My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant and a partner with a National Accounting Firm in Toronto. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. The views and opinions expressed in this blog are written solely in my personal capacity and cannot be attributed to the accounting firm with which I am affiliated. My posts are blunt, opinionated and even have a twist of humor/sarcasm. You've been warned.

Monday, September 19, 2016

Canadians Don't Have the Will

Over the last few years, I have often referenced a 2012 survey by LawPRO reflecting that 56% of Canadians do not have a Will. I have used this startling statistic to urge you to have a Will drafted (or updated) and to suggest you also put in place powers of attorney for property (financial decisions) and personal care (health decisions). The fact that Prince did not leave a will (which I find incomprehensible, given the number of advisors he would have had) has brought further attention to this issue.

Shockingly, in a new Google Consumer Survey conducted by Legalwills.ca, the number of Canadians without Wills has increased to 62%. The survey also notes that 12% of Canadians have an outdated Will (most never updated their Wills once they married and/or had children), which means that 74% of Canadians do not have an up-to-date Last Will and Testament.

In general, I consider this behaviour selfish and I cannot understand how anyone that is part of a functional family unit would ever want to leave their family the chaotic mess that follows when there is no Will in place.

Here are some facts from the Legalwills.ca survey, which can be found here.

Some Startling Numbers


The survey showed a correlation between age group and the probability of having a Will:

Age 18-24: 87% do not have a Will, 5% have an out-of-date Will, and 8% have an up-to-date Will.
Age 25-34: 77% do not have a Will, 10.5% have an out-of-date Will, and 12.5% have an up-to-date Will.
Age 35-44: 68% do not have a Will, 8% have an out-of-date Will, and 24% have an up-to-date Will.
Age 45-54: 53% do not have a Will, 13% have an out-of-date Will, and 34% have an up-to-date Will.
Age 55-64: 32% do not have a Will, 19% have an out-of-date Will, and 49% have an up-to-date Will.
Age 65+: 28% do not have a Will, 21% have an out-of-date Will, and 51% have an up-to-date Will.

As the survey notes, even when discounting younger adults, 48.5% of Canadians aged 35 and older responded to not having a Will and 13.5% responded to having a Will that is out-of-date, leaving only 38% with a Will that reflects their current financial and personal situation.

Unexpected Income Correlation


The survey found a surprising inverse relationship between income levels and the probability of having an up-to-date will.

“The group least likely to have up-to-date Wills was in the $100,000+ annual income range; respondents in this group were also three times more likely to have an out-of-date Will than those with lower incomes. The group most likely to have up-to-date Wills was in the lowest annual income range of $0-$24,999. As annual income increased, the proportion of respondents with an up-to-date Will decreased”.

Legalwills.ca suggests “The cause of this is likely because those with higher incomes can more easily afford to use a lawyer to write their Will; making modifications to a Will with a lawyer requires setting a meeting, and costs hundreds of dollars. To the contrary, those with lower incomes are usually inclined to use more affordable alternatives, such as online services, where the testator can make modifications to his or her Will at any time without extra costs”. (It should be noted that Legalwills.ca provides online services to custom-make Wills, Power of Attorney and Living Wills for Canadians and thus, they have a bias to online services).

Observations from the Survey


Legalwills.ca make some interesting observations from the data, a few of these include:

1. The system for creating and updating Wills is broken – their opinion is the current system is not working for most people.

2. People wait for the perfect time to have their Wills prepared – I agree with this comment. The issue here is; our life circumstances are constantly changing. Consequently, our Will is really a living document that requires various updates throughout our life.

3. Legalwills.ca references a quote from Forbes Magazine by the rapper Snoop Dogg, saying essentially: who cares about his Will, he will be dead. This is not an unusual comment. Legalwills.ca says “unfortunately, what Mr. Dogg doesn’t realize is that writing a Will was never about you. It’s about taking care of your loved ones – the people that you care for through your life, I’m not sure that many people would deliberately inflict trauma on their own family at a time when they can least handle it, but not writing a Will is setting your family up for heartache and emotional turmoil. It all too often leads to acrimonious fallouts between family members who seemed to get along just fine until they
had to work together to administer an estate without a Will”.

