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, 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.

Monday, October 27, 2014

Crowdfunding – What is it? Are there Income Tax Implications?

Over the past couple years, crowdfunding has become a popular way to raise money online. As I only have a passing understanding of this concept, I have done a little research to enhance my own knowledge and for those of you not familiar with crowdfunding, provide a bit of a primer.

What is Crowdfunding?

 

According to the National Crowdfunding Association of Canada, crowdfunding is “the raising of funds through the collection of small contributions from the general public (known as the crowd) using the Internet and social media. … The key to crowdfunding in the present context is its inextricable link to online social networking and its ability to harness the power of online communities in order to extend a project’s promotion and financing opportunities. ...More recently, crowdfunding is becoming an increasingly common form of raising funds in the technology and media industries; including music, film and video games.”.

The top ten business crowdfunding campaigns as of April, 2014 are listed in this Forbes article.

Crowdfunding Models


There are four major crowdfunding models; however, there are multiple variations of these models.

(1) Donation Model – Crowdfunding is used to support a social cause or a charity by raising donations. These contributions are typically altruistic in nature and typically, official income tax receipts are not issued.

(2) Reward Model – Supporters receive non-financial rewards such as discounts on the product and early access to the product or service.

(3) Lending – Investors make interest bearing loans to the start-up.

(4) Equity – Investors obtain an equity stake in the company, similar to investing in any public company, although there may be ownership restrictions.

Regulatory


The regulatory system in Canada is a little all over the place for each province. In March 2014, the Ontario Securities Commission, the largest regulator in Canada, published four new prospectus exemptions including a crowdfunding exemption. The OSC provided a 90-day public comment period (ended June 18, 2014). These exemptions are intended to facilitate the raising of capital by businesses at different stages in their development, while maintaining an appropriate level of investor protection.

Canadian Lawyer Magazine  summarizes these exemptions for crowdfunding as follows:

1. Only Canadian reporting issuers and non-reporting issuers that are not investment funds, real estate issuers, or blind pools may access the crowdfunding exemption.

2. Issuers will be permitted to raise only up to $1.5 million total in any 12-month period. There is no limit to how often an issuer utilizes the crowdfunding exemption in any 12-month period, provided the issuer does not exceed the aggregate limit.

3. Issuers may only offer prescribed securities — for example, common shares or preference shares that are relatively simple.

Consistent with the policy of minimizing risk; investors will not be permitted to invest more than $2,500 per offering and more than $10,000 total in a calendar year.

Income Tax

 

The CRA has stated in a technical interpretation  (2013-0484941E 5) that funds received from crowdfunding campaigns are generally taxable as business income. The amounts taxable would generally be where the contributor receives a product or promotional item. Where equity or debt is issued in exchange for funding, those amounts will not be taxable.

The interpretation dealt with raising funds for a musical recording, where the contributors would receive a free recording or promotional item, but would not receive any equity or be entitled to a share of the profits from the venture.

The CRA went on to state that whether certain expenses are deductible is a question of fact. “Expenses related to crowdfunding efforts incurred by a taxpayer for the purpose of gaining or producing income from a business within the meaning of paragraph 18(1)(a) of the Act may be deductible. It is our view that the cost to a business to provide donor gifts (ex. cost of T-shirts) and fees paid to undertake crowdfunding activities may be deductible if the requirements of the Act are otherwise met.”.

Crowdfunding is an ever-evolving area, with regulatory and tax authorities constantly trying to keep up. If you intend to raise funds via crowdfunding, it is essential you obtain regulatory and tax advice before you start; hopefully from a professional if you can afford it, or at minimum from an organization such as the National Crowdfunding Association of Canada which may be able to provide some direction if not advice.

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, October 20, 2014

In Ontario, You Are Rich If You Make $220,000!

I think most people would agree, that those of us who make the most money ("the rich") should be taxed at higher marginal tax rates. However, what we may not all agree upon is what level of salary/income makes you “rich” and what the highest marginal tax rates should be. In Ontario, where supposedly only 2% of income earners make more than $150,000, “sort of rich” now starts at $150,000 and you are considered rich at $220,000.

I guess it is all a matter of perspective (my accounting/tax practice and blog is/are directed at high net worth people and small business owners so my living depends on the “rich”) but to me, if you make $200,000 or even $300,000, you are doing extremely well, but are far from being wealthy or rich, especially if you live in Toronto.

A few weeks ago I was undertaking some dividend tax planning for a family that has various family members scattered across Canada. When I compared the taxes that were payable by the child in Alberta and the child in Ontario, I thought I had made an error in calculation. There was a massive tax payable variance on this dividend.

That Alberta and Ontario have a significant taxation gap is not new news. What caught me off guard, and I think will catch several Ontarians off guard at tax time this year, is the impact of the new marginal tax rate threshold in Ontario. In 2013, Ontario taxed incomes over $509,001 at the highest marginal rate. For 2014, the $514,090 threshold in Ontario was dropped to $220,000, and a second level of higher tax rates was introduced for those with income between $150,000 and $220,000.

The excellent website Taxtips.ca, reflects that the highest combined marginal rate for an Alberta taxpayer on a non-eligible dividend paid by the typical small business is 29.36%. In Ontario, that rate for someone who makes over $220,000 is 40.13%. If a small business pays a $200,000 dividend to a high marginal rate child living in Alberta, he/she will owe approximately $59,000 in tax on that dividend; while that same dividend will be taxed to the other child in Ontario at approximately $80,000.

