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, January 16, 2017

What Small Business Owners Need to Know - Cyber Insurance Should be Part of Your Insurance Coverage

When I look back five or ten years, I am just astounded by the pace of change, both technologically and otherwise. The impact of these changes on how I practice and how my client's conduct their business affairs are truly astonishing.

When Katy Basi wrote a guest blog post in 2014 on New Will Provisions for the 21st Century - Reproductive Assets, I remember saying to myself, this is incredible, we now have to consider reproductive assets in our wills.

Today, I have the same feeling. Eddie Kehoe of RDA Insurance is writing on the need for cyber insurance. Who the heck would have ever envisioned such a need ten years ago. Maybe you would have, but I certainly did not.

Anyways, if you own your own business, you should carefully read this blog post and consider whether you need cyber insurance if you do not already have such insurance in place.

Cyber Insurance Should be Part of Your Insurance Coverage 

By Eddie Kehoe

If I was to ask you to consider purchasing a cyber insurance policy for your business, your first response – more than likely – would be “why do I need this, I’m not Target, Sony or Home Depot?”. Many of us have learned about cyber-attacks from the high profile breaches reported on CNN and the other news networks. What the news networks don’t often report is that breaches are occurring to smaller business every minute in Canada today. In addition, since the protection and firewalls of Multi-National corporations are often very good, cyber attackers often attack these companies indirectly through Trojan horses carried in by their smaller suppliers. I would suggest your business is likely out of business if your company indirectly led to an attack on one of these large companies.

The International Cyber Security Protection Alliance Statistics reported, in 2013, that businesses with less than 250 employees accounted for 31% of the total data breaches reported. Another misconception is that hackers are responsible for all cyber and data breaches. A 2016 NetDiligence Cyber Claims Study reports that insider involvement accounted for 30% of the incidents, hackers caused 23%, malware/virus 21% and third parties (vendors) 13% of incidents. In short, humans are the weak link!

Virtually every business sector is vulnerable; Healthcare (19%) and professional services (13%) were the most breached sectors followed by non-profit (11%), financial services and retail (10% each), with the manufacturing and construction industries trailing not far behind.

Theses breaches can cost your business many thousands of dollars along with its good reputation. Impending changes to Canada’s Personal Information Protection and Electronic Documents (PIPEDA) will carry the biggest penalty to many. From 2017 (exact date yet to be determined) PIPEDA will hold companies responsible for the mandatory notification to individuals that their personal information has been compromised following a data breach. No matter the severity of the breach, all clients must be notified. Insurance companies estimate that the average cost per notification is in the region of $2 per individual. So, if your business is amongst the 68% of Canadian businesses holding the personal information of others the cost to notify these individuals is not an insignificant amount.

Is Your Company Prepared for a Cyber Attack?

If you still believe that a cyber-attack presents little or no threat to your business, ask yourself the following. How prepared is your company or organization for:

  • Identity theft resulting from lost or stolen SIN numbers or credit cards, driver’s license or financial information?
  • A hacking that results in the theft of confidential information?
  • A lawsuit stemming from a security failure?
  • A lawsuit alleging trademark or copyright infringement?
  • A lawsuit alleging invasion of privacy, defamation, or product disparagement involving information residing as email on laptops, flash drives, servers or on the internet?
  • Business interruption due to a security failure or internet virus?
  • The transfer of an internet virus and the resulting fall out?
  • Cyber extortion?
  • Costs related to privacy notification, crises management and disaster recovery?

Mitigating the Risk of Cyber Breaches and Attacks

So, if we leave organized hacking groups to one side, there is a check list that companies should use to mitigate the possibility of a data breach occurring to them.

Do you:
  • Allow employees to take laptops off site?
  • Allow employees to take paperwork off site?
  • Allow employees to use USB sticks or other portable memory storage?
  •  Allow employees access to social media on computers in the office?
  • Allow sensitive printed materials to leave the office (even if en-route to a meeting)?
  • Vet all company postings on the company website or social media?
  • Erase all data from the hard drives of devices replaced?
  • Ensure that all paper maters are shredded and disposed of adequately?
Now that you’ve identified the potential risk to your company your next question is how can I protect my business? Virtually every insurance company in Canada offers cyber insurance policies of varying limits tailored to meet your company’s specific needs. Theses insurance policies not only pay data breach notification costs, but typically also insure the following:

E-mail liability
Defamation (even on social media), libel, product disparagement and infringement

E-commerce extortion
Coverage paid due to threats regarding an intention to fraudulently transfer funds, destroy data, virus attack, or disclose customer information

Funds transfer fraud
Coverage for loss of money or securities due to a fraudulent transfer.

Network Security Liability 

Third party coverage from a failure of security, including theft of a mobile devices and system intrusion. Coverage extended to outsourced data processing and data storage.

Privacy Breach Liability 

Breach of privacy law or the disclosure of protected and personal data
coverage extends to insured’s employees
proceeding defense and penalties included

Privacy Breach Expenses Includes 

Notification expense
Crises management expense
Credit monitoring and data recovery
Cyber investigation expense

Business Interruption 

Coverage for loss of income and the extra expense incurred to restore operations as a result of a computer system disruption caused by a virus or unauthorized computer attack.

Cyber risk is a very real threat to your business continuity. The statistics and the real life stories show that what you thought was only headline news, may well end up on your door step.