4. Legalwills.ca suggests that not having a Will is a huge missed opportunity. They suggest you can do wonderful things in a Will, for example:

  • Leave a few thousand dollars to a charity
  • Give your favourite niece some funds to travel the World
  • Set up an event in your memory
  • Create a scholarship fund
  • Organize and pay for some social events for your best friends
  • Leave a cherished item to somebody who will really appreciate it
  • Make sure your digital accounts are all taken care of appropriately
  • Make sure that your pets are taken care of

Whether you have a complex estate and need a lawyer to draft or update your Will, or have a simple estate for which you can use an online service, as Nike says “Just Do It” and get your Will and powers of attorney in place. You will have peace of mind and your family will be appreciative that you made their financial lives simpler at a time of grieving.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.

Monday, September 12, 2016

Steve Stamkos, Olympic Medals and Income Taxes

As a sports enthusiast, I am always interested in stories that combine sports and income tax. Today, I want to discuss a couple of these stories:

1. Steve Stamkos resigning with the Tampa Bay Lightning in June and the income tax considerations he would have had to ponder (if he ever truly considered the Toronto Maple Leafs as a final destination).

2. The income tax that Canadian Olympic gold, silver and bronze medalists have to pay on the bonuses they earned in winning their medals.

Steve Stamkos Signing


If you are a hockey fan, you were well aware that Steve Stamkos ("Stamkos") was a free agent this spring and that there were rumours negotiations were not going well with his current team, the Tampa Bay Lightning. As result, many Toronto Maple Leafs fans were hopeful Stamkos would sign with the Leafs, his hometown team (some fans felt that spending money on Stamkos at this time would
impact the current Leafs rebuild and thought such a move would be a year or two early - but I digress).

In the end, Stamkos resigned with Tampa Bay for a reported contract of $68,000,000 over eight years (or, an average $8.5 million a year), paid as $9.5 million in each of the next five years, followed by $7.5 million, $6.5 million and $6.5 million in the final three years. It was also reported that Stamkos' base salary will sit at $1 million each year, with the rest being paid as a signing bonus.

While Stamkos was deciding where to sign, there were various discussions on whether he would provide Toronto with a hometown discount to offset the preferential U.S. tax system. With the possibility that one of the NHL’s top players would potentially be moving teams, sports writers quickly had to get up to speed with economic and income tax issues.

I asked a friend last June (who prepares U.S. tax returns) to run some numbers comparing Stamkos’s average $8.5 million salary for a Florida resident to an Ontario resident assuming there was no foreign exchange issue (I did this to solely isolate the income tax consequences and to avoid the complications of dealing with fluctuating F/X rates and the purchasing power of the $U.S. – but yes, this would be a large factor in any decision). BTW: I understand that all NHL players are all paid in $U.S.

My friend ran some tax numbers based on a U.S. resident with single filing status using 2015 tax rates/brackets, and assumed no itemized deductions to keep things simple. He determined the income tax on an $8,500,000 salary would be around $3,320,000, or about 39.06%. Given the top U.S. federal marginal rate for 2015 and 2016 is 39.6%, this rate is in the ballpark as the top bracket for a single taxpayer is reached at $413,201 for 2015 ($415,051 for 2016).

A huge factor in calculating the income tax variance between the U.S. and Canada is there is no state personal tax in Florida. However, hockey players are taxable in the various U.S. states/cities where they play away games (which would likely push the average tax rate into the low 40s).

If Stamkos had decided to play for the Leafs in 2016 (again, assuming a neutral exchange rate for purposes of this discussion), his tax payable would have been approximately $4,510,000 and his average tax rate at 53.10% and his marginal rate at 53.53% (accounting for the increase in tax rates implemented by the Liberals). Thus, if Stamkos had decided to play for the Leafs, he would have owed approximately $1,190,000 more in income tax than in the U.S. and his average tax rate would have been 10-13% higher depending upon all the facts.