For your information, the highest marginal rate on employment and interest income in Alberta is 39% versus 49.53% in Ontario. Although it should be noted that Alberta considers you rich at $136,270.

The point of this post was twofold. Firstly, to warn those of you who earn more than $150,000 in Ontario, that you may owe substantially more income tax next April; especially if you have self-employment, rental income, or other investments (not subject to tax withholding) and secondly, to note the huge taxation discrepancy between Alberta and Ontario. I expect there are going to be many Ontario accountants dealing with angry nouveau riche clients next April.

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, October 13, 2014

The Emotional Side of Retirement for Entrepreneurs

Last week, I featured a guest blog by Betty Hansen of Crossroads Planning Group Inc. on the emotional side of retirement. That post titled Retirement or Refirement can be found here as a complement to my six-part series titled How Much Money do I Need to Retire? Heck if I Know or Anyone Else Does! 

Today, Betty returns with another great post on the emotional side of retirement for entrepreneurs. As someone who has dealt with owner-managers of companies for years, I know they are often wired a little different and thus, retirement can seem like they have put their life into slow motion. I thank Betty for her excellent blogs and without further ado, here is her post.

The Emotional Side of Retirement for Entrepreneurs

By Betty Hansen


We all know what has to be done when it comes to our finances for retirement…investing, saving and years of planning. But many entrepreneurs have not thought about how they will emotionally handle this new stage in their lives.

Many definitions of retirement are similar to “the act of ending your working or professional career”. Sounds exciting, doesn’t it?

In my experience one group that generally does not transition gracefully through the act of ending their working or professional careers are entrepreneurs. The following quote from “You Can’t Fire Me I’m Your Father” by Neil N. Koenig sums up the reason why very well!

“Work is fun; it is seductively engrossing and exhilarating when it provides challenge, risk and reward.” This is what entrepreneurs live for and it certainly has a lot more appeal than a traditional definition of retirement.

I would love to be able to create a word to replace “retirement”… for many people that’s one of the biggest hang-ups. There’s an implication that you no longer are as useful to your business as you have been in the past. The roles may change. However, the importance of the knowledge, skills and experience that the entrepreneur can continue to bring to the business can be invaluable. When and how does retirement occur? I think there is no definitive answer to that question (or should there be).

Entrepreneurs quite often are stubborn, independent, confident and resilient. These characteristics work well while building up the business but often work against the entrepreneur when the time comes to pass on, sell or retire from the business. These characteristics cannot be turned off like a switch.

Let’s explore a few emotionally driven areas related to retirement for entrepreneurs.

Control, Identity and Purpose

 

Understanding how and when to give up control depends a lot on why one wants to keep control in the first place.

Wanting to keep control may arise because the entrepreneur feels no one can replace the skills they bring to the table. It can also arise from the fear that the next owner will do better.

There is also control for control’s sake. That usually happens when recognizing mortality and keeping control of the business is often one of the ways of putting that recognition out of mind.

Then there is control that’s kept because there is nothing else to replace it.

For the entrepreneur, the business may have been the focus of their purpose for decades and that has become their identity. That purpose and resulting identity has been imbedded in structure. However once the entrepreneur retires they may be faced with a future with no structure, no purpose and no identity and that can be daunting.

During the first few months of retirement there are usually lots of activities to be undertaken…then reality sets in. That reality may take the form of disenchantment and/or depression. A feeling of “so this is it?”.

A recently retired entrepreneur expressed these feelings. “When you have a business and become depressed you still have to deal with the business so you get up and deal with the business and the depression…when you are retired and become depressed there may not be anything out there to motivate you to get out of the depression”. That’s a depressing thought in itself.

I feel that the entrepreneurs who have a healthy and happy transition into retirement (or into new careers) are those that have started the planning process early and have created a culture of communication with their families and employees in order to create a future for themselves. One of the questions to be asked is “When not thinking about the business what am I doing when I lose all track of time?”

The answer to the above question may be the foundation on which to build the future. The business which has been an outlet for the entrepreneur’s control, purpose and identity needs to be replaced by something that will provide a similar outlet and create a vital and vibrant future.

At some point in time the entrepreneur will dispose of their business. The disposition may be voluntary or involuntary and may be to a third party or to family, but it is going to go. Let’s redefine the future before, during and after the disposition. That future may or may not include continuing participation in the business.

When a young man asked his 80 year old grandfather what he would change about his entrepreneurial career if he had to do it over, the grandfather indicated that he would have developed interests outside the business early on in his career that would give him greater purpose now.

Because we are living longer and better than generations in the past, I like to look at retirement not as an event but as a process that evolves over a period of time and a process that is just as important as succession planning or preparing the business for sale.

And that period of time will be different for each entrepreneur, their families and their business.

Betty’s company, Crossroads Planning Group Inc., helps familes transition their business from one generation to the next while encouraging family harmony. Betty believes that communication is the foundation of effective retirement, succession and estate planning. Please feel free to contact her directly at 519.269.9634 or by email at bhansen@crossroadsplanning.com. More information is available on Betty’s company website, www.crossroadsplanning.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.