My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant and a partner with a National Accounting Firm 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 are written solely in my personal capacity and cannot be attributed to the accounting firm with which I am affiliated. My posts are blunt, opinionated and even have a twist of humor/sarcasm. You've been warned.

Monday, April 18, 2016

Rock On

Over the years, I have often suggested, probably to the point of ad nauseam, that I think you should make a Bucket List (A list of things to do before you die. Comes from the term "kicked the bucket"). I keep preaching this point because I’ve seen too many people never get to do the things they dream of, due to financial, health or age related reasons.

Personally, over the last eight or so years, I have crossed off multiple items from my Bucket List. For some of the more ambitious items on my list, such as my safari to Africa and playing golf at Pebble Beach, I have posted blogs detailing my experiences. One adventure on my list I did not recount was a golf trip I took last year to Ireland. It was an awesome trip and on a cold blustery typical Irish golf day, my friends and I and maybe only ten other people watched Dustin Johnson play a practice round for the British Open.

Bucket list items need not be extravagant trips. My list included watching a baseball game at Wrigley field and taking guitar lessons (which resulted in tennis elbow and quickly derailed my guitar playing to the relief of my families ears). The most recent item crossed of my list, was a visit to the Rock & Roll Hall of Fame (“RRHF”) in Cleveland. My wife took me for my birthday.

During my jaunt to Cleveland, I also attended a Cleveland Cavalier game in which Lebron James was his usual magnificent self (the game happened to be a throwback night to celebrate the 1976 Cavalier team, so the Jumbotron included a video clip of the current Cavs players dressed in 1970’s attire with a Soul Train motif in which many of them danced to the amusement of the crowed). The dancing is caught on this YouTube video. If you remember Soul Train and know some of the Cavs players, you will enjoy this video.

If following celebrity chefs is your thing, you’ll appreciate that we finished off our Cleveland experience with an awesome dinner at Michael Symon's restaurant called Lola’s.

Anyways, before I fall off my Soap Bucket - get it, soap box :) here’s a quick summary of the RRHF.

The Rock and Roll Hall of Fame



The first thing that strikes you about the RRHF is the structure itself. The building was designed by I. M. Pei, one of the world’s most famous architects. It is a really beautiful building.

While I thoroughly enjoyed my time at the RRHF (I was there for over 6 hours) and would recommend it to any music/rock fan, I can’t say there is one overall thing that stood out to me. It was a well- balanced combination of exhibits, video clips and interactive displays. My wife and I were struck by how disruptive rock and roll was to the “establishment”, both at its beginnings and again in the late 60’s and early 70’s.

The first floor of the exhibit was my favourite. It included among various exhibits:

(1) a gallery dealing with the Roots of Rock

(2) an Elvis exhibit (not really my thing)

(3) a Cities and Sounds exhibit which I really enjoyed (I have always personally been especially intrigued by the San Francisco scene of the late 60’s)

(4) a Dick Clark American Bandstand video retrospective (just so interesting seeing many rock stars as they were just coming on the scene)

(5) a legends of Rock exhibit that included clothing/costumes, pictures, video’s on such greats as the Beatles (see picture below), Rolling Stones, Jimi Hendrix, Doors, U2, David Bowie etc.

We enjoyed the colorful and historical guitars and instruments exhibited throughout the floor and the outfits/costumes worn from everyone from Led Zeppelin, to the Beatles, to even the black dress worn by Stevie Nicks on the Rumours album (yes like every teenage guy back then, I had a crush on Stevie).

There were also several fun interactive exhibits such as the one where you discover who inspired your favourite artists. There was also a new Graham Nash exhibit on while we were there.

The second floor provides a historical backdrop to how rock and roll began. Have you ever thought of all those one-hit-wonders you listened to when you were a kid? We had a blast on the second floor which hosted an interactive exhibit where you can search from A-Z for your favourite ones. You forget many of these songs until you see them listed. You then wonder why one only hit?

The third and fourth floors have such things as glass panels with the signatures of inductees and a Pink Floyd: The Wall exhibit. But, I must admit, I spent much of my time on these floors watching film footage and video that tell the story of the inductees and provide musical highlights of the induction ceremony concerts. For example; we watched a concert in which Stevie Wonder played with B.B. King, John Legend, Sting and Jeff Beck, which I really enjoyed.

