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, July 28, 2014

One Big Happy Family - Until We Discuss the Will

This summer I am posting the "best of" The Blunt Bean Counter while I work on my golf game. Today, I am re-posting my 17th blog which I wrote way back in December 2010. This post tackles the taboo subject of whether you should discuss your will with your family. While this is my fifth most read post of all-time, it only had 6 comments which I find puzzling. Maybe our aversion to discussing our will goes as far as commenting on articles about the topic?

I almost forgot that when I started this blog, I used to post a non-financial post with ever tax or financial post, as evidenced by my Dentist's Wallpaper discussion that follows the main post.

One Big Happy Family - Until We Discuss the Will


What I want to discuss in today’s blog is the issue of whether parents should discuss their will with their children.

When there is a “black sheep” child in the family, or a child who is not treated equally in the will, I expect that a family meeting would likely be a disaster. But what about a meeting in situations when the children are treated somewhat equally? There is no right or wrong answer, but I think a family meeting is wise. Any meeting of this type can turn ugly because of money issues, but more likely, any ugliness will be the result of historical family jealousies or resentment over some prior issue or treatment. Nevertheless, if you feel you can navigate the minefields noted above, the family meeting can be very effective and useful.

The family meeting could be used to deal or clarify several different types of issues. For example:
1. Possible perceived inequalities: The meeting could be used to explain why you have left your Picasso to your daughter instead of your son so that he doesn’t feel slighted when the will is read. This discussion could involve explaining that since your daughter studied Art History at university, you feel she would appreciate the Picasso; however, since it is worth $500,000, you have left your son $500,000 of stock to equalize (or if you have not tried to equalize, you can explain why face to face). Also, where you have left more money to one child (perhaps they make less money than the other children), you can use the meeting to clarify why and explain that it has nothing to do with loving that child more, you are just helping them since they have not been as fortunate as the other siblings.
    2. Determine wants and needs of the beneficiaries: Many families have second properties such as cottages or ski chalets. Some children may have attachments to these properties while others might not, or maybe you are not sure whether any child would want to take over the property when you pass. A meeting provides the opportunity to raise the issue for your children to decide among themselves if they will want to sell the property, share the use, or have one child inherit the property. This issue may be best discussed prior to a will being finalized.
    3.  Deciding on an executor: Most children have no idea of the responsibilities and the burden of being named an executor of the will. You can broach this topic at the meeting to explain the duties of the executor and determine if the children or child you wish to be an executor(s) are/is willing to undertake the position.
    4.  Full disclosure: Finally, depending upon how open you wish the meeting to be, you can provide a current list of assets to your children so they know what assets you own and where they are held. In any event, you should also provide such a list to your accountant, lawyer or spouse. A copy of the list should also go into your safety deposit box. They key take-away is that you must ensure such a document exists and someone knows where it is.
    The decision to have a family meeting to explain your estate planning while alive and in good mental and physical health is a complex decision based on past family history and relationships. However, if you feel the meeting can be held without creating a “civil war,” it gives you a great chance to explain your estate planning and to get everyone onside.

    Update: I followed this blog post up with another in February 2012, which reviews an Investors Group survey of Canadians attitudes towards discussing their wills. If you have any interest, here is the link.

    The Dentist’s Wallpaper


    There is not much to do while you are in the dentist’s chair, especially if you are not lucky enough to have nitrous oxide administered. Personally, I look for anything to take my mind off that damn drill.

    One day while having a cavity filled I started reading my dentist’s wallpaper. Before you say “I think you really did have nitrous oxide administered and maybe too much,” you must understand my dentist’s wallpaper actually has “life quotes” all over it. One of the quotes was “Life is Hard by the Yard, But by the Inch Life’s a Cinch.”

    I don’t want to get all philosophical here, but I just found the quote so interesting; it actually took my mind of the drill. Such a simple adage that says so much.

