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

Monday, February 12, 2018

No Will? You’re in Famous Company!

Readers of my blog are aware of my inclination to harp on the fact that you should have a will, and where you have a will in place, that it should be updated for significant life events. As discussed last week, in my post Power of Attorney for Personal Care – Mental Capacity and Medical Assistance When Dying. I also think it is important to have up-to-date powers of attorney for financial and personal care. But today, we are talking wills and the lack of such for some famous people and the lessons you may learn from their estate planning miscues.

In my blog post “Canadians Don’t Have the Will”, I highlighted a 2016 survey conducted by Legalwills.ca, that found 62% of Canadians do not have wills.

The 62% number is astronomical and in my not so humble opinion, just irresponsible. I thought of this survey, when I was recently told by a colleague that they were working on an estate where the first spouse passed away without a will, and then the surviving spouse died a couple years later without ever having a will drafted. I can maybe understand that some couples don’t have wills based on the premise “everything will just automatically flow to the surviving spouse”, although this thinking may be flawed depending upon your province of residence as noted in this link for the laws of Ontario when you die intestate (without a will). But for a surviving spouse to not have a will drafted is just beyond my comprehension.

Since the advice of accountants, lawyers, finance columnists and bloggers is obviously being ignored, I thought instead of lecturing that you should have a will, I would reflect on the folly of not having a will by looking at famous people who have died intestate and the messes they left behind.

Please note: I have no ability to confirm that these people did not have wills and I am relying on articles and other internet sources for this list, so I cannot guarantee its accuracy. Some of the stories in respect of these people’s deaths and estates are fascinating. You may wish to read in detail the links and source documents I provide below.

Famous People Who Supposedly Died Without a Will


The Musicians

There seems to be a correlation between being artistic and financially irresponsible as noted by the extremely famous musicians I note below. This does not surprise me, as I have suggested in prior posts on naming executors, that at the risk of generalizing you will want someone more anal than artistic to carry out this task.

Prince


In this article by People Magazine it was reported “A Minnesota judge has made it official – despite Prince’s estate being worth an approximated $250 million, the singer did not have a will in place to declare the distribution of his assets. A hearing was held Wednesday morning, according to court documents obtained by PEOPLE, and the judge has approved Bremer Bank, the institution Prince trusted with his finances over the years, to move forward with handling his estate – both personal and financial business”.

Prince's former manager, Owen Husney, in this USA today article said “he was too smart to have overlooked something that crucial and he had teams of lawyers, business managers and accountants over the years who would have advised him it was crucial”. Assuming that no will ever surfaces, it is mind numbing that with so many advisors, Prince did not have a will in place and it could have fallen through the cracks (unless he just refused to have one drafted).

"It's astonishing, absolutely astonishing that he did not have a will," says Jerry Reisman, an estate lawyer on Long Island who's been following the case. He predicted trouble ahead. You're going to have 'siblings' coming out of the woodwork alleging they are siblings. Everyone is going to be fighting over this estate.”

Will Lesson #1: Run Out and Write Your Will 

Hendrix, Marley and a Cast of Thousands


In this LegalZoom,com article the writer notes that both Jimi Hendrix and Bob Marley died without wills and that their estates were subject to legal battles for years. Musicians such as Prince, Jimi Hendrix and Bob Marley have complicated estates due to the publishing rights they hold on their music, the typically massive demand for their music once they pass away and the value in unreleased material that is often released posthumously.

Other musicians that have purportedly died without wills include Kurt Cobain, Barry White, Tupac Shakur, James Brown, Sonny Bono and Amy Winehouse.

Athletes

Many athletes are known for blowing fortunes, but you would again think that their advisors would have ensured they had wills in place, but that apparently is not the case, or the athletes ignore their advice.

Steve McNair


Mr. McNair who played in Super Bowl XXXIV as the starting quarterback for the Tennessee Titans and was the NFL’s Co-MVP in 2003, did not have a will. He also had, in addition to his wife and children, a girlfriend - who murdered him in a murder-suicide. The sad details of this case can be read in this Probate Lawyer blog. 

If this story is not tragic enough, this Family Archival Solutions Inc. article discusses how McNair’s mother subsequently lost her home because Mr. McNair had not put his mother’s name on the house or made provision in a will for her to inherit the property as he had intended for her.

