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 tax partner and the managing partner of Cunningham LLP in Toronto. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. The views and opinions expressed in this blog do not reflect the position of Cunningham LLP. My posts are blunt, opinionated and even have a twist of humor/sarcasm. You've been warned.

Monday, December 15, 2014

The Family Tax Cut - Should Joint Filing be Next?

In late October, while I was vacationing in South Africa, details of the proposed Family Tax Cut were announced by Prime Minister Stephen Harper. Since the financial press was all over this, I will provide a quick recap below. Then for a fun (hey I am an accountant, I know fun!) mental exercise, I will compare the income tax burden for a family that maximizes the income splitting benefits of the Family Tax Cut in Canada, to that of a comparable U.S. family that files a joint income tax return.

Family Tax Cut


In Canada, we are required to file our own personal tax return; there is no concept of a joint family filing. Thus, in many cases, where one spouse earns significantly more income than the other spouse (either the second spouse is a stay at home spouse or just makes less money), that family unit often pays more income tax than a two-earner couple that has the exact same family income, but has two working spouses making roughly the same money.

This is because our tax rates are graduated and two spouses making the same income may both be in the 25% tax bracket, whereas a large single earner may be in the 35% tax bracket.

The proposed Family Tax Cut attempts to fix this family income inequality, by allowing the higher-income spouse to transfer up to $50,000 of taxable income to a lower income/lower tax bracket spouse for federal tax purposes. The maximum tax benefit available to a qualifying family is $2,000. Amongst the various conditions to claim the tax credit is that you must have at least one child who is under the age of 18 at the end of the year and who resided with you or your spouse throughout the taxation year. More details can be found here.

Department of Finance Example


In the backgrounder to the Family Tax Cut press release, the Department of Finance provided the following example of the family tax cut:

“Pat and Chris are a two-earner couple with two children. Pat earns $60,000 of taxable income and Chris earns $12,000, for a combined taxable income of $72,000. Pat faces a marginal federal tax rate of 22 per cent. Chris is in the first tax bracket, where income is taxed at 15 per cent. Since the value of his non-refundable tax credits is greater than the tax on taxable income, Chris does not pay federal tax.

For federal tax purposes, under the proposed Family Tax Cut, Pat would be able to, in effect, transfer $24,000 of taxable income to Chris. This would bring their taxable incomes for the purposes of calculating the credit to $36,000 each, which puts both of them in the 15-per-cent tax bracket. In addition, Chris would be able to use up his unused non-refundable tax credits with the notional transfer of income. As one person in the couple may claim the Family Tax Cut, they decide that Pat would do so. The Family Tax Cut would reduce Pat’s tax payable by about $1,260 in 2014, taking into account both the reduced tax on their taxable incomes, and the additional value of the non-refundable credits that Chris is able to use.”

Greater Detail


I ran some numbers for Pat and Chris and determined that they would pay approximately $10,900 in tax in Ontario before the Family Tax Cut. Thus, after the Family Tax Cut they would owe around $9,640 ($10,900 less $1,260 Family Cut Savings).

Since the Conservatives initially announced this income splitting initiative a couple years ago, I have wondered (often aloud or in writing) why they chose an income splitting option as opposed to moving to a U.S. style joint return? If philosophically the government is concerned about inequities in dual family incomes, why not just file as a family and put all couples, on the same tax footing?

I thus thought it would be interesting to compare how much tax Pat and Chris would owe if they lived in California, or if they lived in Michigan. I asked a CPA friend in the U.S. to run some numbers for me. He told me that if Pat and Chris lived in California, they would owe approximately $4,700 in U.S. federal and California state tax. If they lived in Michigan, they would owe approximately $6,130 in U.S. federal and Michigan state tax. Since I always thought California was a high taxing state, I asked him how this happened and he said it was because California has graduated tax rates, while Michigan has a flat rate.

The numbers reflect that, the Canadian Pat and Chris would owe approximately $5,000 more than if they lived in California (keeping in mind that the CA state rate would increase at higher income levels) and $3,500 more in tax than if they lived in Michigan. This comparison assumes the same exchange rate.

As I am comparing Canadian apples to U.S. oranges, this comparison can be misconstrued, but it does reflect that the Family Tax Cut does not save Canadians as much as if they went to a comparable U.S. joint return, with similar U.S. federal and state tax rates.

There are various macro factors as to why Canada has a higher tax rate. As demonstrated above, most U.S. citizens pay far less tax than the equivalent Canadian. However, the U.S. imposes estate tax for wealthier citizens when they die. We can characterize the Canadian tax system as a “pay me now”, while the U.S. is more of a “pay me later” tax system.