    We all can get overwhelmed when we look at all the tasks and requirements of our daily lives, but if you break those tasks down into bite-sized pieces, the totality of all the tasks is less overwhelming. Although this is easier said than done, I do try and remember this quote when I feel overwhelmed.

    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, July 21, 2014

    CRA Audit- Will I Be Selected?

    This summer I am posting the "best of" The Blunt Bean Counter while I work on my golf game (after this weekend's 2 birdie, 5 par and 3 triple bogey performance, I still need lots of work on my consistency). Today, I am re-posting a February, 2011 blog on your chances of being selected for audit. This is my third most read post of all-time and has over 150 comments; I wonder why :)

    CRA Audit- Will I Be Selected?


    I am often asked how the Canada Revenue Agency (“CRA”) selects its audit victims; oops, I meant to say taxpayers subject to audit. Through experience I know certain taxpayers, certain claims and certain industries seem to trigger audits. With that in mind, I will list below what I have seen and how I believe the CRA selects certain individuals and businesses for audit.

    Reasons for Individuals and Corporations

     

    I would suggest there is nothing worse than a scorned lover, a business partner you have had a falling out with or a dismissed employee to trigger a CRA audit. These individuals know your little secrets; a cash deal here, an offshore account there and a conference you expensed that was really a vacation. These people are also vindictive and in some cases, they make statements and claims that are not factual in nature; however, the claims are enough to bring the CRA to your door.

    Update: The CRA has introduced the "snitch line" which offers a reward for tipsters who inform on taxpayers hiding money offshore, as per this National Post Article.

    CRA also loves net worth audits. These are audits undertaken because you live in a 3,000 square foot home, have a Porsche and kids in private school, and yet show minimal income on your tax return. Typically the CRA either stumbles upon these situations, or information from one of the individuals noted in the preceding paragraph provides a lead.

    Reasons Specific to Individuals


    We see far more desk audits (information requests in regard to certain deductions claimed) than full blown audits for individuals. You can expect an inquiry if you claim any of the following:
    • a significant interest expense,
    • an allowable business investment loss (usually if you held shares in a bankrupt private Canadian company),
    • tuition from a university outside Canada (typically the child and parent are tied together as most children transfer $5,000 of their tuition claim to their parents),
    • a child care claim for a nanny; even if you have filed a T4 for the nanny with CRA. Why CRA cannot crosscheck their records is baffling and befuddling.
    In all the above cases you are just providing back-up information, these are not audits.

    In past years individuals who purchased any tax shelter other than an oil & gas or mineral flow through have been audited. However, in most cases the CRA is auditing the tax shelter itself and the individual investors just get reassessed personally.

    Full blown audits seem to occur with regularity in regard to individuals who earn commission income or self employment income and claim expenses against that income. In those cases, CRA gravitates to auto expense claims, requesting logs books they know one in 100 people actually keep, and advertising and promotion expenses they consider personal in nature.

    Reasons Specific to Corporations


    Corporations seem to be selected for three distinct reasons.

    They carry on a business that is CRA’s flavour of the year; some prior flavours have been pharmacies, contractors and the real estate industry and any other industry CRA feels is a “cash is king” industry.

    Corporations file General Indexed Financial Information known as GIFI. This information provides a comparative year to year summary of income and expenses. It is suspected by many accountants that CRA uses this information to review year to year expense and income variances of the filing corporation and to also compare corporations within a similar industry sector to identify those outside the standard ratios, but we don't know that for certain.

    The final reason is that it is just your turn. I have no knowledge of this, but it seems like CRA just runs down a list and if you don’t get caught in regard to #1 or #2, your turn just eventually comes up.

    In all cases it is imperative you keep your source documents to provide to the auditor; CRA more then ever wants source documents. It is also vitally important if you and not your accountant are meeting with the auditor, that you try and keep your cool. In the end, the auditor is just doing his or her job and if you treat them badly, you are not doing yourself any favours.

    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, July 14, 2014

    Are Accountants Really Boring?