It is interesting to note that if the U.S./Canada exchange rate was $1.30 for his entire contract, Stamkos would have been neutral, from a purely cash flow perspective, in signing with Toronto.Yet, per this article, totally speculative and without confirmation, Stamkos supposedly wanted $14million to come to Toronto.

After reviewing the above, you now know why Stamkos and many other players must take into account the income tax considerations when deciding on which team and country to play.

Olympic Gold – Not Tax-Free


During the Olympics, The Globe and Mail ran a story written by Alicia Siekierska titled “It’s gold – for the taxman. In this article she noted that the Canadian Olympic Committee awards Olympic athletes with bonuses (wow, I never knew this. How un-Canadian to incentivize winning for our athletes :)  if they make the podium: $20,000 for a gold medal, $15,000 for a silver medal and $10,000 for a bronze medal).

The article discussed that the Income Tax Act paragraph 56(1)(n) considers only certain prescribed prizes as tax exempt. As noted in Income Tax Folio S1-F2-C3, “Section 7700 of the Regulations defines a prescribed prize as any prize that is recognized by the general public and that is awarded for meritorious achievement in the arts, the sciences or service to the public. It is a question of fact whether a prize is considered to have been recognized by the general public for purposes of section 7700 of the Regulations. In making such a determination, one should consider whether there is evidence suggesting a high level of public awareness of the prize and the extent to which the announcement or receipt of the prize is widely publicized by the media. For example, a Nobel Prize given to a scientist or the Governor General's Literary Award given to a professional writer would qualify”.

The article noted that the Olympics are not considered a public service and thus, the medal bonuses paid to athletes such as Penny Oleksiak and Andre De Grasse will be taxable.

The article quotes William Innes, a tax litigator with Reuters LLP. Mr. Innes states the CRA’s position on taxing Olympians prize money is “outrageous”. He feels winning an Olympic medal should fall under the service to the public section noted above. He goes on to say “I would think that the average man or woman on the street would hold that somebody getting an Olympic medal is providing a service to the public”.

For the Penny Oleksiak’s and Andre De Grasse’s of the world, this is probably a bit of a mute issue, as they will receive significant endorsement opportunities dwarfing the bonus money. But for the typical less high profile medal winners who do not have significant funding, it seems unfair they are taxed on their Olympic bonuses. You would think there would be some co-ordination in policy between the Olympic Committee and the CRA.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.

Monday, September 5, 2016

Blogger Blues


This summer, my intention was to play some golf, spend some time with my family and write a few blog posts. As they say, the best-laid plans of mice and men often go awry.

Unfortunately, injuries waylaid my golfing. First I got shoulder tendinitis. (Household tip: If you have a pot light that will not come out and you get frustrated, do not, I repeat, do not, pull as hard as you can downwards and ruin your shoulder). In addition, I had a strained groin (Golf tip: when your feet are in an awkward position due to an awkward lie and the grass is wet, do not swing as hard as possible). I did however eventually recover from both my injuries by late July and got in some golf including a 74 after 17 holes in my club championship that became an 82 after I choked with an 8 on the final hole (2nd golf tip: If you have been using your 5 iron to drive since your driver was inconsistent, do not switch back to your driver on the last hole).

Switching gears, I was much busier with client matters than I anticipated this summer and was unable to find the time I hoped to write some of my blog posts for the fall. In addition, after six years of writing this blog, I had a bit of a writer’s block, that seemed to break in late August.

In any event, I realized that I’m unable to continue to commit the energy and time required to write this blog on a weekly basis. I will be shooting for two to three posts a month, including guest blogs, which will likely increase in number.

This fall, some of the themes I will be writing about include:

1. Tax planning for those with disabilities. I will have a couple guest posts on that topic.

2. “The Taboo of Money”

3. Canada/ U.S. tax issues

4. I will also continue my “What Small Business Owners Need to Know” series.

So, in summary. I will be writing less this year and in all honesty, I am unsure whether I am staggering to the end or I will get a second wind and will be good for a few more years. See you next week.

Monday, August 29, 2016

The Best of The Blunt Bean Counter - Proprietorship or Corporation - What is the Best for Your (New) Business?