Will Lesson #2: Unintended Consequences Transpire when a Will is Not Drafted

Lamar Odom


This is a story about almost dying without a will. In 2015, former NBA star and ex-husband of Khloé Kardashian was hospitalized after being discovered unconscious
at the Love Ranch, a brothel in Crystal, Nevada. Mr. Odom’s heart supposedly stopped several times and was touch and go to live. Luckily for him, he survived the ordeal. As Mr. Odom supposedly did not have a will, it was reported that if he died, his estate would have all gone 1/3 to Khloé and 2/3 to his children. It is my understanding that Odom and Khloe had a good relationship despite their divorce and she was there at his side while he recovered and she did not want his money. So this is not a story about an ex-spouse trying to get something that was not hers, but clearly reflects that an ex-spouse may be entitled to your estate or part of it, if you are not careful.

Will Lesson #3: When You Do Not Have a Will, Your Ex-Spouse May Inherit Part of Your Estate

Other Famous People Who Died Without a Will (or Updating Their Will)


Martin Luther King


Mr. King who was assassinated on April 4, 1968 was one of the best known civil rights activists in the World. His “I Have A Dream” speech made in 1963 during the march on Washington is known as one of the finest speeches ever given. Unfortunately, when assassinated Mr. King was only 37 years old and did not have a will per this Forbes article.

This LA Times article discusses how the children are threatening his legacy as the estate battles on 47 years after his death in respect of his tomb, sermons and memorabilia.

Will Lesson #4: When You Die Intestate You Create Possible Conflict amongst Your Family

Pablo Picasso


As detailed in this 2016 article by Vanity Fair on the estate of Pablo Picasso,  Picasso did not have a will and left over “45,000 works, all complicated by countless authentications, rights and licencing deals”. The legal fees on this estate have were supposedly over $30 million.


Will Lesson #5: When You Die Intestate, Your Estate Can Be Withered Away in Legal Fees

Heath Ledger


As I noted in the introduction, I not only stress the importance of a will, but that it must be updated to reflect significant life events. Heath Ledger died of an accidental drug overdose in 2008 during the editing of the Dark Knight Batman movie in which he played the Joker and posthumously won the Academy Award for best supporting actor.

Mr. Ledger had a will drafted a few years earlier in which his parents and sisters were beneficiaries. He however, had neglected to update his will upon his marriage to actress Michelle Williams and on the birth of their daughter Matilda. However, unlike many messy and nasty estate fights highlighted in this blog post, Heath’s family as detailed in this People article altruistically handed over the entire estate to Matilda. It is nice to see some kindness amongst the greed and fighting of the other estates.

Will Lesson #6: Update Your Will for Life Events, or You May Negate the Benefits of Having a Will

Howard Hughes


As per Wikipedia, Howard Hughes “was an American business magnate, investor, record-setting pilot, film director, and philanthropist, known during his lifetime as one of the most financially successful individuals in the world. He first made a name for himself as a film producer, and then became an influential figure in the aviation industry. Later in life, he became known for his eccentric behavior and reclusive lifestyle—oddities that were caused in part by a worsening obsessive–compulsive disorder (OCD), chronic pain from several plane crashes, and increasing deafness”.

As discussed in this New York Times article it took over 20 years to sort out the estate of the reclusive Howard Hughes. Mr. Hughes did not leave a will and his estate was subject to various forgeries.

Will Lesson #7: If You Have Not Decided to Draft or Update Your Will After Reading These Stories, I Give Up!

While most of these famous people had substantial estates, the lesson is still the same for the average person. Have a will drafted (and powers of attorney) so that you ensure your estate goes to whom you wish and it is not frittered away on legal battles that not only cost significant sums, but destroy the lives and relationships of your loved ones.

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. Please note the blog post is time sensitive and subject to changes in legislation or law.

Monday, February 5, 2018

Power of Attorney for Personal Care – Mental Capacity and Medical Assistance When Dying

While I still act as a corporate accountant, I am spending more and more of my time providing wealth advisory services to my current and new clients, which allows me to utilize my tax, estate planning and general accounting background. When I combine these technical aspects together with the experience I have gained in respect of understanding the nature of people in relation to their families and their wealth, I am able to provide a comprehensive plan for their current, retirement and estate planning.