    This summer I am posting the "best of" The Blunt Bean Counter while I work on my golf game. Today, I will start with a June, 2012 post I considered somewhat humorous (at least for an accountant).

    Are Accountants Really Boring?

     

    The joke goes like this. "When does a person decide to become an accountant?" Drum roll please. The answer…"When they realize that they do not have the charisma to become an undertaker." Or how about this one? Question: "What does an accountant use for birth control?" Answer: "Their personality."

    With a reputation like that, Flo Rida will not be penning any rap songs called Wild One’s featuring accountants. So are we accountants that boring or do we take an unfair rap?

    Unfortunately, in general, I think the rap is probably warranted, although perception may be reality. How would us CA’s be viewed if there had been a TV show called LA Accountant, instead of LA Law? Did you know John Grisham got his undergraduate degree in accounting? What if his books had been about accounting firms instead of law firms? Accountants would then be looked upon as cool dudes/dudettes with a conservative bent.

    Is it nature, or nurture? I think probably a combination of both. Many accountants by nature are cautious and conservative. Years of training to refine these character traits amplify the situation in non-professional environments. It would probably help if our dress style did not include pens hanging from our dress shirts, pencils behind our ears, or if we occasionally loosened our ties both literally and figuratively. I always had this underlying desire at a cocktail party full of accountants to run about the room and loosen all their ties.

    Personally, although I have pride in my profession and my job, I know the boring stereotype precedes me and I try not to advertise the fact that I am a CA upon initially meeting people. You can only have so many people at parties walk away after you tell them you are an accountant before you get a complex.

    Classic Bean Counter
    Unlike many accountants, I don’t advertise my profession with a vanity licence plate with the initials MG CA. Although I am considering getting one saying “The BBC” [The Blunt Bean Counter]), but I am concerned everyone will just think I am just a British public television expatriate.

    When I am outed as an accountant, I always say I am a tax accountant or the managing partner to make my job sound sexier. Although my naturally boring nature often gives me away, many of my other characteristics are non-accountant like and I enjoy surprising people when they find out this blunt, sometimes arrogant, sometimes confrontational and very occasionally humorous person is an accountant. My happiest social outings are not when a good looking girl stares at me, but when someone says, “Wow, I would never have thought you to be an accountant”.

    So, are any of my kind not boring? I did a search of famous accountants and came up with this list. For those of you old enough to remember the Bob Newhart Show, Bob Newhart the namesake and star was a former accountant. Now I am not sure Bob helps our cause. He was funny, but in a boring deadpan style, certainly was not stylish and definitely was no Chris Rock. 

    To my surprise I found a musician who started life as an accountant. You figure any musician would break the stereotype as they lead crazy drug induced lifestyles. I found out Kenny G, a great saxophone player, is our exception. However, although Kenny is a great musician, I typically hear his music in my  dentist's office and as far as I know, he did not have a Playboy Playmate as a girlfriend like so many rock stars. 

    I was about to give up when a beacon of light shone and led me to Paul Beeston. Finally, an accountant with attitude! Beeston, who was a CA with Coopers and Lybrand, became the President and CEO of the Toronto Blue Jays and later the President and COO of Major League Baseball. Paul  is a cigar chomping, fun loving, non-sock wearing CA. Yes, there is one out there.

    There you have it, proof that there is an accountant out there who does not fit the stereotype. Anyways, if you ever meet me, I will be easy to spot. I am the outgoing accountant who will be looking down at your shoes instead of staring down at my own shoes

    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, July 7, 2014

    Gone Golfing With a Twist

    Again this summer, I will be taking a sabbatical from posting on my blog. Unlike last summer, when the blog went dark (although some will say they could not tell the difference from when I was posting :), I will be posting a “Best of The Blunt Bean Counter” blog each week.
    Yes, that is me, "slightly off the fairway" at Pebble Beach

    What qualifies as a best of blog? It is a bit subjective, but I will pick amongst my personal favourites and the most popular posts based on the number of page reads and the number of comments.

    I hope you have a great summer and see you in September.