As I stated at the outset, this post was sort of a fun mental exercise for me and does not prove much of anything. However, I would suggest that since we are now into family income splitting, it would probably make some sense to move to a joint return filing system in Canada in the near future.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

Monday, December 8, 2014

Personal Pension Plans

The last time I wrote about Individual Pension Plans (“IPPs”) was in 2011; see my blog. Recently, I have received a few emails from my readers asking if I planned to update the discussion on this topic. As it happens, over the last year or so, I have met and spoken to Jean-Pierre Laporte of INTEGRIS Pension Management Corp. about his company’s personal pension plan (“INTEGRIS PPP”), and I thought I would ask Jean-Pierre to write a guest blog.

It should be noted upfront that the INTEGRIS PPP while similar to an IPP, is more of an IPP on steroids, and was created to be a private sector version of the major public sector defined pension plans for incorporated individuals.

While I think that for some small business owners, a personal pension plan may make sense (especially for anyone concerned their corporation is a personal service business), please be aware, that neither Cunningham LLP nor The Blunt Bean Counter blog is endorsing INTEGRIS Pension Management Corp. or the INTEGRIS PPP in any manner, and you should obtain independent professional advice on whether an IPP or a personal pension plan makes sense for your own circumstances.

With all the caveats out of the way, I will leave it to Jean-Pierre to discuss personal pension plans.

Personal Pension Plans

By Jean-Pierre A. Laporte

If there is one thing that most business owners can agree on, it is that Canadians pay too much tax. Even with well-informed accountants providing advice in the background, there is a general feeling within Corporate Canada and in the small private sector that the various levels of government are in dire need of tax revenues.

Ontario’s recent introduction of new tax brackets for the “wealthy”, the increase in the taxation of non-eligible dividends and the punitive corporate taxation of personal service businesses, in conjunction with the introduction of the mandatory Ontario Retirement Pension Plan all reinforce this perception.

Personal Pension Plan vs RRSP


One option available to reduce this tax burden is a personal pension plan. Simply-put, a personal pension plan (or PPP) is a registered pension plan offered for the owner-operator of a business or for an incorporated professional. A PPP provides a flexible contribution mechanism that can match the available cash flow of the company while enjoying superior tax deductions unavailable to those saving through RRSPs.

For example, a 55 year old doctor earning $300,000 from her medical practice corporation could contribute $24,270 her RRSP this year. If the Dr. established a PPP, she would be allowed to contribute $33,395 to her PPP, and $24,270 to her RRSP as well in the year that the PPP is established.

The double RRSP and PPP contribution noted above can occur only if two conditions are met:

(1) the member had no T4 income in the year 1990 and

(2) the RRSP deductions can only occur in the year of PPP set up. For subsequent years, the RRSP deduction is limited to $600, called the PA Offset.

Moreover, if she had drawn T4 income from her company over the past 10 years, she would also be eligible to claim an additional corporate tax deduction (in this case $95,640 assuming she received the maximum pensionable salary over that 10 year period) in the year past service is purchased.

Any investment management fees the Dr. pays to have someone manage her registered assets are tax-deductible to her corporation.

At retirement, her basic pension benefit could also be enhanced with indexing protection or she could retire early on a full unreduced pension and make a final tax deductible contribution out of her corporation. For example, in the example above, if the Doctor decided to retire at age 60 instead of 65, on a full (i.e. unreduced) pension, the medical corporation would have to contribute $286,252. This amount called “terminal funding” is also tax-deductible in the hands of the medical corporation, against corporate income taxes. At 15.5% of corporate tax, the medical corporation will receive a cheque from the CRA worth $44,369.06. Not a bad way to start one’s retirement. In addition, by removing excess cash out of the sponsoring corporation, there is a secondary benefit of purifying the corporation for purposes of the $800,000 lifetime capital gains exemption, especially where you are preparing the company for sale.

The value of the tax refunds generated by the additional deductions permitted by pension law can often reach over $100,000 over a 20 year period, a sum that, by definition, cannot be accessed through an RRSP. The true value of the PPP though comes from the substantially higher tax-deferred compounding of assets resulting from higher contributions.

Personal Service Businesses


For small businesses who only have one large client (such as IT Consultants and oil patch service providers) and may be considered personal service corporations, a PPP may be a very effective tax planning tool. In Ontario, these types of corporations pay corporate tax at the rate of 39.5%. While deductions are limited to salaries and benefits, the Canada Revenue Agency does consider contributions to an individual pension plan such as the PPP to be an eligible corporate deduction. As such, the PPP provides a great way to convert tax owing into pension benefits.