Eddie Kehoe is a commercial insurance broker with RDA Insurance who specializes in cyber insurance. Feel free to contact Eddie directly at or 905-652-8680 Ext 2379.

The above blog post is for general information purposes only and does not constitute insurance or other professional advice or an opinion of any kind. Readers are advised to seek specific insurance advice based on their business circumstances.

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, January 9, 2017

Your Investment Return - What Is It Telling You?

I find it shocking, how many people have no clue what their investment returns are for any given year let alone their historical returns. Some investment firms have been purposely opaque in respect of reporting investment returns for their clients. It is hoped that with the introduction of CRM2 (see this article) there will be far greater transparency in respect of the returns generated on your investments and the fees you pay your investment firm.

As of December 31, 2016, your investment statement should start reporting a personal rate of return. From what I understand, the reporting of your returns will only be mandated for 2016 and prior year investment returns do not have to be reported (some investment advisors/managers are very lucky; as 2016, the first year of reporting was a strong market year and this may allow them to hide poor past performance - thus, I would also request personal return information for the last three years, the last five years and since inception in addition to the 2016 return information). While your statements will not necessarily provide index benchmarks for you to compare your return against, at least you will have a return number!

If you have an investment advisor or investment manager and they have not reviewed your returns and strategy on a yearly basis before this required reporting, I would put them on notice you are disappointed and expect far more going forward. In addition, you should also review the investment fees you paid in 2016, which should also be provided on your statement. If you manage your own investments, you should be reviewing your performance on a yearly basis, or you are doing yourself a disservice.

Okay, enough with my rant. Today I actually intend to talk about what your investment returns are actually telling you about your investment strategy and investment policy and whether you are adhering to your strategy or chasing returns. (As an aside, if you are a good writer, you always tell your audience what your intended topic is within the first couple lines, you do not wait until the fourth paragraph. So do as I say, not as I do :).

Your Investment Strategy

When you engage an investment advisor or investment manager etc. the first thing that should be done is to create an investment policy statement and strategy based on your needs and risk. This will include a target allocation between fixed income and equities and target allocations between different asset classes and global diversification among other considerations. You should also be provided benchmark indices to compare your fixed income, Canadian, U.S. and World allocations against; unfortunately, this is often not provided.

For this post, let’s assume for simplicity sake that you want an asset mix of 30% fixed income and 70% equity which is allocated 30% Canadian, 30% World and 40% United States.

What Are Your Returns Telling You?

For purposes of illustration, I am going to use 2015 stock market returns since there were some of the larger variances within portfolios I have seen in years (I personally observed returns ranging from up 12% to down 17%). I will only briefly comment on 2016, since most statements are just being mailed.

So why the wide variance in returns in 2015? The reason was simple. The Canadian markets and resource stocks in particular were weak and preferred shares, especially rate reset preferred shares (due to low interest rates that were not contemplated when the shares were issued) were hammered. The TSX ended 2015 down around 11%. The U.S. market was down around 3% or so (but there was a huge foreign exchange gain where you held U.S. stocks because of the increase in the U.S. dollar relative to the Cdn dollar). World markets were also fairly weak.

So I ask you. If you had a 3-5% return in 2015, was that good or bad? This is a loaded question. If your allocation was the 30/70 mix I note above, that was probably somewhat expected and almost all due to the 30% or so increase in the U.S. dollar. Is that good investing or proper fund allocation? I would say a bit of both.

I noted that I saw people with losses as high as 17%. Was this bad? The answer surprisingly could be yes or no. If you had a large Canadian equity allocation with a resource bent (some people believe in investing most of their funds in the country they will live and retire in) then, the 17% loss may not have been as bad as your initial reaction and somewhat expected. That same portfolio will have exploded to the upside this year. Personally such a portfolio has too much volatility for me, but it may have been in adherence to that person’s investment strategy. Where you had a 17% loss because of rate reset preferred shares the investment industry sold and pushed (especially to seniors), but did not understand, that is another story.

For those people who had a 12% return in 2015, these returns were solely because they were over-exposed to U.S. stocks. I would say those returns, while excellent, were gained at the expense of risk (too much U.S. stock allocation) and you would have to understand the downside risk on a reversal in the dollar.

Some people told me their advisors did a great job over-allocating to the U.S. in 2015 and they were scaling back in 2016 (these conversations were in early 2016) to protect against a F/X reversal. When I hear comments such as the above, I cringe, since this says to me that their advisor has not created a disciplined strategy, but is stock picking, which more often than not, ends up badly.

2016 Returns

This year both the Canadian and U.S. markets have done very well. So if we look at the sample portfolio, one would expect a return somewhere between 8-11%. If you are this person and your returns are 18% I would want to understand why I outperformed far greater than my expected asset allocation. A better than expected return may indicate something amiss with your investment mandate. The same goes if your return was 6%, why were you below your expected return?

In conclusion I suggest the following:

1. Ensure your investment advisor/manager provides you with current and historical returns don’t just accept the 2016 returns that will be on your December, 2016 statement. Meet with them to discuss your returns and compare them to your intended strategy and investment policy and compare your returns to benchmark indices you agree upon. Ensure the returns you are provided with are net of management and investment fees and that the returns are not varying significantly from your expected returns. Variations both up and down may be cause for concern.

[BTW: If you are unhappy with your advisor and looking for a change, let me know. Depending upon your asset base, I or a colleague, may be able to assist you with financial planning and investment oversight and provide you access to several investment managers I work with directly (as an accountant I cannot provide specific investment advice, so I must work with an investment manager)].