    Future Topics


    Many of my blog topics originate from questions readers ask. If you have a suggestion for a future topic, please leave the suggestion in the comments section. The topic must be broad enough that someone other than you would be interested in the discussion.
     

    Monday, June 30, 2014

    RRIFs - How they Work and Tax Planning

    By the end of the year in which you turn 71, you are required to terminate your RRSP. You have three viable options at that point.

    1. You can transfer your RRSP savings into a Registered Retirement Income Fund (“RRIF”).
    2. You can transfer your funds into an annuity.
    3. You can blend the RRIF and annuity option.

    There is a fourth option, which is to withdraw the full value of your RRSP; however, unless you have a very small RRSP, this option is a non-starter.

    Today, I am going to discuss the RRIF option. I will likely write about annuities at some point in the future. Many investment advisors suggest that you consider using some portion of your RRSP to purchase an annuity to provide a fixed stream of income in retirement, especially if you don’t have a company pension upon retirement. Rob Carrick wrote this article last week on how you can use annuities in your retirement.

    The RRIF Rules


    RRIFs are subject to an annual minimum withdrawal, which commences the year after you open your RRIF account. The minimum withdrawal amounts are based on a percentage of the value of your RRIF. The standard percentages are noted below.




    Age*
    RRIFs
    established
    after 1992


    Age*
    RRIFs
    established
    after 1992
    71
    7.38%
    83
    9.58%
    72
    7.48%
    84
    9.93%
    73
    7.59%
    85
    10.33%
    74
    7.71%
    86
    10.79%
    75
    7.85%
    87
    11.33%
    76
    7.99%
    88
    11.96%
    77
    8.15%
    89
    12.71%
    78
    8.33%
    90
    13.62%
    79
    8.53%
    91
    14.73%
    80
    8.75%
    92
    16.12%
    81
    8.99%
    93
    17.92%
    82
    9.27%
    94 or older
    20.00%
    * On January 1 of the year for which the minimum amount is being calculated.
     

    The minimum withdrawal rates may force you to withdraw more funds than you need to live and push you into a higher income tax bracket. Fortunately, you can elect to have the withdrawal minimums based on the age of a younger spouse or common-law partner. This election cannot be changed once you select the spousal age option.

    If you have a spouse under the age of 71 the minimum percentage is calculated as 1 divided by (90 minus your spouse's age). As per this article by Preet Banerjee, if your spouse is only 50, you would only have to withdraw 2.5% [1/(90-50)].

    The website RetirementAdvisor.ca has this excellent RRIF calculator to help you determine your minimum withdrawal rates and whether you should use your age or your spouses. 

    Income Tax Planning for RRSPs & RRIFs before Age 71


    It may make sense to withdraw funds from your RRSP before you convert it to a RRIF at age 71. You would do this only where your marginal income tax rate will be lower in the years between retirement and when you convert your RRIF at age 71. For example, assume you will have $40,000 of pension and investment income when you retire at age 65. At this level of income, the next $4,000 you earn will be taxed at approximately 24% and the following $27,000 will be taxed at 31%. Thus, you may want to cash in $4,000 and possibly more, since when you must withdraw funds from your RRIF at age 72, you will at minimum be taxed at 31% and possibly higher (depending upon your minimum RRIF withdrawal and your ability to pension split with your spouse).

    You also want to manage your total net income so that you will not have to pay back your old age security. The 2014 clawback threshold starts at $71,592 with your OAS being completely clawed-back once your total net income reaches $115,716.

    To some, the above may seem simplistic and fairly standard advice. In fact, I was taken to task by a reader for similar advice during my 6 part series on retirement. The reader commented that they "have seen very few models that give a detailed picture of how to manage the drawdown of your RRSP and take into account the minimum RRIF withdrawals". As I like a challenge, I actually attempted to create such a model. Alas, after a couple hours and a brief discussion with Michael James who is a math whiz, I realized this is a herculean task, in which I have little interest in attempting to conquer. Thus, I suggest the only way to deal with this issue is to have your financial planner consider your RRSP drawdown in context of your retirement plan.

