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 BDO. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. My posts are blunt, opinionated and even have a twist of humour/sarcasm. You've been warned. Please note the blog posts are time sensitive and subject to changes in legislation or law.

Monday, January 13, 2020

My latest podcast interview – The Rational Reminder Podcast

I was recently interviewed by Ben Felix and Cameron Passmore, portfolio managers at PWL Capital, for their Rational Reminder Podcast. I thank Ben and Cameron for the interview. It was fun and they had some great questions.

Here’s a link to the podcast.

On the podcast we discuss a bunch of really interesting topics. Here are some highlights:
  • Why it is important to ensure that both spouses are relatively financially literate
  • When it makes sense to hire a corporate executor
  • Why you should involve your adult children in financial conversations
  • Why you may want to consolidate your investment holdings
  • How to deal with potential uneven distribution in an estate
  • Why success is not always linked to money
  • How I define my own personal success

The last question, about my own personal success, was a surprising question from Ben and Cameron. I was expecting to only discuss and provide advice on getting your financial affairs in order, not my personal successes. Afterwards, I thought about that question and my answers and was a bit surprised where I went with my answers, especially my comment on jealousy. I became so introspective on that answer that during the holiday break I wrote a blog post on that topic and will publish it in a couple months.

Anyways, I think this podcast is worth a listen and you may also want to check out some of the other interesting podcasts Ben and Cameron have made.

The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

Please note the blog posts are time sensitive and subject to changes in legislation.

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.

Monday, December 23, 2019

2019 Year-End Financial Clean-Up

This is my last post for 2019 and I wish you and your family a Merry Christmas or Happy Holidays and a Happy New Year.

As in many prior years, my last post of the year is about undertaking a "financial clean-up" over the holiday season. I feel this clean-up is a vital component to maintain your financial health. For full transparency, much of this post is similar to last year's, except for the portfolio review section.

So, what is a financial clean-up? In the Blunt Bean Counter’s household, it entails the following in between eating and the 2020 IHF World Junior Championship.

Yearly Spending Summary


I use Quicken to reconcile my bank and track my spending during the year. If I am not too hazy on New Year’s Day, I print out a summary of my spending by category for the year. This exercise usually provides some eye opening and sometimes depressing data, and often is the catalyst for me to dip back into the spiked eggnog

But seriously, the information is invaluable. It provides the basis for yearly budgeting, income tax information (see below), and among other uses, provides a starting point for determining your cash requirements in retirement.

Portfolio Review


The holidays or early in the new year is a great time to review your investment portfolio, annual rate of return (also 3-, 5- and 10-year returns if you have the information), asset allocation, and to re-balance to your desired allocation and risk tolerance. The million-dollar question is how your portfolio or advisor/investment manager did in comparison to appropriate benchmarks such as the S&P 500, TSX Composite, an international index and a bond index. This exercise is not necessarily easy (although some advisors and almost all investment managers provide benchmarks, they measure their returns against). The Internet has many model portfolio's you can use to create your own benchmark if you are a do-it-yourself investor.

While 2019 has been a great year in the markets, I would not skip reviewing your investment portfolio because your returns were strong. I say this for the following two reasons:

1. Your returns should still be measured against the appropriate benchmark as noted above. That is how you should compare your returns on a yearly and multi-year basis. So even if your return is good, you may have still under-performed your benchmark last year or over a 3-, 5- or 10-year comparative basis.

2. We are usually concerned with ensuring our returns are not worse than a benchmark. However, what if your returns were way higher than the benchmark? This can also be a concern that your manager is over-reaching their mandate. For example, say your manager way outperformed in 2019. I would ask them why they so outperformed. Assuming their answer is not just that they are awesome and that is why you use them, dig into their reason. Make sure it is just that they were lucky or skillful in 2019 and outperformed within their mandate—and that they did not take more risk than the mandate you provided them.

For example (this is a real case, but I am changing the facts and situation a little to protect the innocent), I was in a meeting where the investment advisor way outperformed in 2019. I asked them why they so outperformed in 2019 and got a somewhat satisfactory answer. However, I also found out they had sold off over 25% of the equity position in late November as they felt they had got their returns and the market was frothy. I nearly fell out of my seat. The investment advisor undertook a massive reallocation which he did not discuss fully with the client, and his actions clearly reflected a market timing mentality that should raise significant red flags despite the great 2019 returns. So sometimes, "too good" returns should be reviewed as intently as poor returns.

Tax Items


As noted above, I use my yearly Quicken report for tax purposes. I print out the details of donations and medical receipts (acts as checklist of the receipts I should have or will receive) and summaries of expenses that may be deductible for tax purposes, such as auto expenses. If you use your home office for business or employment purposes (remember, you need a T2200 from your employer), you should print out a summary of your home-related expenses.