2. If you manage your own investments, ensure you have created an investment strategy that it is written down and then compare your returns to what you expected and ensure you kept a disciplined approach in line with your strategy.

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, December 19, 2016

CRA Information Requests - 2016 Update

Lately, many accountants feel like their main area of practice is responding to information requests sent to our clients by the Canada Revenue Agency (“CRA”). Below, I update you on what I have been seeing in these requests, for both small business owners and individual taxpayers.

What Small Business Owners Need To Know

In 2015, many clients received letters from the CRA requesting support for their equipment (capital cost additions) for income tax purposes. Essentially, the CRA wanted back-up for asset purchases on which capital cost allowance (depreciation) was claimed. These requests were fairly benign and just required some information gathering.

This year, many of my clients have received a CRA information request letter asking for documentary back-up of professional fees claimed on their financial statements.

It appears that for 2016, professional fees are the flavour of year. From the CRA’s perspective, they are looking for personal professional expenses put through small business owner’s corporations. Examples of these types of expenses would be: legal bills for divorces, personal estate planning, and corporate expenses for reorganizations, that should either be all or partially allocated as Eligible Capital Expenditures.

Taxpayers and their accountants are finding these requests extremely time consuming to comply with. The information requested includes a general ledger print out of the expenses, copies of each invoice and where the invoice does not say paid, (invoices issued by professional very rarely are receipted – for example, when your lawyer issues you an invoice for updating your minutes, when you pay, they do not issue a paid receipt) and copies of bank statements to support payment.

Say you have been requested to provide this information for 2014 and 2015; you could be looking for 25-50 invoices if you have a lot of professional subcontractors or are billed monthly by your bookkeeper. You then need to either get each professional to issue a summary receipts letter noting all the invoices issued and paid or provide bank statement back-up (which most clients tend to do).

Once the documentation is provided, the CRA reviews the information (some clients have been contacted to provide additional information or facts) and in some cases issues a reassessment. However, the actual reassessments do not provide any detail as to which expenses have been denied and for what reason(s). Where clients were contacted by the CRA, they assume those expenses were the cause of the reassessment. In other cases, we have to call the CRA to find out what expense(s) were denied. These reassessments are a bit atypical of the CRA who usually provide greater detail in respect of changes made.  

Individual Taxpayers

Non-corporate clients have been receiving several types of information requests. They include:

1. Interest deduction expense claims
2. Foreign tax credit claims
3. Matching income requests

Interest Expense Claims

Several clients have received an information letter request asking for details of their interest expense claims. The letters ask taxpayers for correspondence from the lending institution detailing the original amount of the loan, reasons for the loan, interest expense back-up and bank loan statements. Obtaining this information can be very frustrating, especially where you no longer deal with the lender/bank.

The reasoning behind these information requests is that the CRA is attempting to track the use of funds to a deductible use. i.e. if you took out an investment loan, they want to see the money went into your investment account to purchase marketable securities and was not used partially or wholly for your kitchen renovation.

Foreign Tax Credit Claims

These letters are looking for back-up for foreign taxes paid, where you have claimed a foreign tax credit for investment income or employment or business income earned in another country.

Where you have an investment account with a financial institution and receive a T3/T5 that has foreign income allocated to you and foreign tax withheld, this request is fairly innocuous, as you just essentially send in the T3s or T5s.

However, if you have earned employment income or business income in the United States or another country, you need to provide proof of payment of the taxes. This has become a huge issue for the US, since the IRS does not provide a notice of assessment similar to Canada that shows tax assessed and paid. Thus many people have had to make special requests to the IRS for this information and it is not easily obtained or provided, let alone requests for information from less sophisticated foreign countries. Lately, in the case of the U.S., the CRA is now allowing bank statements and cancelled cheques in lieu of the special request letter, where these documents can support the actual tax paid.

Matching Income Requests

I have written many times about the matching program. Each fall the CRA compares tax slips in its data base to those reported on Canadian’s tax returns. Often slips are missed since they were lost in the mail or misplaced by the taxpayer and the matching program catches the missing slip and related income.

This year, we have started seeing three page print-outs requesting proof that the income was reported. Clients, who have received such requests, have been very concerned that somehow they (or their accountant) missed reporting thousands of dollars of tax slips. However, in most cases, all these slips have been reported, there is just one or two on the three page list that have been reported as perhaps a 50/50 split with a spouse or had an incorrect SIN number.

However, it takes hours to respond to these requests, slip by slip (especially since the financial institutions often summarize income from various sources on T5's, yet report source by source to the CRA. We thus need to reconcile these amounts).

We all accept that the CRA must ensure income tax compliance; however, I wonder if these requests can be streamlined in certain cases? I know some accountants who refuse to Efile and continue to still paper file, solely to reduce the amount of requests they have to deal with.

This is my last post for 2016 and I wish you and your family a Merry Christmas and/or Happy Holidays and a Happy New Year. May your 2017, be information request free :)

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, December 12, 2016

U.S. Estate Tax for Canadians

Estate tax has been a political hot potato in the United States for many years. Essentially it has been a debate amongst those who believe in an inheritance tax and those who do not. The political infighting even resulted in a year (2010), where if you died there was no estate tax. As per this article, George Steinbrenner saved his estate 600 million by dying in 2010. Imagine, your estate planning all revolves around planning to die in a certain year.