The Disadvantages of a Personal Pension Plan


If a business owner is solely looking to their registered plan to claim a deduction but need to access all of their money at any time, the PPP is inappropriate since pension laws require that a portion of the contributions and interest be set aside to provide for a pension in retirement.

In addition, you cannot invest more than 10% of the book value of your pension fund into any one security, as that would be in violation of the specific investment rules that regulates most of the registered pension plans in Canada.

In conclusion, for incorporated professionals and owner/operators of companies (especially those deemed to be personal service businesses by the CRA), a Personal Pension Plan allows you to build up a substantial retirement nest-egg that is much larger than what RRSP rules allow. Even if the rate of return on assets is held constant, over 20 years, the difference in wealth accumulated between the two types of plans can be substantial.


Jean-Pierre A. Laporte, BA, MA, JD, is the Chief Executive Officer of INTEGRIS Pension Management Corp. The company is a private Canadian based company that offers business owners and incorporated professionals tax-effective ways to save for retirement by providing access to highly experienced actuaries, pension and compliance officers. The company has alliances with some of Canada’s highly regulated, respected and well capitalized companies to offer the best-in-class service providers. Jean-Pierre can be contacted at 416-214-5000. The company’s website is https://www.integris-mgt.com/.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

Monday, December 1, 2014

Tax Planning Strategies to Minimize the Old Age Security Clawback

Question: How does an accountant enrage a sweet, mild mannered genteel grandmother?

Answer: Tell her some or all of her Old Age Security (“OAS”) payments were clawed-back on her tax return.

One lesson I have learned over the years is that whether a senior is a multi-millionaire or just well to do, they consider their OAS payment as sacred and any tax planning that causes even one dollar to be clawed-back may result in a tirade against their shell-shocked accountant.

I can only surmise that people feel they are entitled to so little in retirement related payments that they feel it is very unfair to have any of it taken away. I also think some people mistakenly think they have paid taxes to fund the Old Age Security program; however, that is a common misconception. The plan is funded out of the general revenues of the Government of Canada, which means that you do not directly pay into the OAS plan.

In any event, it is prudent for you and/or your accountant to plan to minimize any OAS clawback and that is my topic for today.

Old Age Security


The OAS is a monthly payment available to most Canadians 65 years of age (will gradually increase from 65 to 67 over six years, starting in April 2023). The eligibility requirements are here:

The maximum monthly OAS payment is currently $563.74 (October to December).

For 2014, you must reimburse all or part of your OAS pension if your net individual income exceeds $71,592 (including the OAS pension). The total amount of this reimbursement is equal to 15% of your net income (including the OAS pension) that exceeds $71,592. The full amount of OAS will be repaid when net income exceeds approximately $117,700.

Avoiding the Clawback


Split Income Election


For most people, the best income splitting technique available, and the most effective way to reduce your income, and thus reduce your OAS clawback, is to elect to split pension income (pension income includes most types of pension income, excluding OAS, CPP/QPP). The election is made by filing Form T1032, “Joint Election to Split Pension Income” with you and your spouse’s annual tax returns. CPP can be split also, but a request must be made to Service Canada (Pension sharing form ISP-1002A)

Income Sources


Not all income is treated equally. Only ½ of your capital gains are taxed, while interest income is fully taxable. Dividends are a strange animal as they are subject to a dividend gross-up (38% for public co. dividends) which causes your income to be increased. Thus, dividends can be detrimental for OAS planning purposes; however, the dividend tax credit tail should not solely wag the investment decision.

Holding Company


If you transfer your non-registered investments into a Holding Company (a rollover tax election form needs to be filed), you will no longer earn this income personally and you may reduce or eliminate your holdback. This sounds like a sexy solution, however it often comes with complications. First of all, you will most likely have to pay an accountant to prepare financial statements and tax returns, which will eat up around half your OAS savings. In addition, upon your death, or upon the death of your spouse if you leave your assets to them, you will have a deemed disposition of your Holding Company shares. That means your estate must pay tax on the value of your holding company at death. This may cause a double tax on death that can often only be alleviated by undertaking some complicated tax planning.

However, you may be able to plan around the double tax issue as discussed by Tim Cestnick in this article

To quickly paraphrase Tim’s plan; you transfer your investments into a Holdco and take back an interest free loan. Each year the Holdco declares a dividend to you equal to the full amount of the after-tax earnings of the company. It is important to note the dividend is payable, not actually paid. To cover your yearly cash requirements, you repay your interest free loan as required. Depending upon your financial situation and longevity, at some point the loan is paid off and the company then begins to actually pay the declared dividends, but this could be 15-20 years from now.