Where you claim auto expenses, you should get in the habit of checking your odometer reading on the first day of January each year. This allows you to quantify how many kilometres you drive in any given year, which is often helpful in determining the percentage of employment or business use of your car (since, if you are like most people, you probably do not keep the detailed daily mileage log the CRA requires). 

The CRA recently reviewed or audited multiple clients of mine on their auto expense claims, and not having logs has been problematic. Thus, I would suggest if you are not going to keep an annual log, you should at minimum keep a log for a month or two each year.

Medical/Dental Insurance Claims


As I have a health insurance plan at work, I also start to assemble the receipts for my final insurance claim for the calendar year. I find if I don’t deal with this early in the year, I tend to get busy and forget about it.

To facilitate the claim, I ask certain health providers to issue yearly payment summaries. This ensures I have not missed any receipts and assists in claiming my medical expenses on my income tax return. You can do this for among others: physiotherapists, massage therapists, chiropractors, and orthodontists—even some drug stores provide yearly prescription summaries. This also condenses a file of 50 receipts into four or five summary receipts.

Year-end financial clean-ups are not much fun and are somewhat time consuming. But they ensure you get all the money owing back to you from your insurer and ensure you pay the least amount of taxes to the CRA. In addition, a critical review of your portfolio or investment advisor could be the most important thing you do financially in 2020.

Book Giveaway


The three winners of  the Charles B. Ticker book giveaway, “Bobby Gets Bubkes: Navigating the Sibling Estate Fight” were:

Mike P.
Elaine B.
Kim H.

The winners have been notified.

The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

Please note the blog posts are time sensitive and subject to changes in legislation.

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.

Monday, December 9, 2019

Navigating the Sibling Estate Fight – Plus a Book Giveaway

I recently read the book “Bobby Gets Bubkes: Navigating the Sibling Estate Fight” (bubkes is Yiddish, meaning nothing, nada, zip, zilch), by Charles B. Ticker, which explains how to navigate a sibling estate fight. Charles, who is a mediator and estate litigation lawyer, previously contributed a guest post to this blog on The Top Five Areas of Estate Litigation.

As an accountant who has dealt with families for many years and has written on various sibling issues (such as Sibling Rivalry – Parents Beware, it is not only a Childhood Isssue and Is Your Estate Planning Horizontally Challenged?, where I discuss how parents need to consider their children’s sibling relationships when drafting a will), I found this book very interesting.

Today I am going to highlight a few of the issues and points made in the book that caught my attention (Note: I am not reviewing each chapter, so I jump between chapters in my post below).

In addition, Charles has graciously provided three free copies of his book to give away to readers of the blog. Please see the details at the end of the post.

Mom always liked you best


In his book, Charles states that many sibling estate fights have deep roots that can go back 50 or more years. In the first chapter he notes the most famous line from the Smothers Brothers Comedy Hour, a classic TV show from the late sixties, where Tommy Smothers would complain to his brother, Dick, “Mom always liked you best.” Charles recounts how Tommy said the audience went wild the first time he came out with that line and that it resonated because everyone could relate to the experience.

The issues siblings have do sometimes stem from perceived favouritism by mom, but more likely they come from an event or events that occurred in childhood, such as letting a pet get loose or “killing the pet through neglect,” taking a hockey card collection or injuries from roughhousing. Charles notes that once the parental referees are out of the picture, the gloves come off.

Charles sums up this topic by saying, “My clients constantly refer to negative childhood episodes involving a sibling with whom they are engaged in a legal dispute over the parent’s estate. Even though what happened when they were kids has nothing to do with the lawsuit, the painful memories of those negative experiences fuel the estate dispute between them as adults.”

It’s not fair!


In his second chapter, Charles notes a very common refrain from his clients: the will is not fair. But Charles states that it is a common misconception that a will has to be fair. He notes that “while wills are often challenged because they appear to be unfair, a successful challenge in most jurisdictions is not based on the issues of fairness but rather the issue of whether the parent understood what he or she was doing when the alleged unfair distribution of the estate was made.” This is a shock to most people

The concept of fairness is a tricky one. Is a will unfair if there are unequal gifts? Is the will unfair when there are equal gifts, but one child took mom into her home the last 10 years of the mother’s life and fed her and looked after her?

Charles concludes the second chapter by saying that perceived unfairness – regardless if the children are treated equally or unequally – may contribute to an estate fight.

Why it’s important to visit your parents


Many children are cut out of a will or left a smaller inheritance than their siblings because they had a diminished relationship or no relationship with their parents. Charles makes an interesting comment on this issue when he says, “This may seem like a cruel remark, but the bottom line is that an adult child should not expect to receive a bequest from a parent’s estate if he or she did not have an ongoing relationship with that parent.”