This summer I am posting the "best of" The Blunt Bean Counter blog while I work on my golf game. Today, I am re-posting a November, 2011 blog post on whether you should incorporate a new
or start as a proprietorship?  I also address the logical follow-up question for those that have already started their business as a proprietorship:  when should they convert their proprietorship into a corporation?

Proprietorship or Corporation - What is the Best for Your (New) Business?


Corporation – Non-Tax Benefit


The number one non-tax reason to incorporate a business is for creditor proofing. Generally, a corporation provides creditor protection to its shareholder(s) through its limited liability status, a protection not available to a proprietorship. (It is important to note that certain types of professional corporations while protecting your personally from corporate liability, do not absolve the individual professional from personal professional liability). Where an incorporated business is sued and becomes liable for a successful claim, the only assets exposed to the creditors are the corporate assets, not the shareholders personal assets.

In order to mitigate the exposure that a potential claim could have on corporate assets, a holding company can be incorporated. Once the holding company is incorporated, the active corporation can transfer on a tax-free basis the excess cash and assets to the holding company (as discussed in my blog creditor proofing corporate funds) to insulate those assets from creditors. The assets in the holding company cannot be encroached upon if there is a lawsuit against the operating company unless there was some kind of fraudulent conveyance.

The inherent nature of certain businesses leads to the risk of lawsuits, while other business types have limited risk of a lawsuit. Thus, one of your first decisions upon starting a business is to determine whether your risk of being sued is high and if so, you should incorporate from day one.

Corporation – The Tax Benefits


There are several substantial income tax benefits associated with incorporation:

1) The Lifetime Capital Gains Exemption

If you believe that your business has substantial growth potential and may be a desirable acquisition target in the future, it is usually suggested to incorporate. That is because on the sale of the shares of a Qualifying Small Business Corporation, each shareholder may be entitled to a $824,177 capital gains exemption. So for example, if you, your spouse and your two children are shareholders of the family business (often through a family trust), you could potentially sell your business for $3,300,000 tax-free in the future. It should be noted that typically businesses that are consulting in nature, have limited value, since the value of the company is the personal goodwill of the owner.

Where you start your business as a proprietorship, it is still possible to convert the proprietorship into a corporation on a tax-free basis and to multiple the capital gains exemption going forward. A couple of points are worth noting here: (1) incorporating a proprietorship after the business has been operating for a few years may result in substantial legal, accounting and valuation fees; and (2) the value of the business up to the date of incorporation will belong to you and will be reflected in special shares that must be issued to you (assuming you will include other family members as shareholders in the new corporation).

For example, let's say you operate a successful business which you started as a proprietorship because you were unsure of whether it would be successful. The business has taken off and you have engaged a valuator to value the business prior to incorporating. The valuator has determined that the fair market value of your business today is worth $500,000. Upon incorporation, the $500,000 of value would be crystallized in special shares that would be owned by you. The new common shares that would be issued would only be entitled to the future growth of the business above and beyond the $500,000 and thus, any future capital gains exemptions for the new common shareholders would only accrue on the value in excess of $500,000.

2) Income Splitting

A corporation provides greater income splitting opportunities than a proprietorship. With a corporation it is possible to utilize discretionary shares that allow the corporation to stream dividends to a particular shareholder or shareholders (e.g. a spouse or a child 18 years of age or older) who are in lower marginal income tax brackets than the principal owner-manager.

Dividends are paid with after-corporate tax dollars from the business, whereas salaries, the alternative form of remuneration, are paid with pre-tax dollars and are generally a deductible business expense. The deductibility of a salary by a business is subject to a “reasonability test”. In order to deduct a salary from the business’ income it must be considered “reasonable”. Unfortunately, there is no defined criteria as to what is considered “reasonable”; however, paying a family member a salary of $50,000/annually who has little or no responsibilities within the business is likely not “reasonable”. However, with dividends there is no such “reasonability test”, so paying a family member a dividend of $50,000 even though she/he may have little or no responsibilities within the business is perfectly acceptable. Salaries to family members can be paid in an incorporated business or unincorporated business; however, the dividend alternative is unique to a corporation. Sole proprietors cannot pay themselves a salary; they receive draws from the proprietorship.