    As RRIF withdrawals at age 65 and beyond qualify as pension income, they will be eligible for the $2,000 pension income tax credit. Many advisors suggest converting a small portion of your RRSP into a RRIF so that you can claim the pension credit. The pension credit is worth approximately $400 on a $2,000 RRIF withdrawal. Keep in mind you may have to pay an administration fee for your RRIF that could offset some of this benefit.

    If you will have earned income in the year of retirement, say 2014, you can make a RRSP over-contribution in December, 2014 (equal to 18% of your 2014 earned income). This will allow you to claim a 2015 RRSP deduction. You will pay a one month over-contribution penalty of 1% for your December over-contribution; however, your RRSP over-contribution will cease January 1, 2015 (i.e. If your 2014 earned income is $100,000, you can make a $18,000 over-contribution in December, 2014. You will owe a $180 penalty, but can deduct the $18,000 RRSP contribution on your 2015 return even though your RRSP is now a RRIF).

    If you have a younger spouse and you have RRSP contribution room, you can contribute to a spousal RRSP up to and including the year in which they turn 71.

    Most people know they must convert their RRSP to a RRIF by the end their 71st year, but give no heed to any planning before the year of conversion. As noted above, tax planning should begin with your RRSP/RRIF in your early to mid-sixties.

    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, June 23, 2014

    Inheriting Money - Are you a Loving Child, a Waiter or a Hoverer

    In February 2012, I wrote a blog post titled “Is it Morbid or Realistic to Plan for an Inheritance?”. I knew this was a touchy subject and would elicit various reactions from my readers. In the post, I stated that to “ignore the existence of a significant future inheritance that would impact your personal financial situation may be nonsensical” from a financial and retirement planning perspective.

    Whether you believe you should plan for an inheritance or not, is your own personal decision. Today I want to deal with the behaviors and actions of those who stand to inherit money from their parents. Over the last 25 years, I have dealt with the tax, financial and psychological issues surrounding numerous client estates. I have observed the actions of those who will be the recipients of an inheritance and have found their behavior anywhere from fascinating to sickening.

    I have found people who will inherit money fall into 4 groups:

    1. The Loving Child

    2. The Pragmatic Loving Child

    3. The Waiters

    4. The Hoverers

    The Loving Child


    For this group, their parents come first and money is secondary. Typically, these children are very close to their parents throughout their life and call and see them on a consistent basis, often weekly, or even daily. They have always helped their parents with their medical needs or in some cases with their financial needs, without giving it a second thought; because, their parents are well, their parents. This group would tell you they would give back any inheritance, if it allowed them another day to be with their parents and would consider it blasphemy to plan for an inheritance.

    The Pragmatic Loving Child


    This group is a subset of #1. These children love their parents and just want their parents to enjoy their lives, even if it means that they spend the children's inheritance. Children in this group may consider the reality that they will likely receive an inheritance. Even so, they do not want to take it into account in their planning and it is only at the insistence of an accountant or financial planner that they would even consider such.

    The Waiters


    I am not sure who coined this term, but I have seen it used many times. Waiters are described as children waiting for their parents to die, so that they can benefit from their parents assets. Waiters are considered to have a warped sense of entitlement to their parent’s money. I have observed several waiters over the years, some who went into debt to live a lifestyle based on an assumed inheritance. In my limited sample size, the children have always received their inheritance. However, one day I would love to see the face of a waiter when a lawyer informs them their parent decided to leave everything to charity instead of them.

    The Hoverers


    Hoverers are an even lower species than the waiters. These children often pay little or no attention to their parents their whole life, but when their parents get sick or older, they start hovering around. Several years ago one of my clients was very sick and was expected to pass away any day. I received a call from one of his children. I assumed the call was going to be the bad news that my client had passed away and the child was going to provide me the details of the funeral. The call was indeed to tell me their parent had passed away, but they were not calling to tell me about the funeral arrangements; their question to me was when they could start accessing their inheritance. I just felt sick to my stomach.