My timing was a bit off, as I just missed a Herb Ritts rock portrait exhibit that ended the week before and had gotten rave reviews. The next exhibit unfortunately was under construction.

If you are a music fan, especially a rock fan, you’ll want to add the RRHF to your bucket list. You will not be disappointed by the venue or the exhibits.

Bloggers Note: I will not be posting again until May 9th. I have also disabled the ability to comment on this or any prior blog post. I apologize, but I am too busy during tax season to answer the various questions and comments I receive.

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.

Monday, April 11, 2016

What Small Business Owners Need to Know - Shareholder Agreements

If you are starting in business with another individual, your accountants and lawyers will likely suggest that you draft a shareholder agreement. However, since many small businesses are started by family and/or friends with limited funds, the idea of paying a lawyer to draft a shareholder agreement is usually not at the top of the priority list for two reasons:

123RF Stock Photo Copyright: Andrew Grossman

1. The cost of drafting the agreement.

2. Why Worry? Since the shareholders are family or friends, everything will work out because - well, we are family and/or friends, so what could go wrong? 

Consequently, shareholders of many small businesses may go several years before they decide it is time to engage a lawyer to draft a shareholder agreement. Typically the two catalysts to action are:

1. The business has become profitable enough that the shareholders want to ensure if something were to happen to them, their family is well provided for.

2. There is some shareholder friction.

In today’s post, I will discuss two key areas that should be considered/included in any shareholder agreement, whether drafted at the outset of the establishment of the business or years after the business has begun. As many agreements are over 25 pages, please keep in mind I am touching on maybe 30-50% of what is required in a typical shareholder agreement and providing an accountants take on a legal document. I am not a lawyer. If you need an agreement, you must obtain proper legal advice and should get moving on the project, as most agreements take many months to be hammered out.

Key Considerations in a Shareholder Agreement


The two issues I am going to discuss in this post are:

1. Share Transfer Provisions

2. Death Provisions

Share Transfer Provisions


Share transfer provisions in a shareholder agreement provide some order to the often “unorderly” process of third party share sales, unsolicited share offers, shareholder exits and shareholder power struggles.

The most common provisions included in a shareholder agreement are:

1. Right of First Refusal

2. Shotgun

3. Piggyback

4. Drag-along

Right of First Refusal


In order to protect one shareholder from selling to an unwanted or undesirable third party, shareholder agreements typically contain a Right of First Refusal provision.

These provisions typically state that the existing shareholders have the option to match a third party offer made to any of the other shareholders and to purchase the shares of the selling shareholder themselves, on the same terms and conditions as offered by the third party. Minority shareholders, depending upon their financial situations, may be somewhat prejudiced by these provisions.

A related shareholder agreement provision is a Right of First Offer. Under this provision, a shareholder does not need a hard third party offer and can just state the terms on which they wish to leave the company and if the other shareholders do not take them up on the offer, they can sell to a third party on those terms.

Shotgun


A shotgun provision allows one of the shareholders to offer the other shareholders a price and the terms under which they are prepared to either purchase the other shareholder’s shares or sell their shares to the other shareholders. In theory, this will result in a fair price, since the shareholder triggering the shotgun, does not know if they will be selling or buying.

Once the offer is made, the other shareholders must decide whether they wish to buy the offered shares or sell their own shares on the same terms and conditions presented.

While this provision is often useful in shareholder disputes, where one shareholder has more resources than another, they may be dictating the end result of the shotgun, since the shareholder with less finances will not have the resources to fund the purchase of the shares and will be forced to sell.

Piggyback


A common share provision used to protect minority shareholders is a “piggyback” right. This provision protects a minority shareholder from being excluded by the majority shareholders, where they wish to sell their shares to a third party, but have not included the minority shareholder as part of the deal for one of many possible reasons.

A “piggyback” right typically allows a minority shareholder to sell some of their shares to the third party purchaser under the same terms as the majority shareholders.