When you pass away, your heirs become the owners of the Holdco. The investments can then be distributed from the company in the form of the declared and unpaid dividends and may allow for some income tax savings. More importantly, the value of the company’s shares at the time of your death may have minimal value because the dividend liability owing by the company may be around the same value as the investment assets. This significantly reduces the double tax issue.

This planning is complicated and before you undertake Tim’s plan, you should consult your accountant to ensure the plan makes sense based on your personal circumstances.

A Holdco also is very effective if you have significant US assets, as the Holdco assets are not subject to US estate tax.

Finally, if you have a separate will for your Holdco (at least in Ontario) you can minimize your probate fees.

TFSA


If you have not maximized your TFSA, you should transfer non-registered money that is generating taxable income into your TFSA, to the extent of your unused contribution limit.

Alter Ego Trust


Alter Ego Trusts are special trusts that can only be created by individuals 65 or over. During the individuals lifetime they must be the only person entitled to receive the income of the trust and the individual creating the trust must be the only person entitled to receive the assets of the trust prior to the death of the individual. There is also a similar concept known as a “joint partner trust” with pretty much the same rules, for married or common law partners.

Where you have non-registered assets throwing off significant interest and dividend income that is causing an OAS clawback, it may make sense to transfer these assets to an Alter Ego Trust to reduce your clawback. Generally the transfer of these assets to the trust is tax-free.

However, since the income earned on these assets will be taxed at the highest marginal rate in the Alter Ego Trust, you have to consider whether the OAS clawback savings and other advantages (probate protection), outweigh any extra income tax costs (i.e.: is the extra tax payment a result of having all this income tax at the highest rate, less than the OAS you get to now keep by moving those assets into the trust).

I have outlined various strategies above that may be used to reduce your OAS clawback. However, I caution you; the complications and extra costs of some of these strategies need to be compared to the actual OAS savings they produce, as I have found that many clients over 65 want fewer complications in their life, not more. Consequently, you may face a tug of war between complicating your financial life or just accepting an OAS clawback.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

Monday, November 24, 2014

Tax Loss Selling - 2014 Version

For the fourth year in a row, I am posting a blog on tax loss selling. I am doing it again because the topic is very timely and every year around this time, people get busy with holiday shopping and forget to sell the “dogs” in their portfolio and as a consequence, they pay unnecessary income tax on their capital gains in April. Additionally, while most investment advisors are pretty good at contacting their clients to discuss possible tax loss selling, I am still amazed each year at how many advisors do not discuss the issue with their clients. So if you have an advisor, ensure you are in contact to discuss your realized capital gain/loss situation and other planning options (if you have to initiate the contact, consider that a huge black mark against your advisor). For full disclosure, other than updating dates and the third paragraph, there is very little that is new in this post from last years version.

I would suggest that the best stock trading decisions are often not made while waiting in line to pay for your child’s Christmas gift. Yet, many people persist in waiting until the third week of December to trigger their capital losses to use against their current or prior years capital gains. To avoid this predicament, you may wish to set aside some time this weekend or next, to review your 2014 capital gain/loss situation in a calm methodical manner. You can then execute your trades on a timely basis knowing you have considered all the variables associated with your tax gain/loss selling. This process is more critical than usual this year, as the markets were very strong until the fall and you may have some large realized capital gains in 2014 (let alone large capital gains from 2013 for which you maybe able to carryback any 2014 losses) to offset.

I would like to provide one caution in respect of tax loss selling. You should be very careful if you plan to repurchase the stocks you sell (see superficial loss discussion below). The reason for this is that you are subject to market vagaries for 30 days. I have seen people sell stocks for tax-loss purposes, with the intention of re-purchasing those stocks and one or two of the stocks take off during the 30 day wait period and the cost to repurchase is far in excess of their tax savings. Thus, you should first and foremost consider selling your "dog stocks" that you and/or your advisor no longer wish to own. If you then need to crystallize additional losses, be wary if you are planning to sell and buy back the same stock.

This blog post will take you through each step of the tax-loss selling process. In addition, I will provide a planning technique to create a capital gain where you have excess capital losses and a technique to create a capital loss, where you have taxable gains.

Reporting Capital Gains and Capital Losses – The Basics


All capital gain and capital loss transactions for 2014 will have to be reported on Schedule 3 of your 2014 personal income tax return. You then subtract the total capital gains from the total capital losses and multiply the net capital gain/loss by ½. That amount becomes your taxable capital gain or net capital loss for the year. If you have a taxable capital gain, the amount is carried forward to the tax return jacket on Line 127. For example, if you have a capital gain of $120 and a capital loss of $30 in the year, ½ of the net amount of $90 would be taxable and $45 would be carried forward to Line 127. The taxable capital gains are then subject to income tax at your marginal income tax rate.