3) Income Tax Rate

The first $500,000 of active business income earned in a corporation is currently subject to an income tax rate of only 15.0%  in Ontario. Since the personal rate on income can be as high as 53.53%, income earned within a corporation potentially provides a very large income tax deferral, assuming these funds are not required personally for living expenses. This potential 38% deferral of income tax allows you to build your business with pre-tax corporate dollars. It should also be noted that once you take the money from the corporation, in many cases you essentially pay the deferred 38% tax as a dividend.

Corporations – The Fine Print


1) Expenses

Many people want to incorporate their business because they feel they will be able to deduct many more expenses in a corporation. In a general, that is an income tax fallacy. For all intents and purposes, the deductions allowed in a proprietorship are virtually identical to the deductions permitted in a corporation.

2) Professional and Compliance Costs and Administrative Burdens

The costs to maintain a corporation are significantly larger than for a proprietorship. There are initial and ongoing legal costs and annual accounting fees to prepare financial statements and file corporate income tax returns. These costs can be significant in some cases and can even outweigh some of the tax benefits in certain situations.

In addition, the administrative burdens for a corporation are far greater and drive many a client around the bend. For example, in a proprietorship or partnership, the owner(s) can take out money from the corporation without payroll source deductions. This is not the case when the owner(s) take out money in the form of a salary from a corporation.

So Why Start as a Proprietorship?


If you do not have legal liability concerns and you cannot avail yourself to the enhanced income splitting opportunities with family members a corporation may provide, starting as a proprietorship keeps your costs down and reduces your compliance and administrative issues. More importantly, since most people need whatever excess cash their business generates in its early years to live on, there is generally little or no tax benefit from incorporating a business initially. Finally, a proprietorship essentially provides for an initial test period to determine the viability of the business and if there are business losses, the owner(s) can generally deduct these losses against his or her other income.

When to Incorporate your Proprietorship?


In my opinion, you should incorporate your proprietorship once it has proven to be a viable business and once it has begun to generate cash in excess of your living requirements, so that you can take advantage of the 30% tax deferral available in a corporation.

Once you satisfy the above two criteria and incorporate, you will then benefit from creditor protection and the potential income splitting opportunities with other family members (assuming you want to include other family members as shareholders) and potentially the capital gains exemption or multiplication of the capital gains exemption if you include other family members in the corporation.

There is no “one shoe fits all” solution in determining whether to incorporate a new or ongoing business; however, the answer should become clearer once you address the issues I have outlined in this blog.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.

Monday, August 22, 2016

The Best of The Blunt Bean Counter - How your Family Dynamic can affect your Estate Planning

This summer I am posting the "best of" The Blunt Bean Counter blog while I work on my golf game. Today, I am re-posting a September, 2011 blog post on how your family dynamic can affect your estate planning.

I have found many parents often ignore the interrelationship of their children in their estate planning, which can often be problematic when the parent dies. So ensure you consider these relationships when undertaking your estate planning.

How your Family Dynamic can Affect your Estate Planning


Estate planning is a complicated and delicate process. Where you have more than one child, the planning process is full of minefields, some are in clear sight, but many are hidden. Parents have to navigate these minefields with respect to the determination of executors, the distribution of family heirlooms and the distribution of hard assets. The above decisions may be impacted by the financial wherewithal of your children, your relationship with your children’s spouses, your grandchildren or lack thereof, and in some cases, favouritism of certain of your children.

The above are what I call vertical family hierarchy issues. These are issues resulting from parents making decisions that will affect their children and potentially, the way their children will view their parents after death.

What parents do not often consider is how these vertical decisions impact horizontally: i.e. how the interrelationship of your children must be considered in your estate planning. Any parent who does not consider these relationships runs the risk of creating a divisive wedge amongst their children as sibling rivalry and jealousies may rear their ugly heads.

In this blog, I will attempt to identify several estate planning issues that not only have vertical consequences, but also have horizontal consequences requiring parents to consider their children’s relationships in context of their planning.