Drag-along


As noted above, a “piggyback” provision protects minority shareholders where they are excluded from a sale by the majority shareholders. A drag-along provision is a clause that allows the majority shareholder to drag-along the minority shareholder whether they like it or not, where the majority shareholders want to sell and the purchaser wants 100% ownership with no minority owners.

These provisions will often have a minimum price to protect the minority shareholders from selling at a price they consider too low and/or apply only after they had the opportunity to purchase the departing shareholders shares (which in many cases is not practical given their resources).

Death Provisions


It is very important that any shareholders' agreement consider the death and disability of any of the shareholders. I briefly want to discuss one issue that can arise upon the death of a shareholder; that being the flow-through of the capital dividend account to the spouse or estate of the deceased shareholder.

Typically shareholder agreements require all shareholders to obtain life insurance with the corporation being the beneficiary. The idea is that if one shareholder were to die, the insurance is sufficient to allow the corporation to redeem the deceased shareholders shares at their fair market value, subject to a valuation. It should be noted, that life insurance proceeds generally are added to the corporations capital dividend account and can be paid as a tax-free dividend.

The requirement to redeem the deceased shareholder’s shares generally allows the surviving spouse to receive most of the redemption funds tax-free (via the capital dividend) and the remaining shareholders to obtain control of the corporation, with minimal cash outflow, since typically the insurance covers most if not all of the redemption price payable to the spouse or estate.

The reason I have mentioned all this is; that while most agreements have a clause regarding the redemption of the deceased shareholder’s shares and the requirement for the shareholders to obtain life insurance, I have seen on several occasions no mention that the funds used to redeem the shares must be paid from the capital dividend account ("CDA") caused by the insurance (Nowadays, many lawyers do not specifically reference the CDA, but have a clause requiring the redemption to be made in the most tax efficient manner for the vendor). 

Without this clause, the corporation can use the life insurance proceeds to redeem the shares, but keep the capital dividend for itself and its remaining shareholders. While most people would not try and take advantage of such a missing provision, where the shareholders and their families have not got along, the surviving shareholder could try and “stick-it” to the estate of the deceased shareholder without a clear provision.

Marital Breakdown


Many shareholders do not consider that a marriage breakdown by one shareholder can significantly impact the other shareholders. As this post is too long as it is, I will quickly point you to an interesting article published by Jordan Dolgin Do Family Law Clauses in Shareholder Agreements Really Matter? that discusses this topic.

My post today just touches on just a couple points you need to consider in drafting a shareholder agreement. If you have a corporation and do not have such an agreement, I suggest you contact your lawyer and get to work promptly on drafting such.

Bloggers Note: I have disabled the ability to comment on this or any prior blog post. I apologize, but I am too busy during tax season to answer the various questions and comments I receive.

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.

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.

Small Business Owners - Get on my Mailing List


If you are an owner-manager and/or a shareholder in a corporation and have not signed up for my corporate mailing list, please email me at bluntbeancounter@gmail.com.

I will be sending out specific mailings on matters of importance to small business owners and I am considering, depending upon the interest, holding a roundtable for small business owners who are in the Toronto area. I will start the mailings in May.

Thanks to the many readers who have already signed up.

Monday, April 4, 2016

Reporting the Capital Gains on Your 2015 U.S. Stock Sales

Last year I wrote a blog post titled Foreign Exchange Translation on Capital Gains and Dividends. The article noted that the Canada Revenue Agency (“CRA”) expects you to use the Bank of Canada noon rate or other acceptable exchange rate in effect at the time of purchase and sale for any capital transaction.

To be clear; this means that when you purchase a stock you must translate it at the date of purchase and again at the date of sale [i.e. if you purchased 50 shares of Johnson & Johnson for $80 when the foreign exchange rate is $1.10, your cost for Canadian purposes is $4,400 (50 x $80 x $1.10)]. If you sold the J&J shares later in the year for $90 and the FX rate was $1.45, your proceeds are $6,525 (50 x $90 x $1.45) and your capital gain to report is $2,125 ($6,525-$4,400).

The trouble is, many financial institutions just provide you capital gains summaries based on your U.S. purchase and sale price. If you then multiply that gain by the average foreign exchange rate for 2015 ($1.2787), your capital gain is wrong.