While this would seem obvious, apparently it is surprising to many of Charles’ clients.

Parents: Have that discussion


Readers of my blog will know that I am a huge proponent of discussing your will to some extent with your family and explaining your intentions. Charles seems to agree with me. He states that choosing not to talk to your children is a big mistake, “as leaving questions unanswered can create these difficult disputes.”

The child as a caregiver


I commented above on whether it is fair to have equal gifts where one child has looked after a parent for years. This has become more common the past few years, whether the care is in the home of the child or in the parent’s home or a nursing home. Very often one child becomes the primary caregiver - through desire, geographic location, job demands, whatever.

Charles notes that in Ontario the caregiver child may be able to claim for more of the estate based on the care they provided to their parents. They do this by claiming compensation for services rendered to the parent based on a doctrine called quantum meruit. Of course, this all presumes there was no formal contract between the parent and the child.

Broken promises


In Chapter 4, Charles discusses the common complaint from a child that a parent had promised a particular asset or gift to the child and that “promise” was not in the actual will. Charles notes a recent Ontario case on the issue, where a farmer broke his promise to leave the family farm to his son. Fourteen years after the farmer passed away and enormous amounts of money were expended in legal fees, the Ontario Superior Court awarded the farm to the son but ordered him to pay $1.325 million to his sister.

The moral of the story is: parents, if you promise your child something, ensure it is reflected in your will or don’t make the promise in the first place.

As I don’t want to give away the whole book, I will stop here. If you would like to order a copy of Charles' book, purchase it here (Canadian link).

Charles Ticker is an estates lawyer based in Toronto who focuses on estate litigation and mediation of estate disputes. More information about him can be found at http://www.tickerlaw.com/. The information in this blog is not intended to be legal advice. Readers should consult their own lawyer, attorney or other professional for advice.

Book giveaway


As noted above, Charles has provided me three books to give away to my readers. If you are interested in a copy of the book, email me at bluntbeancounter@gmail.com by December 16th. I will notify the winners by email on December 20th.

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 content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

Please note the blog posts are time sensitive and subject to changes in legislation.

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.

Monday, November 25, 2019

Do You Have To File Taxes for Someone Who Died?

Thinking about taxes on a yearly basis is not fun. When dealing with the death of a loved one, it can make a challenging situation even more of a headache and forces one to face the only real certainties in life; death and taxes. In this blog post, I will walk you through the tax returns an executor needs to file at the time of death, allowing you to ease the stress of an already difficult experience.

Before tackling the filing of the tax returns, make sure that there is a legal representative in place, and that all authorities have been notified. These authorities include the Canada Revenue Agency (CRA), Service Canada, and the deceased person’s financial advisors and institutions. Once those initial steps have been taken, it is time to turn your attention to the tax returns and forms that come into play after a death.

Before I get to the returns that must be filed on death, I would like to thank Christopher Bell of BDO Canada for his assistance with this blog post. A quick backstory. Assisting with this blog post was one of the final things Chris did as a senior tax accountant before he changed career paths from income tax to digital project management. In a related story, I am now persona non grata with our tax department.

Final personal tax return


A final return must be filed for all taxpayers in Canada after they die. This return is a personal tax return (known as the "terminal return") just like in every other year and is filed from January 1st of that year up to and including the date of death, but there are some special rules that need to be followed when filing this return. Please note: that unless otherwise noted, this blog post assumes the tax return is being prepared for a single person who passed away or the last to die spouse.

The first thing to keep in mind is that income paid to the deceased will need to be prorated between the final return and the estate return (discussed below) based on the date of death. For example, some investment income slips such as T5's may be issued for the calendar year, but if the date of death was say July 31st, you need to prorate the income from January 1st to July 31st for the terminal return and from August 1st to December 31st for the estate return. If you are unsure whether the amount was prorated, you should confirm with the issuer of the income slip.

Capital assets


The Income Tax Act deems all capital assets of a taxpayer to be disposed of immediately before the death of a taxpayer and considers the proceeds from selling these items to be received at that time at fair market value (referred to as a deemed disposition). Based on the cost of these assets, this deemed disposition may result in a capital gain or a capital loss. For example, if you own 100 shares of a bank stock that cost $30 and are worth $50 at death, the deemed capital gain is $2,000 ($50 - 30 x 100 shares).

The exception to these rules is when assets are transferred to a surviving spouse or common law partner. The deemed disposition is then deferred to the earliest the surviving spouse sells the shares or dies. In some cases, it may make sense to “elect out” of the automatic tax-free transfer of capital property to the surviving spouse noted above. Tax planning for the death of the first spouse was discussed in greater detail in this blog post along with the related administrative headaches (many of these administrative issues also apply upon the death of the last surviving spouse).