Capital Losses


If you have a net capital loss in the current year, the loss cannot be deducted against other sources of income. However, the net capital loss may be carried back to offset any taxable capital gains incurred in any of the 3 preceding years, or, if you did not have any gains in the 3 prior years, the net capital loss becomes an amount that can be carried forward indefinitely to utilize against any future taxable capital gains.

Planning Preparation


I suggest you should start your preliminary planning immediately. These are the steps I recommend you undertake:

1. Retrieve your 2013 Notice of Assessment. In the verbiage discussing changes and other information, if you have a capital loss carryforward, the balance will reported. This information may also be accessed online if you have registered with the Canada Revenue Agency.

2. If you do not have capital losses to carryforward, retrieve your 2011, 2012 and 2013 income tax returns to determine if you have taxable capital gains upon which you can carryback a current year capital loss. On an Excel spreadsheet or multi-column paper, note any taxable capital gains you reported in 2011, 2012 and 2013.

3. For each of 2011-2013, review your returns to determine if you applied a net capital loss from a prior year on line 253 of your tax return. If yes, reduce the taxable capital gain on your excel spreadsheet by the loss applied.

4. Finally, if you had net capital losses in 2012 or 2013, review whether you carried back those losses to 2011 or 2012 on form T1A of your tax return. If you carried back a loss to either 2011 or 2012, reduce the gain on your spreadsheet by the loss carried back.

5. If after adjusting your taxable gains by the net capital losses under steps #3 and #4 you still have a positive balance remaining for any of the years from 2011 to 2013, you can potentially generate an income tax refund by carrying back a net capital loss from 2014 to any or all of 2011, 2012 or 2013.

6. If you have an investment advisor, call your advisor and request a realized capital gain/loss summary from January 1st to date to determine if you are in a net gain or loss position. If you trade yourself, ensure you update your capital gain/loss schedule (or Excel spreadsheet, whatever you use) for the year.

Now that you have all the information you need, it is time to be strategic about how to use your losses.

Basic Use of Losses


For discussion purposes, let’s assume the following:

· 2014: realized capital loss of $30,000

· 2013: taxable capital gain of $15,000

· 2012: taxable capital gain of $5,000

· 2011: taxable capital gain of $7,000

Based on the above, you will be able to carry back your $15,000 net capital loss ($30,000 x ½) from 2014 against the $7,000 and $5,000 taxable capital gains in 2011 and 2012, respectively, and apply the remaining $3,000 against your 2013 taxable capital gain. As you will not have absorbed $12,000 ($15,000 of original gain less the $3,000 net capital loss carry back) of your 2013 taxable capital gains, you may want to consider whether you want to sell any “dogs” in your portfolio so that you can carry back the additional 2014 net capital loss to offset the remaining $12,000 taxable capital gain realized in 2013. Alternatively, if you have capital gains in 2014, you may want to sell stocks with unrealized losses to fully or partially offset those capital gains.

Creating Gains when you have Unutilized Losses


Where you have a large capital loss carryforward from prior years and it is unlikely that the losses will be utilized either due to the quantum of the loss or because you are out of the stock market and don’t anticipate any future capital gains of any kind (such as the sale of real estate), it may make sense for you to purchase a flow-through limited partnership (be aware; although there are income tax benefits to purchasing a flow-through limited partnership, there are also investment risks) . 

Purchasing a flow-through limited partnership will provide you with a write off against regular income pretty much equal to the cost of the unit; and any future capital gain can be reduced or eliminated by your capital loss carryforward. For example, if you have a net capital loss carry forward of $75,000 and you purchase a flow-through investment in 2014 for $20,000, you would get approximately $20,000 in cumulative tax deductions in 2014 and 2015, the majority typically coming in the year of purchase. Depending upon your marginal income tax rate, the deductions could save you upwards of $9,200 in taxes. When you sell the unit, a capital gain will arise. This is because the $20,000 income tax deduction reduces your adjusted cost base from $20,000 to nil (there may be other adjustments to the cost base). Assuming you sell the unit in 2016 and you have a capital gain of say $18,000, the entire $18,000 gain will be eliminated by your capital loss carry forward. Thus, in this example, you would have total after-tax proceeds of $27,200 ($18,000 +$9,200 in tax savings) on a $20,000 investment.