Since 2011, U.S. estate tax has again been levied and can apply to Canadians who hold U.S. property. With the election of Donald Trump, it is possible the estate tax will be repealed again. However, for purposes of this blog post, we will deal with the current law.

Today, I explain how the U.S. estate tax can affect Canadians.

U.S. Estate Tax for Canadians

Death and taxes. They say that these are the only two things in life you can’t avoid. Unfortunately for some Canadians, this saying extends beyond Canadian borders to the United States; as the U.S. can impose the estate tax on unsuspecting Canadian citizens and residents.

Regrettably, many Canadians do not consider their potential U.S. estate obligations until it is too late. Where proper planning is not done on a pre-emptive basis, it can lead to administrative headaches and substantial monetary consequences for your loved ones.

The Rules

For starters, the U.S. estate tax regime is a tax based on the fair market value of the worldwide estate of any person who was a U.S. citizen at the time of their death (even if they are resident in Canada), or was “domiciled” in the U.S. at that time. Collectively, we’ll refer to these people as U.S. persons. Estate tax rates are graduated, and the maximum tax rate is 40%. There is an exemption from estate tax for any estate that is below the effective exemption amount, which is currently $5,450,000 USD for deaths in 2016. The exemption amount is pegged to inflation, so it is scheduled to increase modestly year over year. However, the exemption amount could change more dramatically if there are any future legislative changes (e.g. with the election of Mr. Trump). So this provision essentially deals with Canadians who were born in the U.S. or live in the U.S.

But the tax does not stop with former citizens or Canadians living in the U.S. Not only does the U.S. have the right to tax U.S. persons, but it also has the right to tax certain U.S. assets held by people who are not U.S. persons, essentially any Canadian resident who falls within the U.S. estate tax provisions.

The U.S. will levy estate tax to non-U.S. persons on what they call “U.S. situs property”. This includes assets such as real estate and tangible personal property situated in the U.S., U.S. securities (including those held in brokerage accounts in Canada), certain U.S. debt obligations, and assets used in a U.S. business activity. As a result, property such as your Aspen vacation home or Google stock could potentially be taxed.

Individuals who are not U.S. persons don’t normally have access to the $5,450,000 USD exemption amount - only a basic exemption covering $60,000 USD of U.S. situs assets. As a result, any non-U.S. person who dies owning over $60,000 USD of U.S. situs assets must file a U.S. estate tax return.

How the Tax Works for Canadians

Fortunately, under the Canada - U.S. tax treaty, there are provisions that effectively allow Canadian residents to have access to the same exemption for worldwide assets that is available to U.S. persons. U.S. persons are entitled to a “unified credit” against U.S. estate tax equal to the estate tax on the exemption amount (currently a credit of $2,125,800 USD representing the tax on $5,450,000 USD). The treaty will allow Canadians to claim a unified credit that is prorated based on the ratio of their U.S. situs assets to their total worldwide estate. For example, if a Canadian was to die holding the following assets:

Canadian residence: $1,500,000 USD

Canadian securities: $1,500,000 USD

U.S. vacation home: $1,000,000 USD

Worldwide assets: $4,000,000 USD

The gross estate tax on $1,000,000 USD of U.S. situs assets is $345,800 USD. The unified credit for 2016 would be limited to $531,450 USD (i.e. $2,125,800 x 1,000,000 / 4,000,000). In this example, the unified credit is enough to eliminate the estate tax. Conceptually, this makes sense because this person’s worldwide assets are less than the $5,450,000 USD effective exemption.

But what if we change the scenario such that one has $5,500,000 of Canadian securities, and as a result the worldwide assets are now $8,000,000 USD? The tax on the U.S. situs assets is still $345,800. However, the prorated unified credit is only $265,725 (i.e. $2,125,800 x 1,000,000 / 8,000,000), such that there is net estate tax payable of $80,075. The higher one’s net worth, the more one’s estate tax exposure is on any given amount of U.S. assets.

But all hope is not lost! If one’s assets are passing to their Canadian spouse upon death, an additional marital credit equal to the unified credit can be claimed. Roughly speaking, this marital credit doubles the size of an estate that can be effectively exempted from estate tax. In the scenario above, one would be able to double up on the unified credit of $265,725, eliminating the estate tax payable.

Strategies to Mitigate the Estate Tax

So what if someone’s estate is large enough that they have estate tax exposure, even after the relief described above - how can one plan to mitigate the U.S. estate tax? Here are some strategies one can utilize:

1. Don’t have any U.S. assets at death – This may be the simplest way of avoiding the estate tax. By liquidating U.S. securities before death, or selling your vacation property to a family member or third party, you could avoid having U.S. situs assets in your worldwide estate. If you’re thinking of transferring real estate to a family member, you should ensure that the property is sold at fair market value, otherwise you could run afoul of the U.S. gift tax rules (another topic for another day). Note: There may be Canadian and/or U.S. income taxes on the transfer of property, so obtaining both U.S.and Canadian tax advice is strongly suggested.
2. Hold U.S. assets through a Canadian corporation – A Canadian corporation would generally shelter the U.S. situs real estate or securities from estate tax, as the U.S. would not consider shares of a Canadian corporation to have U.S. situs. The downside of this plan is that you may pay more in combined Canadian and U.S. tax on income generated by the U.S. assets, particularly for U.S. real estate. As well, personal use of a U.S. real estate property would generally give rise to taxable benefits for the shareholders of the company unless they pay market value rent. Thus, in general the use of a corporation is effective to hold U.S. stocks and securities, but not personal use U.S. real estate.