Under this election, it may be tax effective to trigger taxable capital gains on the final return of the deceased spouse, as the election may reduce the amount of tax paid overall. This is usually limited to circumstances where the deceased spouse had a very low tax rate, had unused capital losses carried forward or had alternative minimum tax carryforward, among a few other possibilities. The election is made on a security-by-security basis at the fair market value.

In some circumstances it may make sense to elect to trigger a capital loss or losses at death instead of a capital gain. This would be for example to offset capital gains on the terminal return.

If there are capital losses on the final return, you can go back up to three taxation years prior to the death of the taxpayer and claim them against capital gains that tax would have previously been paid on using Form T1A.

Alternatively, if there is a net capital loss in the year of death, you can apply these losses against other income on the terminal return. You must first reduce the net capital loss by any capital gains deductions the deceased had previously claimed to date, and the remainder can be reported as a negative capital gain on Line 127 of the tax return.

These topics surrounding capital gain and losses are quite complex and are best discussed with a trusted advisor.

Pensions


Where the deceased was single or a surviving spouse, the fair market value of the RRSP or RRIF is deemed to be received immediately before death and is considered income on the terminal return.

Where there is a surviving spouse or common law partner, you can generally avoid these taxes on death by naming the surviving spouse or common law partner of the deceased as the beneficiary of the RRSP/RRIF, and then to file an election for the assets held in the plan to be transferred to the beneficiary’s RRSP or RRIF on a tax-deferred basis.

If the spouse is not named as the beneficiary of the RRSP/RRIF, the estate representatives can generally elect on the final return for the tax-free transfer to still happen as long as the RRSP/RRIF funds are left to the spouse under the terms of the will. Please seek professional advice in this situation.

Tips to complete the final personal tax return


  • You can still elect to split pension income on the final tax return, so long as the deceased and their spouse or common law partner previously jointly elected to do so on their tax returns prior to death.
  • All assets held in the name of the deceased are deemed disposed of at death, including personal items such as jewelry, paintings, and boats. There are special rules around these assets that need to be considered and should be discussed with your financial advisor.
  • RRSPs and RRIFs can also be transferred tax free to financially dependent children or grandchildren under 18 in certain circumstances.
  • TFSA accounts are fully tax free to the beneficiaries; however, any income earned between the date of death and the distribution is taxable to the beneficiary.
  • TFSA accounts can also be transferred to the spouse or common law partner of the deceased tax free, and the account will continue to exist. The survivor can also elect to transfer the amount to their TFSA if they prefer to not maintain two accounts, as this is considered a qualifying transfer.
  • Any unpaid amounts (including bonuses, dividends, etc.) must be accrued up to the date of death. This amount can be included either on the final return or on the return for rights or things, which we discuss a little later in the post. There is sometimes a benefit to filing this separate return, but it is circumstantial and should be discussed with a financial advisor.
  • You will need to send a copy of the death certificate in along with the final return, so keep a copy at hand.


Final return due date


The due date of the final return depends on when the person passed away. See the below chart for the due date of the final return.

Date of death
Tax return due
January 1 to October 31
April 30
November 1 to December 31
6 months after the date of death
If the deceased or their spouse/common law partner operated a sole proprietorship in the year of death:
January 1 to December 15
June 15
December 16 to December 31
6 months after the date of death

The surviving spouse’s return will always be due April 30 or June 15 respectively, meaning that no extra time is granted to file their return despite the death of the other person.

Optional returns


You may choose to file optional returns to report income that you would normally report on the final return. The benefit of doing this is that you can reduce the total taxes owing by the deceased by claiming certain tax credits and using lower marginal tax rates. It is best to consult a trusted advisor to discuss this type of planning in detail.

There are three types of optional returns:

Return for rights or things


The return for rights or things covers amounts that were payable to the deceased at the date of death and, had the person not passed away, would have been paid to them and included in their income. This return enables the representative to report the asset values at the time of death. Some examples of assets that would be listed on this return are:
  • Unpaid salary, commissions, and vacation pay
  • Dividends declared prior to death
  • Old Age Security benefits that were payable to the deceased
  • Unmatured bonds coupons and bond interest that was unpaid
  • Work in progress for professionals operating as a sole proprietor
This return is due at the later of 90 days after the CRA sends the notice of assessment or reassessment for the final return and one year after the date of death.

Return for a partner or proprietor


This return is filed for a person who was a sole proprietor or partner of a business prior to death. This return is only filed if:
  • the business’ fiscal year-end does not end on December 31; and
  • the person died after the year-end of the business but before the end of the calendar year.
If this return is filed, it would cover the period from the first day of the business’ new year to the date of death. If a legal representative chooses not to file this return, the business income would instead be reported on the final return. This return is due on the same date as the final return.