Donation of Flow-Through Shares


Prior to March 22, 2011, you could donate your publicly listed flow-through shares to charity and obtain a donation receipt for the fair market value ("FMV") of the shares. In addition, the capital gain you incurred [FMV less your ACB (ACB is typically nil or very low after claiming flow-through deductions)] would be exempted from income tax. However, for any flow-through agreement entered into after March 21, 2011, the tax benefit relating to the capital gain is eliminated or reduced. Simply put (the rules are more complicated, especially for limited partnership units converted to mutual funds and an advisor should be consulted), if you paid $25,000 for your flow-through shares, only the gain in excess of $25,000 will now be exempt and the first $25,000 will be taxable.

So if you are donating flow-through shares to charity this year, ensure you speak to your accountant as the rules can be complex and you may create an unwanted capital gain.

Superficial Losses


One must always be cognizant of the superficial loss rules. Essentially, if you or your spouse (either directly or through an RRSP) purchase an identical share 30 calendar days before or 30 days after a sale of shares, the capital loss is denied and added to the cost base of the new shares acquired. 

Disappearing Dividend Income

 

Every year, I ask at least one or two clients why their dividend income is lower on their personal tax return. Typically the answer is, "oops, it is lower because I sold a stock early in the year that I forgot to tell you about". Thus, if you manage you own investments; you may wish to review your dividend income being paid each month or quarter with that of last years to see if it is lower. If the dividend income is lower because you have sold a stock, confirm you have picked up that capital gain in your calculations.

Creating Capital Losses-Transferring Losses to a Spouse Who Has Gains


In certain cases you can use the superficial loss rules to your benefit. As per the discussion in my blog Capital Loss Strategies if you plan early enough, you can essentially use the superficial rules to transfer a capital loss you cannot use to your spouse. A quick blog recap: if you sell shares to realize a capital loss and then have your spouse repurchase the same shares within 30 days, your capital loss will be denied as a superficial loss and added to the adjusted cost base of the shares repurchased by your spouse. Your spouse then must hold the shares for more than 30 days, and once 30 days pass; your spouse can then sell the shares to realize a capital loss that can be used to offset their realized capital gains. Alternatively, you may be able to just sell shares to your spouse and elect out of certain provisions in the Income Tax Act.

Both these scenarios are complicated and subject to missteps, thus, you should not undertake these transactions without first obtaining professional advice. From a timing perspective, you may wish to consider this option for next year, given the above hold restrictions.

Settlement Date


It is my understanding that the settlement date for stocks in 2014 will be Wednesday December 24th. Please confirm this date with your broker, but assuming this date is correct, you must sell any stock you want to crystallize the gain or loss in 2014 by December 24, 2014.

Summary


As discussed above, there are a multitude of factors to consider when tax-loss selling. It would therefore be prudent to start planning now, so that you can consider all your options rather than frantically selling via your mobile device while sitting on Santa’s lap in the third week of December.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

Tuesday, November 18, 2014

Jet-Lagged

You may (or may not) have noticed that I did not post my blog on Monday morning as per my usual routine. This is because I have just returned form a trip to South Africa and Botswana and I am recovering from an over 30 hour airport/travel day. The trip was awesome and I had some great safari experiences.
I will post a blog or four :) discussing my trip in the next few weeks, but as of next week, it is back to your regularly scheduled programing. Here is one of the impressive photos my wife took (she is the family photographer) in Africa. This photo was intentionally cropped, and wait until you see what is on the right hand side of the leopard in the full shot.

Monday, November 10, 2014

Cottage Trusts

Last week Katy Basi wrote a blog post on the various estate planning challenges in passing on your cottage to your family. Today, in part 2 of her series, Katy discusses the use of cottage trusts to facilitate the transfer of your cottage. I thank Katy for her excellent series.

Cottage Trusts

By Katy Basi

 

This blog is a follow-up to my previous blog on the topic of inheriting a cottage, cabin or chalet. There are three main reasons that I have come across for a cottage in Ontario to be owned by a trust:

1) Minimization of estate administration tax, aka probate tax. Ownership of a cottage by a trust was a popular strategy in Ontario in first half of the 1990’s as a way to avoid having to pay probate tax on the value of the cottage. (In the first half of the 1990’s the Ontario government increased the rate of probate tax from its then fairly negligible rate to its current level (1.5% of the fair market value of an estate over $50,000)). A number of cottage owners were convinced to transfer the cottage to a trust in order to avoid probate tax on the value of the cottage upon their death. Many of these trusts are now reaching their 21 year anniversary. Without professional planning, a cottage trust will be required to pay tax on any accrued capital gain on the cottage due to the “21 year deemed disposition rule”. Given the increase in Ontario cottage prices over the last 21 years, very significant tax bills could result. There is often planning that can be undertaken to avoid this capital gain, usually involving a transfer of the cottage to one or more beneficiaries of the trust, but this planning must be undertaken a number of months before the 21st anniversary. If this is your situation, do not delay in getting professional advice!