In providing these services, I always ensure my clients have up to date wills and powers of attorney (“POA”) for their finances and personal care (health). In many cases, the POAs are either very old or not even in existence. When discussing POAs for personal care, I advise my client that there have been many changes in the law in respect to heroic measures and medical assistance in dying and depending upon their personal and religious views, they need to review these issues with a very qualified estate lawyer.

I thought today, I would do a bit of a Q&A on some of these issues and specifically the mental capacity required to make these decisions. I thus turned to my resident estate and wills expert, Katy Basi, for some direction.

Please note Katy's answers are specific to Ontario, if you live in another province, you will need to confirm that province’s legislative provisions.

If you are a reader of this blog, Katy needs no introduction. If you are a new reader of the Blunt Bean Counter, check out some of Katy’s guest blogs from estate planning for extended families to New Will Provisions for the 21st Century – Your Digital Life to Cottage Trusts among many other posts.

I thank Katy for her assistance with this blog post.

Power of Attorney for Personal Care and Medical Assistance When Dying


Below is a summary of the responses to my questions from Katy. I was personally very surprised at some of her answers to my questions, but given this complex, controversial and still evolving area of law, I guess in retrospect, I should not be surprised.

Questions and Answers:


Mark: Katy, a concern for all of us as we age is mental capacity. How does mental capacity affect POA‘s for health?

Katy: “First we need to appreciate that a POA for personal care is only relevant and effective when the person in question does not have the mental capacity to make their own health care decisions. I am asked fairly commonly by my clients to include provisions regarding medical assistance in dying in their powers of attorney for personal care. This request usually comes on the heels of a discussion about whether or not to include a “no heroic measures” clause in their document. I have to tell my clients that the legislation does not allow a mentally incapacitated person to have medical assistance in dying. This is the case even if the person requested this assistance, when they were capacitated, in writing via their power of attorney for personal care.”

Mark: So, are you saying that even where you have requested medical assistance in dying in your POA for personal care, if you do not have mental capacity when the medical assistance is desired, that request is essentially voided?

Katy: “There is a clear distinction in the medical assistance in dying legislation between a person who has the capacity to make their own personal care and health care decisions, and a person who does not have this capacity. The former can request medical assistance in dying if all of the other conditions of the legislation are met, and the latter cannot. As a person’s power of attorney for personal care is only effective upon the person losing their capacity to make personal care and health care decisions, by definition the document is only relevant upon incapacity. At that time medical assistance in dying is off the table as an option".

Katy clarifying note to Mark: "This exclusion only relates to medical assistance in dying – your most recent verbal or written instructions, made while capacitated, otherwise govern your personal care and health care".

Mark: This provision seems unfair?

Katy: “So under one view the legislation is discriminatory – people with capacity can obtain this assistance, and those without capacity cannot. So, I guess that if I have a grievous and irremediable medical condition, which is another requirement under the legislation, I hope that I at least have capacity, as otherwise I cannot receive medical assistance in dying. If I am mentally incapacitated, with a grievous and irremediable medical condition, my power of attorney for personal care can request that all heroic measures stop at this point, and that lots of morphine and other pain relief be administered. But that’s it – medical assistance in dying cannot be given, and I will have to die on my own, when my body finally gives up”.

Mark: So, is there anything that can be done in case of mental incapacity?

Katy: “For some clients we include a clause in their power of attorney for personal care that indicates their desire for medical assistance in dying if they are in a situation where the other conditions of the legislation are met, in the event that the current requirement to have capacity is amended by future legislative changes. A bit of a Hail Mary, but why not?”

I thank Katy for her insights on this complex topic.

Katy Basi is a barrister and solicitor with her own practice, focusing on wills, trusts, estates, and income tax law (including incorporation's and corporate restructurings). Katy practiced income tax law for many years with a large Toronto law firm, and therefore considers the income tax and probate tax implications of her clients' decisions. Please feel free to contact her directly at (905) 237-9299, or by email at katy@basilaw.com. More articles by Katy can be found at her website, basilaw.com.