Return for income from a graduated rate estate


This return can be filed if the deceased received money from a graduated rate estate (GRE) prior to death. This return is rarely filed, and the income is normally included on the final return. This return is due on the latter of April 30 (or June 15 if the deceased was a sole proprietor) and six months after the date of death. If you want to know more about this, we recommend you refer to a blog we previously posted, written by Howard Kazdan here for some background information, but you should contact your professional advisor for detailed guidance.

Estate Returns (T3 Return)


In addition to the returns noted above, the estate of the deceased must file T3 tax returns each year until the estate is wound up. Typically, the returns are filed based on a year starting from the day after the date of death and ending one year later, although you may elect to have a December 31 year-end for these returns as well. Estate returns and any balance owing are due within 90 days of the year-end of the trust. Winding up an estate could take several years and is a lengthy topic on its own.

Even if the estate is wound up quickly, the executor may file at least one estate return (the “executor’s year”). And there may be tax advantages to filing even when it is not mandatory. One is having income earned in the estate taxed at graduated personal rates (instead of the higher marginal rates of the beneficiaries) – basically, a way to effectively have another return on death for the income earned in the first year of an estate.

When filing the first T3 return after the death, make sure to include a copy of the will.

Clearance certificate (Form TX19)


If you are serving as the legal representative for a deceased taxpayer or trustee of an estate, getting a clearance certificate is advisable prior to distributing any assets from the estate. A clearance certificate is issued by the CRA upon request, and certifies that either the liabilities payable to the CRA have been paid or security has been accepted in place of payment. If a legal representative chooses not to obtain a clearance certificate, they could be held personally liable for the amounts outstanding up to the value of the assets that were paid out. I previously wrote a blog specifically on clearance certificates, which you can read here.

Reduce the stress with a plan


As you can see, there is a lot to do with taxes at the time of a person’s death, and the sooner you begin to organize and plan for it, the smoother the process will go. A lot of the stress that goes along with filing these returns can be mitigated through proper estate planning and having trusted financial advisors in place to guide you and your loved ones through the process. On top of this, having a good plan in place will ensure that you avoid unnecessary probate and income tax, which will save you money.

Plan to Sell Your Business? You may be Interested in this Survey! 


If you’re a financial executive or business owner, here's your chance to share insight on how you plan to sell your business. My colleagues at BDO are conducting a survey in partnership with Financial Executives International Canada. The survey will be open until November 27 and will generate research to be released in 2020. Take the survey here.

The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

Please note the blog posts are time sensitive and subject to changes in legislation.

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.

Monday, November 11, 2019

The ins and outs of Registered Retirement Income Funds

The RRIF (Registered Retirement Income Fund) occupies an odd space for most Canadians. Everyone has heard of them – hands down, they are the most enjoyable financial vehicle to pronounce; the acronym is pronounced as it is spelled – but many people don’t realize the nuanced and sometimes surprising ways that a RRIF can help them and their families increase their income.

To clarify this piece of the retirement puzzle, I invited my colleague Jeffrey Smith to share his insight on this post of The Blunt Bean Counter. Jeff is a Manager in BDO’s Wealth Advisory Services practice, based in Kelowna
BC.

What is a RRIF?


A RRIF is a way of turning your retirement savings into income. This is achieved by converting your Registered Retirement Savings Plan (RRSP) into a RRIF no later than December 31 of the year you turn 71. You do have the option to convert all or a portion of your RRSP into a RRIF even before the year you turn 71. However, if the whole account is converted, you can no longer make RRSP contributions to the account and will have to open a new RRSP account. (In addition to converting the RRSP into a RRIF, you could also deregister the RRSP and take a lump-sum payment or purchase an annuity.)

The income earned in the RRIF still maintains its tax-deferred growth status; however, once the RRSP becomes a RRIF, there is a minimum amount that must be withdrawn annually. This withdrawal is fully taxable as income.

How do withdrawals from a RRIF work?


Once you convert your RRSP to a RRIF, you will be required to take out the annual minimum beginning the following calendar year. For people under 71, this amount is based on a formula:

1 / (90 – age) 

For example, at age 65 it would be 4%, based on this calculation:

1 / (90 – 65) or 1 / 25 = 4%

If the RRIF value on January 1, 2019 is $100,000, and the minimum RRIF withdrawal 4%, minimum RRIF income in 2019 will be $4,000 ($100,000 x 4% = $4,000). The 4% would apply to the value of the RRIF on January 1 and have to be drawn from the RRIF during the calendar year.

For people age 71 and older, the minimum withdrawal is calculated by applying a percentage factor that corresponds to your age and RRIF value at the beginning of the year.