This is a huge issue for 2015, where the U.S. dollar strengthened significantly against the Canadian dollar. You really need to go back and translate your purchases and sales at the FX rate in effect at that time. The same holds for sales of U.S. real estate or any other U.S. capital property.

The above was recently re-enforced when a client of mine advised me of the following:

My client informed me that a certain financial institution was very proud of themselves this year for coming up with a new Realized Capital Gain report and had sent him an email to tell them how wonderful they are.

However, he noted the trouble was they were only reporting capital gains in the original currency, USD.

My client said, “I would bet that many taxpayers are just taking that USD number and converting it to Canadian at the sale date and calling that the gain. Given the big drop in the CAD$ in recent years, they are, of course, under-reporting grossly. There is no warning on the report, not to do this”. He suggested I write another blog post on this topic and hence, today's topic.

When he calculated his capital gain using the rates in effect at the time of purchase and sale, he emailed me to tell me the gain was $35,000 higher than if he had just taken the U.S. gains on the report and used the CRA's average rate for 2015.

It is very important to ensure you translate your capital gains at the actual purchase and sale prices in 2015, or you may be severely under reporting your capital gains.

Bloggers Note: I have disabled the ability to comment on this or any prior blog post. I apologize, but I am too busy during tax season to answer the various questions and comments I receive. 

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.

Monday, March 28, 2016

The 2016 Federal Budget


Last Tuesday, the Minister of Finance, Bill Morneau, delivered the Liberal governments much anticipated 2016 Federal budget.

While much of the budget had been floated and/or proposed during the election and confirmed in part on December 7th (the middle-class tax cut and 4% increase in tax rates for high income earners) by Mr. Morneau, there were some still some surprises.

In January, I wrote a blog post on how the "Top 1%, are not Happy Campers". I would suggest they are still not (see my CBC National News interview on this topic here and the story of this high earner leaving Canada). Yet, I think between all the trial balloons and rumours, from raising the small business tax rate to 26.5%, to a possible increase in the capital gains rate from 50% to 75%, many of the "Top 1%" felt they escaped tax Armageddon to some extent. However, if you are a small business owner or professional, there were many under the radar changes that may significantly impact your future tax planning and depending upon your fact situation, potentially result in even more income taxes. If planned, it was an excellent job of misdirection from the government in respect of high income earners.

The "middle-class"are the winners here. However, I still want to reserve judgment as to how big a win certain people had. The "middle-class" has lost the family tax cut worth $2,000 to some people. In addition, much of the "middle-class" gain revolves around children, so if you are single or do not have children or only say one child, your benefit is not quite as large. Finally, the new Canada Child Benefit ("CCB") starts to phase out on adjusted family income in excess of $30,000, so many families will have a reduction in their child tax benefit. So while most people will be net winners, some middle-class people may not benefit as much as they anticipate. This Toronto Star article
presents some interesting numbers on how the federal budget affects everyday Canadian families.

Business Changes


The budget contains several proposals that will close down many popular tax planning techniques used by high income earners. These include:

a) The transfer of personal life insurance policies to private corporations that allow the shareholder to extract tax-free funds. New measures will reduce or eliminate these transfers effective March 22, 2016. For those who transferred policies prior to the budget date and took back tax-free shareholder loans, essentially the new proposal will cause the tax-free capital dividend received by the corporation upon your death, to be reduced by the tax-free loans you took from your company while alive. 

b) Many partnerships created structures whereby the partners had corporations that provided services to the partnership allowing them to potentially access the $500,000 small business exemption. For taxation years that begin after March 21, 2016, the budget will change the rules to catch this type of service income. I am surprised it took this long to eliminate this type of planning.

c) It is somewhat common for the spouse of a high income earner to incorporate a company that provides services to their spouse's corporation. This planning can often allow both spouses corporations to access the $500k small business deduction. Also applicable on or after March 22, 2016, the budget will deem the service income to not be eligible for the SBD where the shareholders or a person does not deal at arm's length (such as spouses). Thus, combined, the two related corporations can only claim $500k SBD in total.


Other Business Changes

  1. The small business tax rate reductions legislated by the Conservative government will be frozen at 10.5% for 2016 and beyond.