3. Hold U.S. assets through a Canadian trust – Provided that the trust is set up properly, assets held by the trust should be able to be excluded from your estate. A trust is more income tax-friendly than a corporation as well. The main catch is that you would need to give up a significant degree of control over the assets. This approach is often used for U.S. real estate that one intends to pass on to the next generation.

4. Hold U.S. assets through a partnership. It is a grey area as to whether an interest in a partnership holding U.S. real estate and stock is a U.S. situs asset, so one should be cautious about using a partnership to mitigate estate tax exposure. This ownership method is commonly used for U.S. rental properties, particularly those with multiple unrelated owners.

5. Have an insurance policy to cover the tax – It may be simpler and more cost-effective to take out a life insurance policy as a contingency to cover the estimated estate tax exposure, rather than try to avoid the estate tax altogether. However, premiums might be costly depending on the age and health of the individual. As well, the proceeds of life insurance would be included in the worldwide estate value, and could increase your exposure to estate tax.

There is no universally best way to hold U.S. situs assets, and the “right” answer for you depends on your facts and circumstances. Once a decision has been made as to hold U.S. assets, it can potentially be difficult to change the holding method without triggering income or gift tax. So an ounce of prevention can be worth a pound of cure!

The advice in this blog post is general in nature. U.S. estate tax is a very complicated area of tax law and any planning discussed above should only be undertaken after obtaining professional tax advice, typically from someone who is familiar with both the Canadian and U.S. tax laws. It is also strongly suggested that you obtain tax advice before acquiring any significant U.S. situs assets.

I would like to thank Grant Campbell, Manager, U.S. Tax for BDO Canada LLP for his extensive assistance in writing this post. If you wish to engage Grant for U.S. tax planning, he can be reached at
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, November 28, 2016

Tax Loss Selling (or for 2016 - Tax Gain Selling?)

In keeping with my annual tradition, I am today posting a blog on tax loss selling (or as per paragraph 3, maybe tax gain selling this year). I am doing it again because the topic is very timely and every year around this time, people get busy with holiday shopping and forget to sell the “dogs” in their portfolio and as a consequence, they pay unnecessary income tax on their capital gains in April.

Additionally, while most investment advisors are pretty good at contacting their clients to discuss possible tax loss selling, I am still amazed each year at how many advisors do not discuss the issue with their clients. So if you have an advisor, ensure you are in contact to discuss your realized capital gain/loss situation and other planning options (if you have to initiate the contact, consider that a huge black mark against your advisor).

For full disclosure, there is very little that is new in this post from last year's version; however, there is one issue I wish to discuss. I have had a few calls from clients asking whether they should sell their stocks with unrealized gains this year, instead of selling their stocks with unrealized losses. They are asking this question because they are worried the 2017 Federal budget may change the inclusion rate on capital gains from 1/2 to 3/4 as rumoured in the last budget.

I will provide you the same answer I provide them. I cannot tell you what to do. The Liberals have not clearly stated they intend to do such and thus, any change appears to be conjecture. However, given the Liberal's clear intention to tax the "rich", such a change would not be surprising, though many "middle class" taxpayers would also be affected. So you have to roll the dice either way.

Many people persist in waiting until the third week of December to trigger their capital losses to use against their current or prior years capital gains. To avoid this predicament, you may wish to set aside some time this weekend or next, to review your 2016 capital gain/loss situation in a calm methodical manner. You can then execute your trades on a timely basis knowing you have considered all the variables associated with your tax gain/loss selling. As the markets have been strong this year, you hopefully will have only a few stocks with unrealized capital losses you can sell to use the losses against capital gains reported the last 3 years. Alternatively, you may want to trigger a capital loss to utilize against capital gains you have already realized in 2016.

I would like to provide one caution in respect of tax loss selling. You should be very careful if you plan to repurchase the stocks you sell (see superficial loss discussion below). The reason for this is that you are subject to market vagaries for 30 days. I have seen people sell stocks for tax-loss purposes, with the intention of re-purchasing those stocks and one or two of the stocks take off during the 30 day wait period and the cost to repurchase is far in excess of their tax savings. Thus, you should first and foremost consider selling your "dog stocks" that you and/or your advisor no longer wish to own. If you then need to crystallize additional losses, be wary if you are planning to sell and buy back the same stock.

This blog post will take you through each step of the tax-loss selling process.

Reporting Capital Gains and Capital Losses – The Basics

All capital gain and capital loss transactions for 2016 will have to be reported on Schedule 3 of your 2016 personal income tax return. You then subtract the total capital gains from the total capital losses and multiply the net capital gain/loss by ½. That amount becomes your taxable capital gain or net capital loss for the year. If you have a taxable capital gain, the amount is carried forward to the tax return jacket on Line 127. For example, if you have a capital gain of $120 and a capital loss of $30 in the year, ½ of the net amount of $90 would be taxable and $45 would be carried forward to Line 127. The taxable capital gains are then subject to income tax at your marginal income tax rate.

Capital Losses

If you have a net capital loss in the current year, the loss cannot be deducted against other sources of income. However, the net capital loss may be carried back to offset any taxable capital gains incurred in any of the 3 preceding years, or, if you did not have any gains in the 3 prior years, the net capital loss becomes an amount that can be carried forward indefinitely to utilize against any future taxable capital gains.