The Family Business


Where there is a family business and the succession plan is to pass on the business to the next generation, several issues must be considered. The issues include the following:

How many children have an interest in the family business?

If you have more than one child, is one specific child best suited to the role of CEO or president? If so, based on your children’s current relationship(s), do you foresee them working together or will they butt heads or worse? If the eldest child is named president, have you reinforced a perception the younger child has held for years, that the eldest is favoured and always assumed the most capable?

How do you value the business?

This is not an issue if all the children are given equal shares of the business, since they will have an equal ownership no matter the actual value attributed to the company. But what if you decide to leave the business to one child and equalize a child or the other children with say cash or other assets? The value of the business can fluctuate wildly over the years, with the result being that the child who inherits the shares may in essence have inherited a significantly larger asset than the other child(ren). Alternatively, the shares of the company may prove to be worth substantially less than the assets distributed to the other child(ren) if business conditions cause the value of the business to diminish. As a parent, can you do anything to avoid potential disparities in value? I have seen situations where asset distributions were equal at the time of death, but the inherited business grew astronomically and the children who did not inherit the company shares felt wronged by their parents.

Finally, if you have undertaken an estate freeze while alive, (see my blog on introducing a family trust as a shareholder and the related discussion on estate freezes) which child will inherit the voting shares? You risk alienating the children who do not receive the voting shares, since they may feel that you did not think they had enough acumen to vote and run the company.

The Family Cottage


The family cottage is often a contentious asset. In some families all the children want to keep ownership of the cottage and in some families only one or two siblings want the cottage. As a parent, you must speak to your children and determine who wants the cottage. Where more than one child wants the cottage, you have to consider whether those children have a good relationship and if they will be able to share ownership of the cottage without starting a world war. If not, do you have to consider selling the cottage in your later years to avoid creating a divisive issue amongst your children?

Another important factor to consider is whether the children interested in keeping the cottage have the financial wherewithal to pay their share of the cottages expenses on a yearly basis? If not, how do you overcome this potential issue, especially if one child has the financial resources and another does not?

Also, where there is a large inherent gain on the cottage, you have to determine whether your estate will be able to pay the income taxes without forcing a sale of the cottage and causing the estate to unwind your original intention to keep the cottage in the family? In this case, you may be able to use life insurance to cover off this issue.

The Will


A will may be construed as a document that reflects a parent’s opinion of their children and confirms the children’s opinion of themselves. If you infer one child is more responsible than the others (by selecting a certain child(ren) as an executor and excluding others), you risk igniting the fire of past resentments amongst the children and potentially causing resentment of you even in death.

Assuming you can navigate the determination of the executor(s) amongst your children without creating jealousy or animosity (if not, a corporate executor may be required), how do you distribute your assets upon death in a manner that mitigates any damage that can occur to your children’s relationships?

The distribution of material items is fraught with danger. How does one ever balance sentimentality and value? If you provide one child a sentimental heirloom, you risk that child complaining the other children got more value, while the other children complain they were not left sentimental heirlooms. What if you have art? How do you balance the value of art that has significant value differentials?

What about the situation where one child has been financially successful and another has not. If your will provides for a greater distribution to the child with less money, how do you ensure you do not create resentment with the financially well-off child? The less well-off child, who should be ecstatic, may actually be insulted, as they interpret the larger inheritance as their parents saying they were "financial losers" as opposed to being grateful for the larger inheritance. In these cases, one must tread carefully, but an unequal allocation may be more readily accepted where you explain your reasoning to your children before your death.

Another issue is grandchildren. Where the number of grandchildren is different in each family or one child does not have any family, do you give equal amounts to each family or equal amounts per child? How about where one of your children may be incapable of providing for a grandchild’s education and you feel a trust would be appropriate? Will any consideration other than equal consideration be construed as favouritism by your children?

Finally, many parents have provided loans to their children to assist with university, purchasing a house or what have you. How do you deal with prior gifts or loans? If you forgive the loans, you may have an unequal distribution and cause an issue among your children? Thus, you may want to consider a reduction of any distributions in the will for any outstanding loans.