For example, at age 71 that amount is 5.28%, at age 80 the minimum amount rises to 6.82%, and by age 90 the minimum percentage is 11.92%.

If your spouse is younger than you, their age can be used to calculate the minimum withdrawal. This allows you to withdraw less money from the RRIF in earlier years and thus extend the life of your RRIF. This is a very important tax planning feature of the RRIF and should always be considered in your RRIF and retirement planning.

There are no income tax withholding requirements on the minimum RRIF withdrawal; thus, be sure you either request tax be withheld by your financial institution, or you set aside the appropriate amount of tax related to your minimum RRIF withdrawal

For amounts taken in excess of the minimum amount, withholding taxes of 10% to 30% would apply, depending on the total amount withdrawn in the year, similar to redeeming RRSPs. Therefore, if you don’t need the income, don’t withdraw more than the minimum. It is also very important to understand that statutory withholding rates may be less than your actual marginal income tax rate, and as noted above with the minimum withdrawal, you either need to set aside the extra tax or ask for your financial institution to withhold a higher amount from any withdrawal.

RRIF: Specific situations


There are specific situations where someone may want to create a RRIF. Example situations may include:
  • Retiring early
  • Taking a leave of work to assist with a sick family member
  • You are 65 and have no other qualifying pension income to use your pension income tax credit (which depends on having $2,000 in qualifying pension income)
  • Extended sabbatical leave. If the leave is temporary, you can convert the RRIF back to an RRSP and continue contributing to the RRSP when you return to work, provided you are age 71 or younger at the end of the year.
While creating a RRIF to access the $2,000 pension credit is typically a sound idea, the other situations should be discussed with your investment and/or tax advisors to determine whether the benefit of creating the RRIF is more tax efficient than utilizing your RRSP (i.e. whether to withdraw a RRSP lump-sum in a low income year because you retired early versus creating the RRIF).

What happens to your RRIF when you die?


The three most common outcomes for a RRIF on the death of the owner are:
  • Spouse or common-law partner is named a successor annuitant;
  • Spouse is named a beneficiary
  • Estate is designated a recipient

Successor Annuitant


If the surviving spouse is named as the successor annuitant, they would essentially take over the RRIF as if nothing had happened. For clarity, if your spouse is named as the successor annuitant, the RRIF would continue to exist and your spouse would now be the annuitant. The spouse would continue to receive the RRIF payments that were set up. They would also be required to withdraw the annual minimum amount in the year of death if it was not already paid.

Naming your spouse as the successor annuitant typically has the benefit of administrative ease and simplified tax reporting.

Beneficiary


If the spouse is the sole beneficiary of the RRIF, the entire eligible amount of the RRIF is transferred to the spouse’s RRSP (provided the spouse is age 71 or younger by the end of the year of transfer) or RRIF, or used to purchase an eligible annuity by December 31 of the year following death. To be clear, under the beneficiary option, the RRIF ceases to exist and your spouse has the option to undertake the rollover transfer.

The eligible amount of the RRIF is the full value of the RRIF account minus the RRIF minimum for the year of transfer that was not actually paid that year.

Estate


If the estate was designated as the RRIF recipient, the executors of the estate will control the RRIF assets. Assuming there is a surviving spouse, the executor and RRIF carrier could agree to name the spouse as the successor annuitant as long as the spouse is a beneficiary under the will. This would have the benefit of creating a tax-deferred rollover.

If nothing is done, the value of the RRIF will be included in the deceased’s final tax return as taxable income.

If a financially dependent child or grandchild under the age of 18 is a named beneficiary under the RRIF, they could purchase an eligible annuity and thus save the estate from incurring the tax.

The many ways to use an RRIF


Every Canadian has unique circumstances, and RRIFs can be used in a surprising number of ways. Customization is key. Work closely with your advisor to obtain guidance on when to convert your RRSP into a RRIF, how to ensure beneficiary designations are made, and how to tax-plan your retirement and estate needs to save you and your family money in the long run.

The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

Please note the blog posts are time sensitive and subject to changes in legislation.

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.

Monday, October 28, 2019

What To Do When Your Spouse Dies Before You – Part 2, Taxes

Two weeks ago we discussed the administrative steps people need to take when their spouse dies.

The truth is, there is more to this topic than the administrative steps we listed in that post. Surviving spouses also need to navigate several high-stakes tax issues, some of which are specific to a surviving spouse. Our blog from two weeks ago tackled the administrative piece – today we dig deep to analyze the steps related to tax.

It should be noted that for income tax purposes, “spouse” includes not only a married couple but also common-law and same-sex couples.

When the surviving spouse avoids tax


On death, a taxpayer is deemed to dispose of all of their assets at their fair market value. This means that tax must be paid on any accrued capital gains to the date of death. For your RRSP, the value at the time of death is included as income on the deceased's terminal tax return.