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

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. Please note the blog post is time sensitive and subject to changes in legislation or law.

Monday, January 29, 2018

If You Are Not Learning – You Are Forgetting

As noted in October, I am planning to write occasional blog posts under the title “Let Me Tell You” that delve into topics that may a bit more philosophical or life lessons as opposed to the usual tax and financial fare. Today I discuss the importance of always striving to increase your knowledge by continuously learning.

My father-in-law, who is a very knowledgeable and smart man, has a saying “If you are not learning, you are forgetting”. He has repeated this mantra to his family and grandchildren for as long as I have known him. What a brilliant adage.

Knowledge is vital to our growth and understanding as people. It is also scary, since I seem to need post-it notes to remember anything these days, so I am hoping my knowledge inflow is exceeding my forgotten knowledge outflow 😊 But seriously, this is a great adage and I want to examine it in a little more detail today.

How To Keep Learning


My father-in-law and mother-in-law have sat in on classes at The University of Toronto for years, read vociferously and are patrons of the arts. While I am not exactly a “knowledge expert” it would seem to me the best ways to keep learning are as follows:

  • Attending courses & seminars at a college, university, library, or anywhere someone is speaking on a topic that interests you.
  • Reading books, newspapers, blogs (especially this one), etc.
  • Watching Videos and Listening to Podcasts – For many people, videos and podcasts are now their go to sources for knowledge.
  •  Listening and Observing – We meet many people who are far more intelligent and/or knowledgeable than us (or at least than me). Personally, I have found this source of knowledge to be my favourite, since in many cases, knowledgeable people are able to explain their thoughts in “plain English”, which is not always the case when reading a book or attending a lecture.

Knowledge Increases Our Awareness Of Our Ignorance


In 1962, while speaking at Rice University on the space program, President John F. Kennedy said, “The greater our knowledge increases, the greater our ignorance unfolds.” While the context of this comment was in relation to space travel it is a brilliant observation for life in general. The more we learn, the more we realize what we don’t know. Those who are self-aware enough to understand this never become arrogant or at least only slightly and are always open to learning and collaborating with others.

Why Keep Learning


There are multiple benefits from continuing to learn and increase your knowledge. I would suggest these three are amongst the most important:

1. Increases your chances for success in your chosen job or profession

2. Allows you to better interact with others

3. Provides for the transfer of knowledge to future generations

Job Or Profession


This is self-evident, but the greater knowledge you have about your chosen job or profession, the greater your chance for success and promotion. In addition, your job satisfaction increases, and people want to collaborate with you. General knowledge is also very important for your career as it allows you to connect and be respected by your co-workers on both a personal and professional level.

Interacting With Others


Greater knowledge also helps to make it easier for you to converse with others and have confidence in your comments and opinions. While knowledge and self-awareness do not necessarily go hand in hand, if you are self-aware or at least have spent some time learning about personal behaviour and that of others, you will understand your shortcomings and behavioural tendencies. You will also be able to communicate better with others if you have knowledge of their behaviours.

Generational Transfer of Knowledge


My father-in-law not only spouts the “if you are not learning, you are forgetting” mantra, but acts on it. Over the years he has shared his abundant knowledge either in a group or in a one on one session with his grandchildren. It always amazed me to hear how much the kids got out of the conversation and what they had learned.

While I may not have told you anything new in todays blog post, my objective was to remind you of how important it is to keeping learning, because, if not (chorus of grandkids response)—you are forgetting!

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. Please note the blog post is time sensitive and subject to changes in legislation or law.

Monday, January 15, 2018

Estate Administration - The Importance of Advertising for Creditors

After writing the last two weeks about the Tax On Split Income Rules and the Ontario Minimum Wage Increase, I thought I would try a less controversial topic this week; that being the importance of advertising for creditors.

Over the years, I have written numerous times on the various issues associated with being named an executor, including this laundry list of requirements. Included on this list is the necessity to advertise for any creditors of the estate.

My guest blogger today is Patrick Hartford, who is the founder and managing director of NoticeConnect, which is a platform for publishing and accessing legal notices online to simplify the process of advertising for creditors. Patrick will discuss the importance of advertising for creditors and the risk to an executor if they do not do so.