2) Protection from having to share the value of the cottage upon separation or divorce. As noted in my previous cottage blog, a cottage often qualifies as a matrimonial home for family law purposes, in which case the value of the cottage is shareable upon a separation or divorce (as part of a process called “equalization”). If the cottage is instead owned by a discretionary trust, with a number of beneficiaries, and no guaranteed right of the beneficiaries to any of the income or capital of the trust, the argument can be made that none of the beneficiaries actually own the cottage or have any right to the cottage that can be valued, so that no equalization payment should be made. I advise my clients that a family court may “look through” any trust, including a cottage trust, and allocate a value to a discretionary trust interest. However, if three siblings would otherwise co-own a cottage, each having a one-third interest subject to potential equalization, this situation may be ameliorated by having a discretionary family trust own the cottage with the three siblings as trustees, and the siblings and all of their children as potential beneficiaries. If each sibling has two children, there will be 9 beneficiaries. The value of a 1/9 interest in the trust will be far less than the value of a 1/3 direct ownership interest, and there is a chance that a sibling’s interest will be valued at nil due to the discretionary nature of the trust.

3) “Wait and see” trust. When a cottage owner wants to give their children the option of inheriting the cottage, but is unsure as to whether the children will be able to deal with the practical issues of cottage ownership, and the even greater challenges of cottage co-ownership, a “wait and see” trust may be a good option. The cottage owner leaves the cottage to a cottage trust in his or her Will. The cottage trust is structured to last for the length of time that the parent thinks will be required for the children to figure out a workable long term plan for the cottage. If there are sufficient funds in the estate, the parent may leave a “cottage maintenance fund” as part of the cottage trust in order to reduce the financial burden on the children of maintaining the cottage for the duration of the trust. Upon the termination of the cottage trust, the children figure out if they will co-own the cottage, whether one child will buy out the other children’s interests, or whether the cottage will be sold to a third party.

Transferring a cottage to a trust during the lifetime of the owner can trigger capital gains tax, unless the trust qualifies as an alter ego trust or a joint partner trust. In addition, the trust itself is a separate taxpayer which pays tax at the highest marginal rate, resulting in higher tax bills, under certain circumstances, compared to ownership by the previous owner. Cottage trusts are often created in the Will of the cottage owner as a method of assisting the beneficiaries to keep the cottage in the family, given that any accrued capital gain on the cottage is taxable upon the death of the owner in any event (especially where the owner does not leave the cottage to his or her spouse). Cottage trusts are not appropriate for all situations, but they can be a lifesaver under the right circumstances.

Katy Basi is a barrister and solicitor with her own practice, focusing on wills, trusts, estate planning, estate administration and income tax law. Katy practiced income tax law for many years with a large Toronto law firm, and therefore considers the income tax and probate tax implications of her clients' decisions. Please feel free to contact her directly at (905) 237-9299, or by email at katy@katybasi.com. More articles by Katy can be found at her website, katybasi.com.

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 blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

Monday, November 3, 2014

Inheriting the Cottage/Cabin/Chalet –The Great Estate Planning Challenge

My life is a bit crazy currently, so I have asked my most popular guest poster, Katy Basi to step in for the next two weeks. Katy has guest posted such BBC favourites as Qualifying Spousal Trusts - What are They and Why do we Care? and a three part series on new will provisions for the 21st century dealing with your digital life, RESPs and reproductive assets. This week and next, Katy deals with a more meat and potatoes subject, the Cottage. Before Katy gets going, you may wish to review a three part series I wrote a couple years back for the Canadian Capitalist on the taxation of cottages ( part 1, part 2, part 3). So without further ado, here is Katy!

Inheriting the Cottage/Cabin/Chalet –The Great Estate Planning Challenge 

By Katy Basi


From my lovely vantage point on the dock at my dad’s cottage, looking around the lake at all of the other family cottages, I’m reminded that every cottage, cabin and chalet has a story. Some have been in the same family for generations, with or without accompanying drama. Too many more were sold to a third party against the expectations of the family, often as a result of poor estate planning.