  2. The Eligible Capital Property regime (such as goodwill, customer lists and licences) will now be replaced with a new capital cost allowance class (Class 14.1) with a 5% declining balance. The CEC balances will be transferred effective January 1, 2017. This is very complex, but will be less beneficial than the current regime in many cases as active income is now being turned into investment/property income.

  3. There will be significant changes to transfer pricing and anti-surplus stripping and various foreign transactions which are beyond the scope of this post (meaning, way too complicated for me and you need a non-resident specialist).

Miscellaneous Personal Changes


1. The budget proposes the elimination of the children's fitness tax credit, arts tax credit and education and textbook tax credits as of January 1, 2017. The children's fitness tax credit and arts tax credit will be halved for 2016 and you can continue to carry forward unused education and textbooks credits. The Federal tuition credit is unchanged.

2. The family tax cut will be eliminated for 2016 and subsequent years.

3. The child tax benefit and universal child benefit will be combined into one non-taxable Canada Child Benefit ("CCB"). The CCB will provide annual benefits of up to $6,400 per child under six years old and up to $5,400 per child six through seventeen. On the portion of adjusted family net income between $30,000 and $65,000, the benefit will be phased out at a rate of 7 per cent for a one-child family, 13.5 per cent for a two child family, 19 per cent for a three-child family and 23 per cent for larger families. Where adjusted family net income exceeds $65,000, remaining benefits will be phased out at rates of 3.2 per cent for a one-child family, 5.7 per cent for a two-child family, 8 per cent for a three-child family and 9.5 per cent for larger families, on the portion of income above $65,000.

The budget proposes to provide an additional amount of up to $2,730 per child eligible for the disability tax credit.

4. The retirement age for Old Age Security will be rolled back to age 65.

5. Many mutual funds have been structured to allow "switches" among the funds (known as corporate class funds) to avoid triggering tax. The budget proposes that for dispositions after September 2016, a taxable disposition will occur when you switch among mutual funds with the exception of switches between series of shares within a class (i.e.: the shares within the class are essentially the same funds).

6. There was no budget proposals in respect of stock options, a pleasant surprise, given the Liberals had discussed restrictions being implemented.

7. The Conservative governments proposal to allow the donation of real estate or private corporation shares will not proceed.

The budget contained multiple proposals, but I have only touched on a few. For many of the proposals, the devil will be in the details.


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.

Monday, March 21, 2016

Estate Planning and the Black Sheep Child


In November, Adam Mayers of The Toronto Star reviewed my book, Let’s Get Blunt About Your Financial Affairs. In his article, he discussed some of the comments I made in my book on inheritances.
123 REF-Tomas Marek

My observations elicited some very interesting emails to my inbox. Some of the emails provided tragic and sad details of children being left out of their parents' lives and consequently their wills for various reasons. One reader, who is gay, asked me if he could be left out of a will solely for that reason.

This question is far outside my area of expertise. I thus enlisted my wills, trusts and estates expert Katy Basi, to answer his question and discuss in general, the consequences from both the parents and child's perspective, of leaving a black sheep child out of the will.

Please note: Katy and I use the term "black sheep" colloquially and the term is not meant to be demeaning in any manner.

Estate Planning and the Black Sheep Child

By Katy Basi


Many families have one (or more) black sheep children, and estates lawyers commonly deal with two categories of questions regarding these shunned family members. In this blog post I will refer to our sample unfortunate as Cain (though most black sheep are not guilty of fratricide!). The two situations are as follows:
  1. If the client is not Cain - can I cut Cain out of my will? If I do, will he be able to challenge my will? 
  2. If the client is Cain – can my family members cut me out of their wills?

The Parent is the Client


If you plan to cut Cain out of your estate plan, I typically have three pieces of advice for my clients:

(1) Explain in the will why Cain is being treated differently than other family members of the same degree of family connection. For example, if a child is being cut out of a will because they have chosen not to have contact with their parents for two decades, the will should state that very relevant fact. Otherwise, Cain could argue that the lawyer made a drafting error by leaving him out, or this omission could be used as evidence of the parents’ lack of capacity to make the will(s) in question (i.e. the argument then goes “Clearly the fact that they “forgot about me” indicates that they had lost their marbles!”).