Planning Preparation

I suggest you should start your preliminary planning immediately. These are the steps I recommend you undertake:

1. Retrieve your 2015 Notice of Assessment. In the verbiage discussing changes and other information, if you have a capital loss carryforward, the balance will reported. This information may also be accessed online if you have registered with the Canada Revenue Agency.

2. If you do not have capital losses to carryforward, retrieve your 2013, 2014 and 2015 income tax returns to determine if you have taxable capital gains upon which you can carryback a current year capital loss. On an Excel spreadsheet or multi-column paper, note any taxable capital gains you reported in 2013, 2014 and 2015.

3. For each of 2013-2015, review your returns to determine if you applied a net capital loss from a prior year on line 253 of your tax return. If yes, reduce the taxable capital gain on your excel spreadsheet by the loss applied.

4. Finally, if you had net capital losses in 2014 or 2015, review whether you carried back those losses to 2013 or 2014 on form T1A of your tax return. If you carried back a loss to either 2013 or 2014, reduce the gain on your spreadsheet by the loss carried back.

5. If after adjusting your taxable gains by the net capital losses under steps #3 and #4 you still have a positive balance remaining for any of the years from 2013 to 2015, you can potentially generate an income tax refund by carrying back a net capital loss from 2016 to any or all of 2013, 2014 or 2015.

6. If you have an investment advisor, call your advisor and request a realized capital gain/loss summary from January 1st to date to determine if you are in a net gain or loss position. If you trade yourself, ensure you update your capital gain/loss schedule (or Excel spreadsheet, whatever you use) for the year.

Now that you have all the information you need, it is time to be strategic about how to use your losses.

Basic Use of Losses

For discussion purposes, let’s assume the following:

· 2016: realized capital loss of $30,000

· 2015: taxable capital gain of $15,000

· 2014: taxable capital gain of $5,000

· 2013: taxable capital gain of $7,000

Based on the above, you will be able to carry back your $15,000 net capital loss ($30,000 x ½) from 2016 against the $7,000 and $5,000 taxable capital gains in 2013 and 2014, respectively, and apply the remaining $3,000 against your 2015 taxable capital gain. As you will not have absorbed $12,000 ($15,000 of original gain less the $3,000 net capital loss carry back) of your 2015 taxable capital gains, you may want to consider whether you want to sell any “dogs” in your portfolio so that you can carry back the additional 2016 net capital loss to offset the remaining $12,000 taxable capital gain realized in 2015. Alternatively, if you have capital gains in 2016, you may want to sell stocks with unrealized losses to fully or partially offset those capital gains.

Identical Shares

Many people buy the same company's shares (say Bell Canada) in different accounts or have employer stock purchase plans. I often see people claim a loss on the sale of their Bell Canada shares from one of their accounts, but ignore the shares they own of Bell Canada in another account. However, be aware, you have to calculate your adjusted cost base on all the identical shares you own in say Bell Canada and average the total cost of all your Bell Canada shares over the shares in all your accounts. If the cost of your shares in Bell are higher in one of your accounts, you cannot pick and choose to realize a loss on that account; you must report the average adjusted cost base of all your Bell shares, not the higher cost base shares.

Creating Gains when you have Unutilized Losses

Where you have a large capital loss carryforward from prior years and it is unlikely that the losses will be utilized either due to the quantum of the loss or because you are out of the stock market and don’t anticipate any future capital gains of any kind (such as the sale of real estate), it may make sense for you to purchase a flow-through limited partnership (be aware; although there are income tax benefits to purchasing a flow-through limited partnership, there are also investment risks and you must discuss any purchase with your investment advisor). 

Purchasing a flow-through limited partnership will provide you with a write off against regular income pretty much equal to the cost of the unit; and any future capital gain can be reduced or eliminated by your capital loss carryforward. For example, if you have a net capital loss carry forward of $75,000 and you purchase a flow-through investment in 2016 for $20,000, you would get approximately $20,000 in cumulative tax deductions in 2016 and 2017, the majority typically coming in the year of purchase. Depending upon your marginal income tax rate, the deductions could save you upwards of $10,700 in taxes. When you sell the unit, a capital gain will arise. This is because the $20,000 income tax deduction reduces your adjusted cost base from $20,000 to nil (there may be other adjustments to the cost base). Assuming you sell the unit in 2018 for $18,000 you will have a capital gain of $18,000 (subject to any other adjustments) and the entire $18,000 gain will be eliminated by your capital loss carry forward. Thus, in this example, you would have total after-tax proceeds of $28,700 ($18,000 +$10,700 in tax savings) on a $20,000 investment.

Donation of Flow-Through Shares

Prior to March 22, 2011, you could donate your publicly listed flow-through shares to charity and obtain a donation receipt for the fair market value ("FMV") of the shares. In addition, the capital gain you incurred [FMV less your ACB (ACB is typically nil or very low after claiming flow-through deductions)] would be exempted from income tax. However, for any flow-through agreement entered into after March 21, 2011, the tax benefit relating to the capital gain is eliminated or reduced. Simply put (the rules are more complicated, especially for limited partnership units converted to mutual funds and an advisor should be consulted), if you paid $25,000 for your flow-through shares, only the gain in excess of $25,000 will now be exempt and the first $25,000 will be taxable.