However, where the assets are transferred under the terms of the will to their surviving spouse or a qualifying spousal trust, the deemed disposition at fair market value is avoided and the assets transferred to the spouse take place at their adjusted cost base (the same deferral can occur for a RRSP where the spouse is a designated beneficiary of the RRSP or a beneficiary under the will and an election is made). If the assets are not transferred to the surviving spouse or qualifying spousal trust, there is a deemed disposition and tax must be paid on the accrued gains and/or value of the RRSP.

As the deemed disposition rules are complicated, I think an example at this juncture may help clarify how these rules work.

 Let’s consider the case of Tom and Mary. Tom unfortunately died while preparing his 2018 income tax return and transfers all his assets to his wife, Mary, under his will. He owned 1000 shares of Bell Canada stock. He had paid $10 per share for them (a $10,000 cost), but they are now worth $30 per share ($30,000 fair market value).

In this case, the shares roll over to Mary at $10,000. She effectively steps into Tom’s cost base of $10 per share, and there are no current income tax consequences. However, Mary will pay tax on the deferred capital gain on the Bell Canada shares at the earliest of when she actually disposes of the Bell Canada shares or dies. 

Saying no to the rollover


Tax-free transfers sound good on paper, and this one is no different. But sometimes the surviving spouse should consider saying no to the automatic rollover. They can do this by “electing out” – a procedure that is highly specific to a surviving spouse and involves triggering taxable capital gains.

The surviving spouse should consider this path in several scenarios. Common ones are when the deceased spouse had:
  • a very low tax rate - for example, they had low income in the year of death, or they died early in the year and only have a month or two of income
  • unused capital losses carried forward
  • alternative minimum tax carryforward
The election is made on a security-by-security basis (i.e., you can select anywhere from one Bell Canada share to all thousand shares) at the fair market value (or stock price) of Bell Canada at the date of death.

Once the election is made, the surviving spouse inherits the higher tax cost base from the deceased spouse. Put simply, where the election is made, the surviving spouse’s tax cost will be the fair market value of the asset as of the date of death of their spouse.

To explain, let’s return to our Bell Canada example from above. if it was determined that for tax purposes to elect to trigger the entire Bell Canada capital gain $20,000 ($30,000 fair market value less $10,000 cost) because your deceased spouse had capital losses, the surviving spouse would have a cost base of $30,000 going forward on these shares, instead of the $10,000 cost base if no election was made.

In some circumstances it may make sense to elect to trigger a capital loss or losses at death instead of a capital gain. This would be for example to offset capital gains on the terminal return. There are various technicalities to this election, so speak to your advisor.

The election may also be applicable if the deceased spouse owned shares in a qualified small business corporation. It may make to elect to trigger a gain to utilize the capital gains exemption, which is $866,912 in 2019. This is a highly complex mechanism, so again, speak with your advisor. 

Family farms


If your spouse owned part of a family farm you may also wish to speak to a professional who is familiar with farming to determine the best course of action. 

Filing an income tax return


Finally, you will need to file at minimum a terminal income tax return for the deceased from January 1 to the date of death. You may have other filing option such as a rights and things tax return. I will post a blog in the next few weeks with more detail on filing returns at death.

The tax and administration issues are immense when a spouse dies. For the surviving spouse, they represent a huge burden. The above will hopefully assist you in understanding these issues. However, I strongly urge you to obtain professional legal and tax assistance immediately in the event of your spouse’s passing.

The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

Please note the blog posts are time sensitive and subject to changes in legislation.

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.

Monday, October 14, 2019

What To Do When Your Spouse Dies Before You

I have written before on what happens when someone dies: both on the administrative issues an executor needs to consider and also on the income tax issues upon death. However, I recently realized those posts are essentially directed at what happens when a single person dies, or a widower or widow passes away.

Today I’m filling in the gap with a look at what happens when the first spouse in a married or common law couple passes away. This week I address the administration issues – many of which are the same as for when the surviving spouse dies later on, but I have added several additional items. My post in two weeks will tackle the tax issues – which can be very different from when the surviving spouse dies.

How to tackle the nitty gritty of administration


Here are 25 administrative considerations for the surviving spouse (family, or executor of someone who dies):

1. Determine the deceased’s funeral wishes and if the funeral has been prepaid. If they have not made arrangements, you may unfortunately need to deal with this issue immediately while you are likely still in shock from your spouse’s or parent’s passing.

Key takeaway: Always ensure your funeral arrangements have been communicated while you are healthy.

2. Obtain several copies of the funeral director’s statement of death. Many institutions accept this document in lieu of the death certificate, which is issued by the province and is time consuming to apply for and receive.