Please note that while I agree it is important to advertise for creditors, the policy of this blog is to not endorse any specific company, so you will need to do your own research as to whether you engage NoticeConnect or not.

With the legal disclaimer out of the way, I thank Patrick for his blog post on this important, but often neglected estate issue.

Estate Administration - The Importance of Advertising for Creditors 

By Patrick Hartford


The majority of estate trustees in Ontario - both executors and administrators - are not advertising for creditors. This is a problem because trustees who do not publish a notice to creditors risk personal liability.

When someone dies, any outstanding debts of the deceased must be paid before the assets of the estate can be distributed to the beneficiaries. Whatever is leftover after the creditors have been paid can then be inherited by the deceased’s spouse, children, pets, etc.

It is the job of the estate trustee to identify and pay these outstanding debts.

Some debts are easy to identify, particularly if they involve a secured creditor like a mortgage lender. But there are often other debts that the trustee has no way of identifying. They could be old utilities or credit card bills, municipal taxes, or any other type of debt. The likelihood that outstanding debts exist increases if the deceased lived and worked in multiple cities or did business online.

It’s unrealistic to expect a trustee to play detective and track down every possible debt the deceased may have had. Instead, the law says that a trustee should ‘advertise for creditors’. In Ontario, this is governed by section 53 of the Trustee Act. Other provinces have similar legislation.

The trustee publishes a public advertisement, called a ‘notice to creditors’, stating that a deceased’s estate is being administered and any outstanding creditors have a set amount of time (typically 30 days) to come forward with their claims. When this time period expires, the estate will be distributed with regard only to claims that have been filed.

The law says that an estate trustee who advertises for creditors will be protected from liability if a previously unknown creditor comes out of the woodwork after the assets of the estate have been distributed. Conversely, if an estate trustee does not advertise for creditors, an outstanding creditor can sue the trustee personally for the full amount of the debt. There is no statutory limit or cap to this liability.

So why aren’t trustees publishing notices to creditors?

Sometimes because they are confident that the deceased had no outstanding debts that they are unaware of. This can be risky. Estates lawyers will tell you stories about clients who didn’t advertise for creditors, only to be caught by surprise later.

Another reason is the fact that advertising for creditors used to be prohibitively expensive. Notices to creditors used to be published in print newspapers, and publishing ads in multiple cities would easily cost thousands of dollars. While the estate covers this cost, few trustees wanted to spend this much money for print ads that few people would ever read. Fortunately, with the advent of services for publishing notices to creditors online and its acceptance in Superior Court (see this page for various articles and discussions on this case), the cost of advertising for creditors has been dramatically reduced and has restored its efficacy.

If you’re an estate trustee, it’s important to protect yourself from liability. Advertising for creditors will prevent you from having to pay the deceased’s old debts out of your own pocket.

Patrick Hartford, is the founder and managing director of www.NoticeConnect.com a platform for publishing and accessing legal notices online. Over 200 law firms, banks, and legal service organizations in Ontario have trusted NoticeConnect for publishing estate notices to creditors their clients.

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 or estate issue.

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. Please note the blog post is time sensitive and subject to changes in legislation or law.

Monday, January 8, 2018

Ontario’s Minimum Wage Increases

Today, I am writing about the changes to the Ontario minimum wage. For full disclosure, I wrote this blog post during the holiday break, with the intent to try and have a fair-minded discussion about this issue. However, as you likely know, all heck broke loose last week in respect of this issue, when certain retailers took steps to reduce the impact of the minimum wage increases and Ontario Premier Kathleen Wynne responded strongly informing them if they wish to pick a fight, pick it with her and not their employees.

I have updated the post to account for some of these recent events and comments, but the intent remains the same, an attempt to have an even-handed review of the issues surrounding this significant labour change. In my opinion, that review ends in two conclusions:

1. The various studies related to minimum wage increases are not conclusive.
2. Small business owners, in general, will take steps to maintain their bottom line and in many cases, those steps will likely be diametrically opposed to the government policy intent. 

So, what is all this uproar about? As of January 1st, the Ontario Liberal government increased the minimum hourly wage to $14, with a further increase to $15 on January 1, 2019. That is a 32% increase since the beginning of 2017. This follows the lead of Alberta which plans to increase its minimum wage to $15 by October 2018.