So if you are donating flow-through shares to charity this year, ensure you speak to your accountant as the rules can be complex and you may create an unwanted capital gain.

Superficial Losses

One must always be cognizant of the superficial loss rules. Essentially, if you or your spouse (either directly or through an RRSP) purchase an identical share 30 calendar days before or 30 days after a sale of shares, the capital loss is denied and added to the cost base of the new shares acquired.

Disappearing Dividend Income

Every year I ask at least one or two clients why their dividend income is lower on their personal tax return. Typically the answer is, "oops, it is lower because I sold a stock early in the year that I forgot to tell you about". Thus, if you manage you own investments; you may wish to review your dividend income being paid each month or quarter with that of last years to see if it is lower. If the dividend income is lower because you have sold a stock, confirm you have picked up that capital gain in your calculations.

Creating Capital Losses-Transferring Losses to a Spouse Who Has Gains

In certain cases you can use certain provisions of the Income Tax Act to transfer losses to your spouse. As these provisions are complicated and subject to missteps, you need to engage professional tax advice.

Settlement Date

It is my understanding that the settlement date for Canadian stock markets in 2016 will be December 23rd (The U.S. exchanges may be different). Please confirm this date with your broker, but assuming this date is correct, you must sell any stock you want to crystallize the gain or loss in 2016 by December 23, 2016.


As discussed above, there are a multitude of factors to consider when tax-loss selling. It would therefore be prudent to start planning now, so that you can consider all your options rather than frantically selling via your mobile device while waiting in line with your kids to see Santa the third week of December.

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, November 21, 2016

The Top 10 Estate Planning Mistakes

I think it is fair to suggest, that most of us wish to plan our estates to minimize any income tax and probate fees owing upon our passing. Yet, many of us do not seek professional assistance to deal with the various technical income tax, probate planning and "soft family" issues that must be considered when dealing with our estates.  As such, we often end-up eroding our estates because of unanticipated tax obligations and significant legal costs when family members litigate the estate. Today, Neil Milton an estates expert discusses the Top 10 Estate Planning Mistakes he observes in his practice.

The Top 10 Estate Planning Mistakes

By Neil Milton

There are many widely held myths and misconceptions about wills, probate and estates. These myths and misconceptions lead to estate planning mistakes. These mistakes can cause a lot of damage – both to your wallet and to relationships with family members. In this blog we have gathered 10 of most common and yet easily avoided estate planning mistakes.

1. Not Having a Will

The rules for how an estate is divided in Ontario when there is no will (intestate succession) can have some shocking consequences. Remarkably few people are aware that if you die without a will:
  • Your common law spouse inherits nothing. Zero. (They might have a claim for support, but that is a very different thing).
  • If you are separated but not divorced from a spouse, your legally married, they will inherit the bulk of your estate (The first $200k + a healthy chunk thereafter).
  • If you are legally married and not divorced, your parents and siblings get nothing.
  • If you have ‘step children’ that you have not legally adopted, they get nothing.
Everyone adult should have a will. If you do not have a will, get one now (74% of Canadians do not have an up-to-date will).

2. Do It Yourself Wills

Sure you can save $500 by doing your own will, but that does not mean you should. You can also do your own dental surgery. For both wills and dental work, the results of DIY are rarely satisfactory and often very expensive to fix.

3. Joint Accounts to Avoid Probate Tax

Do not put your investments or bank accounts in the name of one of your adult children to avoid probate tax without proper advice. You may save probate, but you may trigger significant income tax consequences. In addition, you may create a lot of grief and legal fees to fix the mess where the child whose name you put on the account, claims it for their own and the other children sue.

4. Joint Ownership of Houses to Avoid Probate Tax

Do not put one of your adult children on title to your house (“joint tenancy”) to avoid probate tax without very careful proper planning and documentation. You can create income tax issues and unless you document in writing your intention to give the house as a gift to that child to the exclusion of your other children, you do not save probate tax and you create lots of misery and a legal fee bonanza.

5. Assuming Your children get Along

Do your children really get along? Are they really facing similar financial circumstances and stresses? Many children have serious issues with their siblings. Do not assume that just because they are your children that they trust or work well with each other. This is particularly relevant to your choice of executor.

6. Choosing an Executor who is Not Up to the Job

Being an executor is a difficult job, not an honour. Good executors are a rare breed. They are prudent but decisive, can handle conflict (especially among beneficiaries), are attentive to detail, communicate well, are financially savvy, enjoy accounting and taxes, and must complete, send and receive many letters and forms. An ideal executor is tech savvy, and can scan, print, and email at will.

Your favourite caregiver may be a wonderful person, but that does not mean they will be a good executor. Being an executor is a hard job and you should provide for reasonable compensation (“pay peanuts, get monkeys” applies here). Also consider aging – your executor must be able to perform when the time comes, which may be a long time from now. At the very least, you should have an alternate if the primary choice is unable to act.

I strongly recommend that you consider using a professional to handle this complex job at a pre-agreed fair rate of compensation (which does not have to be a flat 5%).

See Mark's post on the duties of being named an executor for more information.

7. Putting Your Executor in a Conflict of Interest

Enormous trust is placed in an executor, and it is very difficult to force an executor to act at all or decently. If you do not trust someone absolutely to behave quickly, properly and fairly as between all beneficiaries, do not appoint them at all. Too many executors have massive conflicts of interest between their interests and the interests of other beneficiaries, and these conflicts were created by the testator.

