to build my RSSP. I am just saying balance your today and your tomorrow. Don’t deprive yourself, because you may not have tomorrow to enjoy the financial benefits of your frugality and savings, whether because of health issues or worse.

As I suggested in the second part of my blog Sign That Will, you should consider creating a bucket list to give your frugality some purpose and balance. This year I crossed off one of my bucket list items, Pebble Beach. The cost was excessive, but I did not care, it was an awesome experience.

For what it is worth, my suggestion is that you create a bucket list of things you really want to do during your lifetime and try and build in actual time frames to cross the items off your list. Use your frugality or savings ability to specifically save for a bucket item and thus, leverage your behaviour and financial philosophy while gaining some personal life balance. Don't just save for tomorrow, save for today!

Old and not Thrifty

There are a multitude of blogs in the blogosphere on how to be thrifty and which stores can help you get more for less. One of the best of this genre is the blog Young and Thrifty. Y&T was one of the bloggers who joined in the Bloggers for Charity initiative, showing she is not only thrifty but also altruistic. Y&T, who decided to be her own guest blogger, wrote a great post on Tibet and the Trans-Himalayan Aid Society.

While I appreciate Young and Thrifty's blog and her related tips, personally, I am far from young and thrifty and a more accurate characterization of myself would be old(er) and not thrifty.  

My wife who is thrifty says I am like a caged animal 5 minutes after she takes me into a Costco or Walmart. She has declared me persona non grata for her shopping excursions to Costco unless she is there to purchase one or two things. As for Winners or Target, I am sure they  have some awesome clothes for sale, the problem is I won’t dig twenty minutes to find that gem of a deal.

So what is my problem? If I navel gaze, I would suggest there are three reasons for my lack of thrift.

A bean counting accountant,
but he is not The Blunt
Bean Counter

1. I am an accountant. You are probably thinking what the heck is Mark talking about, accountants are numbers guys and notoriously cheap. Although counter intuitive, accountants are taught as wee auditors that materiality is important. In auditing a financial statement, if an item is not material to the financial statement, you are taught to ignore it. So I have been programmed to only worry about material dollars, so if I can save 5 bucks, I don't care, talk to me about $50 or $100 and I will pay attention.

2. Secondly, I am a guy. Typically in order to be thrifty you must undertake due diligence and shop around to determine your options and then zero in on the cheapest option. That means actual shopping at an actual store in a crowded mall or superstore. Let’s be honest, most guys cannot stand to shop unless it is for power tools, cars, sporting equipment or swimsuit shopping (yes, girls, we really are shopping for the most up to date swimwear, and we are not there to look at the women trying on their new bikini's), so how can most guys even be close to being thrifty?

Believe it or not, I actually like shopping for clothes. However, this is how I work: if I walk into a store and I like something, I buy it. Why do I need to go to 3 other stores to see if I like something better? If I like the clothing item and I don’t feel I am being ripped off, I buy it and I am done, no shopping around.

3. I have no patience. I just cannot take the time to spend several hours finding the best blender at the cheapest price. I would be willing to bet most thrifty people have far more patience than I do.

There is no doubt, being thrifty is financially beneficial. Also, so I don’t get hate mail for my lack of empathy, I realize thrift and prudence is not a choice for many people.

However, I would suggest if you are playing the thrift game, you have a quick two strikes against you if you are male and lacking in patience.

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Multiple Accounts, Multiple Advisors, Minimal Returns

I recently read an excellent post by the Canadian Investor on the blog How To Invest Online titled ETF Allocation across RRSP, TFSA and Taxable Accounts.

In the introduction to this blog, the Canadian Investor provides a very insightful and important message: “The wise investor diversifies across different types of investments to maintain a portfolio asset allocation with the percentage breakdown specified to meet investment objectives. A fundamental principle is that though the portfolio may span many accounts it should be managed as a whole, not as independent pieces.”

What the Canadian Investor is implying above is, that many Canadians have multiple investment accounts from non-registered accounts to RESPs, to RRSPs to TFSAs and often these accounts are not managed as a whole, which can result in less than desired investment returns.

Effectively managing your assets across various accounts becomes a far more arduous task when you muddle the issue by having multiple investment advisors managing the various accounts. Many people seem to "accumulate" multiple investment advisors over time, for a plethora of reasons. The three main reasons I typically hear are:

1. This advisor is a relative (friend); I had no choice but to use him/her.

2. I need to spread my advisor risk around. I am concerned if I have all my eggs in one basket with one advisor and they screw-up, my portfolio returns will be disastrous.

3. I really have not paid attention. I have just accumulated different advisors as I purchased different investments and never gave much thought to the fact I now have multiple advisors.

Whatever the reason for people having multiple advisors, the situation is almost always dysfunctional. Many advisors work in their own silos oblivious to their clients’ other investments and, in many cases, there is no co-ordination or attempt to properly allocate and balance investments across all accounts, by the advisors.

If you find yourself in this situation, I suggest you consolidate your various accounts with one or two advisors. Alternatively, you can provide full disclosure to one of your advisors and have him or her inform your other advisors of their mandates within your overall portfolio allocation. This approach will put one advisor in charge and assist you in achieving proper diversification of your assets across multiple accounts and advisors.

In summation, you should review all your investment accounts to ensure you are managing them as a whole and in accordance with your overall asset allocation and portfolio strategy. In addition, if you are one of those people with multiple advisors, consider whether you should fire one or more of those advisors, and at a minimum, ensure one advisor oversees and quarterbacks your other advisors.