This whole blog may be construed as ludicrous on a certain level. Some may say this blog is evidence as to why they will not leave anything to their children. Others may say I will leave my children whatever I feel like and if the distribution is unequal, so be it. However, it has been my experience that the majority of parents truly do not want to create any dissension among their children and aim to provide for an equal distribution. Even though they will have passed on, many parents still don’t want to alienate any of their children or cause resentment upon their death.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.

Monday, August 15, 2016

The Best of The Blunt Bean Counter - Personal Use Property - Taxable even if the Picasso Walks Out the Door

This summer I am posting the "best of" The Blunt Bean Counter blog while I work on my golf game. In March, 2011 I wrote this blog post on personal use property and how many families tend to "ignore" these type of items for income tax and probate purposes.

Since 2011, this has become an even larger issue in Ontario, to name one province, as recent legislation has increased the liability of executors. So if you are an executor, tread carefully with respect to Personal Use Property such as art and collectibles.

Personal Use Property - Taxable even if the Picasso Walks Out the Door

I will start today’s blog with a question. What do stamps, duck decoys, hockey cards, dolls, coins, comics, art, books, toys and lamps have in common?

If you answered that the collection of these items are hobbies, you are partially correct. What you may not know is, that these hobbies also generate some of the most valuable collectibles in the world.

When a collector dies and leaves these types of collectibles to the next generation, the collectibles can cause rifts among family members. The rifts may occur in regard to which child is entitled to ownership of which collectible and whether the income tax liability related to these collectibles should be reported by the family members.

Let’s examine these issues one at a time. Many of these collectibles somehow "miss" being included in wills. I think the reason for this is two-fold. The first reason is that some parents truly do not recognize the value of some of these collectibles, and the second more likely reason is, that they do realize the value and they don't want these assets to come to the attention of the tax authorities by including them in their will (a third potential reason is that your parents frequented disco's in the 70's and they took Gloria Gaynor singing "Walk out the Door" literally- but I digress and I am showing my age).

Two issues arise when collectibles are ignored in wills:
  1. The parents take a huge leap of faith that their children will sort out the ownership of these assets in a detached and non-emotional manner, which is very unlikely, especially if the collectibles have wide ranging values; and
  2. The collectibles in many cases will trigger an income tax liability if the deceased was the last surviving spouse or the collectibles were not left to a surviving spouse. 
Collectibles are considered personal-use property. Personal-use property is divided into two sub-categories, one being listed personal property (“LPP”), the category most of the above collectibles fall into, and the other category being regular personal-use property (“PUP”).

PUP refers to items that are owned primarily for the personal use or enjoyment by your family and yourself. It includes all personal and household items, such as furniture, automobiles, boats, a cottage, and other similar properties. These type properties, other than the cottage or certain types of antiques and collectibles (e.g. classic automobiles), typically decline in value. You cannot claim a capital loss on PUP.

For PUP,  where the proceeds received when you sell the item are less than $1,000 (or if the market value of the item is less than $1,000 if your parent passes away) there is no capital gain or loss. Where the proceeds of disposition are greater than $1,000 (or the market value at the date a parent passes away is greater than $1,000) there maybe a capital gain. Where the proceeds are greater than $1,000 (or the market value greater than $1,000 when a parent passes away), the adjusted cost base (“ACB”) will be deemed to be the greater of $1,000 or the actual ACB (i.e. generally the amount originally paid) in determining any capital gain that must be reported. Thus, the Canada Revenue Agency essentially provides you with a minimum ACB of $1,000.

LPP typically increases in value over time. LPP includes all or any part of any interest in or any right to the following properties:

  1. prints, etchings, drawings, paintings, sculptures, or other similar works of art; 
  2. jewellery; 
  3. rare folios, rare manuscripts, or rare books; 
  4. stamps; and 
  5. coins. 
Capital gains on LPP are calculated in the same manner as capital gains on PUP. Capital losses on LPP where the ACB exceeds the $1,000 minimum noted above, may be applied against future LPP capital gains, although as noted above, these type items tend to increase in value.