For instance, if one child lives with you in your home, and you name that child your executor, they have a clear conflict between their desire to stay in the house as long as they can and to avoid paying rent, versus their obligation to sell the home and distribute the estate. It is unfair to them and the other beneficiaries to put them in this awkward spot – choose an executor without a conflict of interest.

8. Hedging Your Bets With Multiple Executors

Being an executor is a hard enough job without having to chase a co-executor for approval and signatures on everything. In most cases you should choose one person as your primary executor, and name an alternate. Do not name co-executors because you don’t trust one or you are too indecisive to choose between them.

9. Not Thinking Gifts Through or Keeping Them up to Date

Just because someone is your child does not mean that they will outlive you. You need to plan for contingencies. Similarly, if you appoint someone a trustee of funds for a minor child, make sure that they are willing and able to handle the task, and will be able to for the duration of the trust – if a trust for a child might last 20+ years, do not name someone who is already in their 70s as the trustee.

10. Not Giving Enough Away Sooner or to Charity

Gifts of things or experiences to your loved ones (to support their education, or travel for instance) while you are alive often have a much bigger impact on the recipients than lump sums of cash when you pass away (See Mark's blog post on Family Vacations. Meaningful gifts to mark milestones like graduation often get remembered much longer than cash inheritances. See Mark's blog post on Family Vacations for how meaningful and fulfilling a family vacation can be.

Even modest gifts to charity can have a big impact on the intended charity. Gifts to charity teach your values to your family. Also, a gift to a charity can create a legacy that is shared among your survivors giving them a common bond and remembrance of you that the same amount of cash, divided among them as inheritance, can never have. Lastly, there are tax benefits for gifts to charity.

Estate law is complex because life is complex. There are often many options, and choosing the options that are best for you and your family depends on your unique circumstances. We strongly recommend that you get advice from an expert in the field who can help you weigh the options, choose a desired outcome, and get there efficiently.

Neil Milton is an experienced estates lawyer who advises estate trustees (executors) and beneficiaries on all aspects of probate, guardianship, and estate administration, and helps resolve estate-related disputes. Miltons Estates Law has offices serves clients across Ontario from offices in Ottawa and Toronto, and provides a wealth of free information and eBooks on its website Feel free to contact Neil directly at or 1.866-297-1179 ext 224

Please note that this post is based on Ontario law. If you live outside of Ontario, it is strongly recommended that you consult with an estates lawyer licensed to practice in your province.

The above blog post is for general information purposes only and does not constitute legal or other professional advice or an opinion of any kind. Readers are advised to seek specific legal advice regarding any specific legal issues.

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

Monday, November 14, 2016

The Nest

In February, 2012, I wrote on the taboo topic of whether it is morbid or realistic to plan for an inheritance. In the blog post, I noted that I had observed over my career, a couple people living beyond their current means, on the assumption they would inherit money at a later date. Their future inheritance would be the fix for their current overspending and excessive debt.

In the circumstances I witnessed, the inheritances were actually received as hoped for/expected by the children when their parents passed away. I noted in the post that I had yet to observe a circumstance where a planned inheritance had been less than what the beneficiaries expected and that is still the case to date.

Thus, when searching for a book to read last summer, I was intrigued when I saw The Nest, by Cynthia D’Aprix Sweeney on The New York Times Best Sellers List. The Times described the book as “Set in New York, The Nest features four neurotic siblings who are squabbling over their inheritance and struggling with the disappointments of middle age. Their joint trust fund, which they call “the nest,” is jeopardized when Leo, the hard-partying black sheep of the family, gets in a drunken-driving accident with a teenage waitress in the passenger seat”.

While the book may not be one of my all-time favourites, this satire about the dysfunctional Plumb family was definitely an entertaining read. More Magazine said this about the book “Few things are more compelling than looking into the interiors of other people’s lives-and finding a truth or two about our own. In Cynthia D’Aprix Sweeney’s wickedly funny novel THE NEST, four midlife siblings squabble over their inheritance; universal questions about love, trust, ambition, and rivalry roil.”

As I do not want to give away too much about the book should you decide to read it, I will just note a few of the interesting concepts Ms. D’Aprix highlights:

1. How a known inheritance can impact current day living.

2. How future plans are premised on the known inheritance.

3. The desperation that ensues when a planned inheritance is jeopardized.

4. How family dynamics can be improved or worsened through the process.

5. Money is not everything.


In my "morbid or realistic" blog post I had the following conclusion:

“Is it morbid to plan for an inheritance? Clearly, it is. Would most people rather have their parents instead of the inheritance? Yes. This topic is a very touchy subject and an extremely slippery slope, but to ignore the existence of a significant future inheritance that would impact your personal financial situation may be nonsensical. However, if your financial planning takes into account a future inheritance, you should ensure you have discounted that amount to cover the various risks and variable that could curtail your inheritance and be extremely conservative in your planning”.

I still feel that in situations where there is a high certainty of an inheritance (significant family assets, strong family bonds, etc.) it is nonsensical to ignore the inheritance in your planning.

However, in other less certain cases, I think Preet Banerjee (whom I quote in the postscript) has it right. He says "There are enough variables affecting your own financial success. Ideally, you shouldn’t bank on an inheritance in your financial plan, but rather treat it as an unexpected windfall”.

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.