(2) Consider leaving a set dollar value legacy to Cain, and then having a clause that takes the legacy away if Cain challenges the will for a reason other than a valid interpretation issue. This is known as an “in terrorem” clause and needs to be very carefully drafted by an estates lawyer in order to be legally effective.

(3) Arrange for a capacity assessor to interview the testator before the will is signed (though not too far in advance of signing). The capacity assessor should then write a letter or report of some kind confirming that the testator has the capacity to make the will in question (presuming that this is the case, of course). This is particularly helpful if the testator is elderly or ill, or if there are any other factors which could lend strength to a “lack of capacity” argument by a disappointed beneficiary. I have seen a capacity assessment stop estate litigation in its tracks.

Cain is the Client


When I am advising Cain, my first piece of advice is to consult an estates litigator (I am an estates solicitor, and therefore a major part of my job, in my view, is to help clients plan their estates in such a way as to discourage litigation). After that disclaimer, my counsel generally flows along these lines:

(a) We are lucky (in my view) to have testamentary freedom in Ontario, subject to certain limitations (other provinces such as British Columbia have enacted laws limiting testamentary freedom to some extent).

(b) One exception to testamentary freedom is the ability of certain family members (e.g. minor and adult children, parents and siblings) to make a support claim against the estate. For example, if Cain is an adult child who was financially supported by his parents, and was not left a sufficient inheritance by them (as determined by a court) Cain may make a support claim against the estate. Support can include providing accommodation at lower than fair market value rent.

(c) Where no financial support has been provided, Cain’s usual recourse is to try to have the will that cuts him/her out declared invalid, usually on the basis of a lack of testamentary capacity (as alluded to above) or undue influence (e.g. “my sister pressured my mom into cutting me out of her will”).

(d) Either of these claims will require solid evidence to be successful in court.

(e) A successful will challenge is not helpful if the prior will also cuts out the challenger, presuming that the prior will is valid.

(f) While in the old days most of the costs associated with estate litigation were borne by the estate in question, the courts have shifted their approach in recent years. These days, courts do not hesitate to order an unsuccessful will challenger to pay, not only their own costs, but also the costs of the estate relating to the challenge. Litigation is very, very expensive and time-consuming, so launching a will challenge due to feeling left out, without a good evidentiary case, is just not a good idea.

(g) However, if the will challenger has been cut out of the will for a reason that is against public policy, then litigation may be successful even if the testator had capacity and was not unduly influenced. If Cain can prove in court that he/she was cut out of an estate plan due to discrimination on a basis not permitted under the Charter of Rights and Freedoms, for example due to their sexuality, or because they married outside of his/her race/religion etc., then Cain may have a valid claim. The evidentiary mountain here can be steep to climb, but in a recent case the claimant was successful in overturning her father’s will on the basis that her father had cut her out as she had a mixed-race child. She was successful despite the fact that there was no reference to this discrimination under the terms of the will. There was, however, substantial external evidence as to the discriminatory reason behind her father’s estate plan.[Note: Just prior to the publication of this blog post, the decision of the lower court was overturned by the Ontario Court of Appeal, reinstating the father's original estate plan. It would be very helpful to have guidance from the Supreme Court of Canada regarding this issue if the daughter decides to ask for leave to appeal].

My discussions with clients about cutting out, or being, the black sheep tend to be fraught with sadness, anger and frustration. My experience is that clients do not cut out a black sheep lightly, and in many cases would usually be overjoyed to reconcile, knowing that there will need to be apologies and compromise on both sides. By the time I am counselling a black sheep about being cut out, it’s clear that no amount of litigation will heal the hurt feelings.

Bloggers Note: Katy has written numerous guest posts for this blog. Many of her articles have proven to be very popular with readers. If you want to read more from Katy, the best way to review her previous blog posts is: go to the search function on the top right hand side of the blog and type in her name.

Katy Basi is a barrister and solicitor with her own practice, focusing on wills, trusts, estates, and income tax law (including incorporation's and corporate restructurings). 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@basilaw.com. More articles by Katy can be found at her website, basilaw.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.

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.