The family vacation home can be the Cyanean Rocks against which an estate plan crashes and sinks. (The Cyanean Rocks, aka the Symplegades, were a pair of rocks at the Bosphorus that moved, causing major problems to boats in the area until Jason and the Argonauts defeated the rocks). There are many factors that make planning for this property more challenging than for other assets. For example:
  1. Often the legal ownership of a cottage does not reflect the practical reality of the cottage situation (for the remainder of this blog, I will refer to the “cottage” as this is the term commonly used in Ontario, but no disrespect is intended to owners of cabins and chalets - many of the same principles and problems will apply!) Due to the inter-generational history of many cottages, cottage ownership is often just not as simple as ownership of a primary residence. I have seen cottage ownership being shared between siblings, or divided among parents and all of their adult children. Sometimes a child is on title “but everyone understands that the cottage belongs to mom”. A parent may own only a “life interest” in the cottage, with adult children holding the “remainder interest”. Other times, ownership was transferred to a trust in the misty reaches of time. If a trust owns your cottage, you’ll want to read my companion blog next week entitled “Cottage Trusts” to ensure that you are aware of some nasty tax traps with the cottage trust structure.

  2. If an owner spends any time at a cottage with his/her family, the cottage will qualify as a matrimonial home for family law purposes, and may therefore be shareable upon a later separation or divorce of the owner (unless there is a marriage contract in place which addresses this issue). Let’s say, for example, that in your Will you leave your cottage to your son Adam and your daughter Beth as 50/50 tenants in common (not as joint tenants, as you want Adam’s children to be able to inherit his 50% interest if Adam so chooses). You shuffle off of this mortal coil, so that Adam becomes a co-owner of the cottage. Adam spends a week a year at the cottage with his wife and two children. Adam then separates, and his wife makes a claim for 50% of Adam’s 50% interest in the cottage on the basis that it is a matrimonial home. Will Adam be able to pay 25% of the value of the cottage to his ex as part of the settlement? Will he need to sell his interest in the cottage to Beth to provide the funds for this payment? If Beth cannot afford to buy Adam’s share, this issue may result in the sale of the cottage to a third party. Leaving the cottage to your beneficiaries in a cottage trust created in your Will may be helpful in this respect if marriage contracts are not doable (this planning technique is discussed in more detail in my “Cottage Trusts” blog).

  3. Cottages are expensive to maintain. Not every beneficiary who wants the cottage can afford the upkeep, and not every beneficiary who can afford the upkeep wants the cottage.

  4. Family members often have strong emotional attachments to the cottage. Leaving the cottage in your Will to the child with the financial resources to maintain the cottage may be the smart choice from a monetary perspective, but if this decision leads to lifelong conflict between the cottage child and the non-cottage child, it may not be the best plan taking all considerations into account.

  5. Cottages are not divisible in the same way as financial assets. Cottage owners who intend to leave the cottage to more than one person need to ask themselves what the practical implications are of each beneficiary inheriting only a share of the cottage. For example, co-ownership agreements are strongly recommended whenever more than one person or family shares ownership of a cottage. These agreements can provide for the payment of maintenance expenses and utilities associated with the cottage, allocation of time at the cottage, “shared time” (everyone is welcome!) versus “private time” (my family only please…), policies on having pets/friends over to stay (allergies? replenishment of beverages required?), bringing household items to/taking household items from the cottage, etc.

  6. If the cottage owner has owned the cottage for a number of years, there is often a large accrued capital gain on the cottage that is triggered upon the owner’s death. If the owner does not have sufficient liquid assets to pay the tax, and the beneficiaries do not have the funds, the cottage must often be sold simply to pay this tax bill. Insurance on the life of the owner is often recommended, where available at an affordable premium, to backfill this monetary gap. Sometimes a beneficiary is given the cottage in the Will upon the condition that the beneficiary pays the related capital gains tax, saving the other beneficiaries of the estate from bearing part of this burden. The calculation of the capital gain is often complex due to shoeboxes of receipts, collected over decades, which may or may not affect the adjusted cost base ("ACB") of the cottage (see Mark's blog post on ACB adjustments for cottages), as well as principal residence issues (sometimes a cottage may be designated as a principal residence for certain years of ownership….and sometimes not!)
If you own a cottage, it is strongly recommended that you speak with a professional to ensure that your cottage estate plan is optimized. My sisters and I spent lots of idyllic summers at my dad’s cottage as children, and we’re very lucky to still be able to enjoy the cottage, and the memories it holds for us, to this day. I hope that I’ve helped my family create an estate plan whereby my children, and my nieces and nephews, will be just as fortunate, and I wish the same for you.

Katy Basi is a barrister and solicitor with her own practice, focusing on wills, trusts, estate planning, estate administration and income tax law. Katy practiced income tax law for many years with a large Toronto law firm, and therefore considers the income tax and probate tax implications of her clients' decisions. Please feel free to contact her directly at (905) 237-9299, or by email at katy@katybasi.com. More articles by Katy can be found at her website, katybasi.com.

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 blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.