3. Open the safety deposit box (“SDB”). You may need to open the SDB if the will is in the SDB or to prepare a list of the contents of the SDB with the representative of the bank.

Key takeaway: Please always ensure someone has a copy of the SDB key or knows where to find the key.

4. Meet with your or your spouse’s lawyer to review the will and understand any legal obligations such as advertising for creditors. In general, most spouses leave all if not the majority of their assets to their spouse. This generally makes things easy for tax, but that is not always the case. In addition, specific assets may often be left to the children or a charity, and those assets need to be dealt with in the near term.

5. Notify any beneficiaries of their entitlements under the will and request their personal information.

6. Meet with your or your spouse’s accountant, to ensure you are clear on the income tax obligations and the income filing requirements. If you or your spouse do not have an accountant, engage one. As noted above, I will address this issue in more detail in two weeks.

7. If the executor is someone other than the surviving spouse, ensure you contact them and advise them of their duties and determine whether they accept the appointment. Hopefully, they are already aware they would be appointed.

Key takeaway: always inform the people who will be your executors and provide them an estate organizer or similar document to provide them a roadmap of your assets. They will need to have a list of all your assets for probate and to ensure a full distribution is undertaken.

8. Your lawyer will advise you whether you will need to obtain a certificate of appointment of estate trustee with a will (probate), a very important step in Ontario and most other provinces.

Key takeaway: If you own shares in a private corporation, in certain provinces you can have a second will that removes these assets from probate. Ensure you discuss this with your lawyer if you do not already have a second will.

9. Collect any life insurance benefits.

10. Meet with your and your spouse’s financial planner, insurance agent or any other relevant advisor.

Key takeaway: Make sure you and your spouse meet all family advisors while both spouses are alive to create at least a basic comfort level.

11. Where the deceased was a controlling shareholder or ran a business, find out if there was a succession plan/disaster plan in place and that it is being followed. If the deceased did not create a plan, take control of the business in the short term and start looking for a manager to take over running the business. Your accountant can likely assist you in this.

Key takeaway: As I’ve written before, many business owners do not have a succession plan. This is the quickest way to lose some or a significant portion of your family’s worth when you die. Ensure you have a plan in place now or take steps to put one in place.

12. Apply for any government benefits the estate is entitled to, such as the CPP death benefit, survivor benefits and possibly child benefits.

13. Notify CPP/QPP and Old Age Security – at Service Canada – of your spouse’s death so they stop making payments.

14. Cancel the deceased’s driver’s licence, health card and other provincial documentation. (See this page for Ontario; each province will have a similar resource online.) Also make sure to cancel the deceased’s Social Insurance Number, passport and Nexus account as applicable.

15. Cancel credit cards in your spouse’s name, email and websites attached to them, and memberships in fitness clubs and organizations.

16. Change the name listed on utility, telephone and other bills.

17. Cancel personal health insurance premiums, cell phones and possible “fall alerts” if the deceased was elderly.

18. Transfer RRSPs, RRIFs and TFSAs.

19. Update your will or power of attorney (POA) if your deceased spouse was the beneficiary of all or some of your assets or your POA.

Key takeaway: It is important to update your will and especially your POA as soon as possible. I have seen many situations where the stress (broken heart) of spouse's passing often creates a medical issue for the surviving spouse, so updating your POA is very important.  

20. If you have real estate holdings in your spouse’s name or in a joint name, review the legal ownership and transfer issues with your real estate lawyer.

21. If your spouse had a vehicle, sell or transfer it and cancel or transfer the applicable auto insurance.

22. If the deceased had a domestic caregiver and the payroll account was in their name, you will need to issue final T4s, and possibly set up a new account in your name.

23. A sometimes-troublesome issue is family members taking items, whether for sentimental value or for other reasons. They must be made to understand that all items must be allocated according to the will or other means, and nothing can be taken.

Key takeaway: This is a very ticklish issue and needs to be handled delicately, but a family member "grabbing" a sentimental item can sometimes cause more dissension than monetary allocations.

24. For any jewellery and art not noted in the will, please note there are tax and probate consequences. See this blog I wrote on “Personal Use Property - Taxable even if the Picasso Walks Out the Door.”

25. Depending upon whether assets were left to beneficiaries other than the spouse, you may have to deal with a passing of accounts - commonly known as an official accounting of the estate’s assets – and possibly request a clearance certificate.

The administration and tax issue burdens are immense upon the death of a spouse. We have now covered the key items that the surviving spouse needs to deal with from an administrative angle. Look out for our next post, which will get you up to date on the taxation issues. For both areas, I strongly urge you to obtain professional legal and tax assistance.

The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

Please note the blog posts are time sensitive and subject to changes in legislation.

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.