    Don’t ask me why I decided to write about this topic. I guess as I have stated many times in my blog, I am just fascinated by how money affects people’s behavior. Thankfully, most people fall into the first two groups. If you are a Waiter or Hoverer, consider taking a good look at yourself in the mirror.

    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, June 16, 2014

    Income Tax Resources

    I know this is the best written, wittiest and most informative tax blog you could read, but I figured today I would give the other guys some notice :). Seriously now, here are some other great income tax related resources you may want to check out:

     

    Blogs and Websites


    Below are some excellent websites and blogs. I am sure there are many more blogs and websites with great information, however, either I am not aware of them or do not access them often; so if you are not listed below, do not send me a hate email.

    Tax Tips.ca - This is probably the best tax resource in Canada. This is not a blog in the typical sense, but more of a resource centre.

    Moodys Gartner Tax Law - This is one of my favourite tax blogs. Some topics may be a bit technical, but very well written and great info for any tax junkie.

    Canadian Tax Resource - Written by Dean Paley, CGA, CFP, who now posts on his own site. The Canadian Tax Resource blog is really a historical resource at this point, as Dean does not blog here anymore. However, the older posts often show up when I search a tax topic.

    John Loukidelis Professional Corporation – Written by tax lawyer John Loukidelis, who wrote a long-running blog at his prior law firm. His blogs tend to be a bit technical, but he has some great information for those who are willing to read technical material.

    Tax Enforcement Agencies


    Canada Revenue Agency - I must say, the CRA does a very good job with their site. There is lots of information and it is usually fairly easy to read. Although, keep in mind; these are the CRA views, which are not necessarily always the view of the courts.

    Internal Revenue Service - This site is more technical and not as user friendly as the CRA’s site; but if you have U.S. tax issues, it is a very good resource.


    Estate Planning


    Estate Law Canada - The person behind this blog is Lynne Butler an estates lawyer. Very readable and informative.

    Toronto Estate Law Blog - Written by the estate lawyers at Hull and Hull LLP.

    E$tate Debate - Written by various experts in the estate and trust fields.

    Tax Treaties


    Tax treaties  - A useful site if you want to know the withholding tax rate of foreign sources of income.

    Large Accounting and Law Firm Websites

     

    The following are links to the tax publications by some of the "big boys' of the accounting and legal world.

    BDO
    PWC
    Deloitte 
    EY
    KPMG
    Dentons
    Thorsteinssons LLP

    Twitter


    Unlike many people, I only follow a small number of people on Twitter. Here are the Twitter handles of the tax people I follow, some already noted above:

    1. @moodysgartner - Moodys Gartner Canadian and US tax lawyers and Chartered Accountants discuss tax strategies and tax issues.
    2. @JamieGolombek – Managing Director, Tax and Estate Planning at CIBC Private Wealth Management and well known tax columnist for the National Post writes about all things tax & estate.
    3. @Xyste – Tax lawyer Greg Ducharme
    4. @taxtips.ca - Canadian tax, financial and investing info, tax and other calculators, tables of tax rates/tax credits.
    5. @IRSnews -IRS news and guidance for the public, the press and practitioners.
    6. @CanRevAgency - Canada Revenue Agency (CRA) administers tax and benefits programs, and ensures compliance with Canada’s tax laws
    7. @WayneBewick -U.S. Certified Public Accountant and Chartered Accountant specialising in U.S. and Canadian tax services.
    8. @DeanPaleyCGACFP - Accountant & Financial Planner.


    Newspapers


    The two best known tax columnists are Jamie Golombek with the National Post and Tim Cestnik with the Globe and Mail.

    Winners of the 4 CD Audio Set of Tom Deans Every Family's Business

     

    The winners of the giveaway are Stephen L. and Michael G. You will be contacted to obtain your mailing information. Thanks to all who entered.

    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.