Monday, March 14, 2016

What Small Business Owners Need to Know - One Day You Will Sell Your Business

Last summer, I attended a four-day course on family business succession planning, put on by The BDO SuccessCare Program. The course dealt with the usual financial issues accountants love to delve into when a business owner is undertaking succession planning, such as valuations and tax planning. But what I found fascinating was; that the meat of the course dealt with the many psychological issues and hurdles that an advisor must consider when dealing with family succession planning.

One of the slides utilized in the course, was a "One Day You Will Sell" flow-chart (see below). I was struck by the simplicity and frankness of this message. If you are a small business owner, the slide bluntly states, that if you do not plan for the succession of your business voluntarily, you unfortunately will likely have that decision made involuntarily for you. Jeff Noble, a Director & Practice Leader of SuccessCare notes that the involuntarily side of the chart can also include disagreement and disenchantment.

You Should Voluntarily Plan the Sale of Your Business


It is prudent for business owners to plan for a voluntary sale to someone inside the family or to a company insider, as this strategy also accommodates a change in direction to a third party sale. (If all preparation is geared towards an external sale, it is much more difficult to later switch to an internal sale.) This way the business decreases dependency on current management, leadership and ultimately current ownership. The by-product is a business that is also better prepared for and attractive to an external buyer.


One-day-you-will-sell-web.png

Why Would Anyone not Plan for a Voluntary Sale?


When you review the left side of the above diagram and see the words death, ill health and bankruptcy, one would have to wonder why any small business owner would ever allow their "baby" to be subject to an involuntary disposition. It is not unusual where there is an involuntary disposition, that the ill business owner or their estate (if deceased) receive only cents on the dollar for the business.

Yet business owners do not plan for their succession in astoundingly huge numbers. In 2015, U.S. Trust undertook an extensive Wealth and Worth survey.

The survey reflected that an astonishing 61% of small business owners do not have a formal plan for the orderly succession of their business. Since in most cases, informal plans are not worth the piece of paper they are written on (although, most informal plans are verbal), these business owners are flirting with involuntary business dispositions.

The U.S. Trust survey noted five reasons business owners do not have formal succession plans. They include (with my comments in parentheses):

1. No plan to retire anytime soon (which means: they don't want to retire)

2. The decisions have yet to be made (which often means: they are procrastinating on deciding between long-time employees, their children or an arm's length sale)

3. Others are aware of their wishes (which means: there is no formal plan and a disaster is waiting)

4. A will is in place to cover the succession plan (which means: pretty much the same as #3 above)

5. They are too busy to think about it (which means: they don't want to think about it)

I would add the following other reasons:

6. They will not face their mortality (see my blog on facing your mortality)

7. They do not want to accept the fact that if they hand over the reins to someone else, the company may function without them (which means: they can't accept they are not the company)

In June of 2014, I wrote a three-part series on estate freezes. In the third installment, I noted Tom Deans, the author of Every Families Business  (the bestselling family business book of all-time) half-jokingly noted during a panel discussion we were part of that "when your parent has a heart attack at 71, twenty years ago they died. Now doctors put in a coronary stent and your parent is good for another 20 years. So when parents tell a child it will all be yours one day, that one day could be when you turn 65 and up until you obtain control of the company, your parent(s) may keep their thumb(s) on you (since they often maintain voting control as per my estate freeze discussion last week). Parents; skipping a generation is not succession planning!"

While the above quote is in reference to an estate freeze and passing the business to the next generation (Tom does not necessarily believe an estate freeze is the best succession plan), Tom's comments reflect that many business owners would rather just work till they drop.

If you are a business owner, review the seven reasons above, get over your obstacle and start planning for your business succession, or someone else may be planning your involuntary succession.

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.

Small Business Owners - Get on my Mailing List

 

If you are an owner-manager and/or a shareholder in a corporation and have not signed up for my corporate mailing list, please email me at bluntbeancounter@gmail.com

I will be sending out specific mailings on matters of importance to small business owners and I am considering, depending upon the interest, holding a roundtable for small business owners who are in the Toronto area.

Thanks to the many readers who have already signed up.