The taxation of collectibles becomes especially interesting upon the death of the last spouse to die. There is a deemed disposition of the asset at death. For example, if your parents were lucky or smart enough to have purchased art from a member of the Group of Seven many years ago for say $2,000 and the art is now worth $50,000, there would be a capital gain of $48,000 upon the death of the last spouse (assuming the art had been transferred to that spouse upon the death of the first spouse). That deemed capital gain has to be reported on the terminal income tax return of the last surviving spouse. The income tax on that gain could be as high as $12,000.

The above noted tax liability is why some families decide to let the collectibles “Walk out the Door.” However, by allowing the collectibles to walk, family members who are executors can potentially be held liable for any income tax not reported by the estate and thus, should tread carefully in distributing assets such as collectibles.

If you are an avid collector, it may make sense in some circumstances to have the collectibles initially purchased in a child’s name. You should speak to a tax professional before considering such, as you need to be careful in navigating the income attribution tax rules.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.

Monday, August 8, 2016

The Best of The Blunt Bean Counter - Speak to your Executor - Surprise only works for Birthday Parties, not Death


This summer I am posting the "best of" The Blunt Bean Counter blog while I work on my golf game. Today, I am re-posting an oldie (all the way to August, 2011) on speaking to your executor. Even though this post is five years old, it is still as relevant today and when I first posted it.  My advice: speak to your executor to not only inform them they have been appointed, but to let them know where you keep your financial information, so they do not have to play a game of hide and seek in administering your assets.

Speak to Your Executor - Surprise only works for Birthday Parties, not Death

In my blog series on being named an executor (So you want to be an executor, You have been named an executor, now what? and Is a corporate executor the right choice?) I discussed many of the issues an executor may face. In the second blog noted above, I talked about the overwhelming responsibility one assumes upon being named an executor and the obligation I feel you have, to discuss a person’s appointment as executor of your will, with them. In today’s blog I want to expand on this topic further.

I have dealt with numerous estates where the executor(s) floundered; notwithstanding the fact they were provided direction. Where an executor(s) flounders or spins their wheels, the ultimate beneficiaries suffer in two ways: (1) Their financial entitlement is often delayed months if not years, and (2) that entitlement may be reduced because of poor investment decisions or non-decisions made by the executor.

Where an executor is in over their head, I place the blame solely upon the deceased. Many people do not take the proper amount of time to consider the personal characteristics of the executor(s) they have selected. What I consider most objectionable is that some people never provide the executor(s) with the courtesy of notice of their potential appointment. In addition, many do not even attempt to meet with their executors to discuss their potential duties and whether they feel comfortable being named as an executor. Jim Yih discusses the characteristics he suggest you consider in an executor is this blog

As noted above, I consider the personal characteristics of a potential executor to be of the utmost of importance. I would suggest a potential executor should (1) have some financial acumen, (2) not stress easily, and (3) be somewhat anal.

At the risk of stereotyping, I have been involved with a couple executors who were more artistic than financial in nature and they were overwhelmed with the position. In my opinion, the reason they were overwhelmed was that their personal characteristics were the complete polar opposite of those characteristics I recommend an executor(s) possess. Years ago I had a very high strung person named as the executor of an estate and they essentially shut down for over a year due to the stress of the job and the estate sat in limbo.

This is not to suggest that an artistic person cannot be an executor or a co-executor with a financial person, but I would suggest that before naming such a person, you sit down and explain the duties of an executor to ensure that they feel they can handle the job.

In many cases, people name their children as executors. I have no problem with doing such; however, you must look at each child’s personal characteristics and the sibling dynamic to determine whether they can handle the job as a group or whether you have to name only one or two of your children as executors. I think many people would name executors from outside the family if the potential executor fees did not approach up to 5% of the estate (you may be able to negotiate a lower rate); however, in some cases, paying the executor fee is worth the independence gained by having an arm's length person administer the estate, despite the associated fees.  

The take away from today’s blog is: (1) you must seriously consider your selection of an executor and their personal characteristics (2) once you have made your selection, I would strongly suggest you discuss their appointment with them and (3) provide them a summary of your assets (or at least where to find such a summary should you pass away).

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.