The Taxation of Automobiles

As discussed in my early January blog Mitigating Your Exposure to Five Popular Canada Revenue Agency ("CRA") Audit Target Areas, automobile expenses are often audited by the CRA and are one of the most contentious items in any review or audit. In my opinion, there are two reasons for this: (1) auto expenses are a fairly simple income tax concept and therefore easy to audit even for inexperienced CRA auditors and (2) auto expenses are an easy target because people do not properly document the business usage of their automobile and thus leave themselves at the mercy of an auditor.

Employees

In order to claim automobile expenses as an employee or commission employee, your employer must complete Form T2200-Declaration of Conditions of Employment. You can then claim your automobile expenses on Form T777  less any non-taxable reimbursements or allowances, to the extent your car is used for business purposes, as discussed in greater detail below. 

Self-Employed Individuals

Similar to employees, most self-employed people typically compile 100% of their gas receipts, repairs expenses, insurance premiums, toll highway fees, car washes and lease costs when organizing and gathering their information for personal income tax purposes. This full claim is then reduced, often after discussions with their accountant, by the personal portion of their automobile usage. For example, if your total automobile costs and expenses are $10,000 and you drive your car 75% of the time for business and 25% of the time for personal purposes, you would report $7,500 for your auto expense claim.

Corporations

If your business is incorporated, the automobile expense issue is more complex. A decision must be made as to whether to own or lease the car in the corporation or whether to own or lease the car personally and charge back the corporation for business use. In the case where you pay 100% of the expenses for your personal car in the corporation, your accountant will typically make an entry to reduce the corporate auto expense by your personal usage ($2,500, using the above example) and charge your shareholder loan for your personal use. Alternatively, if you pay 100% of the auto expenses personally, your accountant will book an entry to increase auto expenses for your business use ($7,500 using the example above) and either have the corporation reimburse you for $7,500 or credit your shareholder loan for the $7,500 of business related costs you paid personally.

In order to avoid the standby charge discussed below, my firm typically does not recommend the purchase or lease of an automobile by the corporation, unless the automobile is used almost exclusively for business and can be documented as such.To be clear, I am not talking about a van, truck, etc. that is used 100% for business purposes, but a car that you drive essentially all the time, both personally and corporately.

Employer Owned Automobiles - The Dreaded Standby Charge

If you are an employee or a shareholder of a corporation that owns or leases the car that you use, you may have an employment benefit called a standby charge. Each year, the standby charge is calculated as 24% of the cost of the car, if the car was purchased, or 2/3 of the lease costs, if the car was leased. In addition, there could be an additional benefit for the operating costs, equal to ½ of the standby charge (if business use is 50% or greater) or 26 cents (for 2012) for each personal kilometre driven. As noted above, the benefit is always 24% of the original cost of the car, even as the car declines in value. Thus, consideration should be given to purchasing the car after three or four years where possible.

If your personal usage of a corporately owned vehicle is low relative to the business usage, there is a possible reduction in the standby charge. Where you drove primarily for business (>50%) and your personal usage km were less than 1,667 km a month or 20,004 km a year, the standby charge is calculated as follows:

Personal use kilometres/ (1,667 x the number of months the car was available to you) x the original standby charge calculated (24% x the original cost of the car or 2/3 the lease costs).

Essentially, the lower your personal use kilometres, the greater the reduction in the standby charge. Based on the formula above, once you reach 20,004 personal km the reduction is eliminated.

Business vs. Personal Usage

For individual and corporate taxpayers who claim a deduction for automobile expenses, the percentage of business use versus the percentage of personal use is often subject to a challenge by the CRA. As support for the relative percentage usage, at a minimum, I always recommend that the taxpayer note the car’s odometer reading as at January 1st and again on December 31st. The reason for doing such is that at least the quantum of kilometres driven in a year will be clear to the CRA reviewer or auditor. The best evidence to support the business use kilometres for purposes of an automobile expense claim is a log book which denotes the client or customer driven to and the number of kilometres the trip took; however, very few people maintain such detailed records. Many people often have to scramble to build a log book by going back up to three years and using their Outlook calendars to rebuild their driving records when asked by the CRA to support their business usage claim. This is not a fun exercise.

Depending upon the auditor, you can sometimes negotiate an agreed upon business/personal usage rate without a logbook; however, where the auditor agrees to this approach, it always results in a reduction of the business use claim by the taxpayer.

The CRA now offers to give some consideration to a log book for a sample period where there is one year of detailed record keeping. The following is what the CRA says in regards to a sample logbook:

The CRA would be prepared to afford considerable weight to a logbook maintained for a sample period as evidence of a full year's usage of a vehicle if it meets the following criteria.

The taxpayer has previously filled out and retained a log book covering a full 12-month period that was typical for the business (the “base year”). The 12-month period is not required to be a calendar year.

A logbook for a sample period of at least one continuous three-month period in each subsequent year has been maintained (the “sample year period”).

The distances travelled and the business use of the vehicle during the three-month sample period is within 10 percentage points of the corresponding figures for the same three-month period in the base year (the “base year period”).

The calculated annual business use of the vehicle in a subsequent year does not go up or down by more than 10 percentage points in comparison to the base year.

In Summary- Documentation is Vital

Claiming and documenting automobile expenses is a tedious and time consuming process. However, if you are ever audited, you will be thankful you undertook the effort.