Monday, March 7, 2016

The CRA’s 2016 Compliance Letter Campaign

Since 2010, the Canada Revenue Agency ("CRA") has been sending letters to specific Canadians to in their words “inform selected taxpayers about their tax obligations and to encourage them to correct any inaccuracies in their past income tax and benefit returns”. The 2016 campaign, for which the CRA estimates it will send approximately 30,000 letters, has already begun. Today I will discuss
A better caption would be "You Are Maybe Getting Audited"
these letters.

Favoured Taxpayers


The letters are sent to selected groups of individuals where the CRA feels the taxpayers may not fully grasp the technicalities regarding the deductibility of specific expenses. These groups tend to fall into the following three main categories:

1. Self-employed business owners

2. Commission employees

3. Rental property owners

Expenses That Catch the CRA's Eye


The letters tend to focus on the following type of expenses:

Self-employed and commission employees
 
  • Advertising and promotion, specifically meals and entertainment
  • Wages, often in relation to spouses and for commission employees, any deductions for assistants
  • Auto expenses, especially the quantum of business related mileage
  • Home office use

Rental property owners 

  • Capital cost additions (cost of property)
  • Repairs and maintenance
  • Travel expenses

 

What the Letters Look Like


The typical compliance letter will say something like this:

“You have reported $XX of XX expenses in 2014 as business/employment expenses/rental expenses. The CRA is asking you to review this amount as taxpayers often make common errors with XX expenses”…….

The CRA includes an appendix with a detailed description of the expense they are reviewing and what the criteria are to qualify for deducting the expense at issue.

The letters clearly state that you are not being audited at this time, but that if changes are required you should make them within 45 days using a T1-Adjustment Form. The CRA also notes that later in the year they will be auditing taxpayers who earn a certain type of income and claim certain types of expenses. They then add that an audit may cover tax years or other items not noted in the compliance letter.

Since in cases other than misrepresentation, the CRA can audit you three years back from the date of your notice of assessment, you can be at risk for three years of audit review.

Obviously, the audit discussion scares the heck out of most people, even where they have properly claimed their expenses.

The Possibility of Being Audited


On its website, the CRA says the following regarding the possibility of an audit.

“Receiving this letter does not necessarily mean that you will be selected for an audit. We consider a number of risk factors before conducting audits.

We rely on risk-assessment systems and research to determine which taxpayers are most likely to misunderstand their tax obligations. We also randomly select tax returns and conduct reviews to verify that taxpayers are paying their taxes in full and on time. If our review indicates that certain activities are more at risk for non-compliance than others, we may conduct more audits of taxpayers reporting these types of activities”.


Should You Be Concerned if You Receive a Letter?


I would suggest, that in the vast majority of situations, taxpayers have claimed expenses that are within the rules of the Income Tax Act ("ITA") and adjustments will typically not be required. The ITA rules can be interpreted differently and while most people attempt to stay on the straight and narrow, some people push to the grey areas. If you are one of those people, you may want to consider a possible adjustment if your grey is hinging on black. In addition, some people do not keep the best of records to support their deductions and that could be a cause for concern.

If you have an accountant, you should speak to them once you receive the letter. They can review with you, if they perceive you to have any audit risk.

If you do not have an accountant, you will need to consider if you have been “aggressive” in claiming deductions or misinterpreted the rules. If so, filing the T1 adjustment may make sense.

You are probably wondering if filing a T1 adjustment will minimize the risk of an audit? Unfortunately, I cannot answer that question, as I have no access to the rates of follow-up audits on those who have filed T1-adjustments. If I had to guess, filing an adjustment would only minimally affect a future audit (you cleaned up your affairs, but are noting they were not clean to begin with), but again, I have no substantive proof one way or another and this is just my opinion.

If you feel you have filed your return accurately and correctly, you do not need to take any action. However, there is no guarantee you will not be audited and that the CRA will not reassess you on expenses claimed (since your interpretation of what is say a deductible advertising expense may be different than the CRA’s, even if you feel it clearly meets the criteria of the ITA).

So the long and short of this; if you have filed your returns accurately, you have no need to fear these letters. However, the letter may be indicative you have claimed expenses the CRA has found are often claimed incorrectly or aggressively and you may be audited in the future.

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.