This issue is very complex. I have conflicting views: through the prism of an individual and fair-minded person, I feel higher minimum wages, especially in high cost provinces like Ontario and Alberta are necessary to keep workers in these provinces, and to allow those individuals to maintain a minimum standard of living. As an advisor to small businesses, and a former employer of 35 or so people, I also understand one of the main objectives of a business is to make money and increase the bottom line. The margins on products or services are very often correlated to the cost of wages and salaries and thus, any increase to these expenses, can have significant profit consequences.

What the Studies Show


In December of 2017, the Bank of Canada released this report, titled "The Impacts of Minimum Wage Increases on the Canadian Economy".

 Some of the key findings of the paper are as follows:
  • 8% of employees in Canada work at the minimum wage and estimates in the literature suggest that changes in the statutory rate have historically affected the wages of up to 15 per cent of employees with lowest wages. 
  • There could be a very modest inflationary effect ranging from 0.0-.02 percentage points over the next couple years.
  • The increases in the minimum wage lead to higher real wages, which push up firms’ marginal costs, and thus inflation increases accordingly as a fraction of firms adjust their prices in the short term.
  • Weaker labour demand leads to reduced employment and lower hours worked, although the net impact on labour income is positive.
  • Employment losses may amount to about 60,000 workers (it is my understanding this does not mean 60,000 in job losses, but means 60,000 fewer jobs may be created and in the detailed part of the report, it states the number could be as low as 30,000 or as high as 136,000 depending upon the measure used).
  • Consumption would be reduced slightly as the higher inflation would elicit a slight interest rate increase, which would more than offset the higher labour income.
  • Potential output should remain unchanged in the short run. Longer-term effects are possible through automation, productivity changes or changes in labour force participation. The sign of these longer-term effects is, however, ambiguous.
In this Talent Economy article titled “How Does the Minimum Wage Impact the Economy?" a U.S. publication, the author references several academic papers. The first study by The Institute for Research on Labor and Employment, finds “that a $15 minimum wage in California would increase earnings for 38 percent of the state, and businesses would see a reduction in turnover and increases in productivity. Raising prices by 0.6 percent through 2023 would offset increased payroll costs” which reflects a positive outcome of a higher minimum wage.

Yet, in the same article, the author quotes a report published in August 2016 from The Heritage Foundation that finds that a nationwide minimum wage of $15 per hour would lead to 9 million jobs lost, and states with lower costs of living would see the most negative impact. “Efforts to create jobs and reduce poverty should not center on forcing employers to pay higher starting wages,” the story concludes.

So, the studies are not conclusive one way or the other.

The Government's Position


In this Toronto Star opinion piece written yesterday by Kathleen Wynne, the Premier of Ontario, she opines the minimum wage increase is about fairness and opportunity for the citizens of the province. She does not feel the economics gains in Ontario have been shared equally by employers with their employees.

Premier Wynne states the following in the editorial "Big businesses and major corporations continue to celebrate record profits, while many people in this province juggle multiple jobs and still can’t afford the basics. CEOs enjoy massive salary increases while their workers can’t pay their bills.
That’s not right, and it's not who we are as a society".

Business Owners Position


Business owners are far from a homogeneous group and have varied situations and opinions on the topic. However, in general their position seems to be that minimum wages are an admirable social position, but it is not a practical policy, especially for certain industries such as restaurants and retail outlets (For example, it has been reported by the Great White North Franchisee Association, that the cost of implementing minimum wage hikes to each Tim Horton’s franchisee is $6,968 per employee and for the typical store, that results in increased costs of $243,889). Many small business owners feel the increase in minimum wage should be much smaller, phased in over more years and done in conjunction with tax policy that assists lower earning citizens.

How Retailers and Business Owners Can Manage Rising Minimum Wages


As discussed by BDO Canada LLP in this report titled “Nine Ways Retailers Can Manage The Rising Minimum Wage” there are both tactical and strategic options retailers can consider to reduce the impact on their businesses, where the impact of the minimum wage increase is significant.

Tactical Options


The BDO reports provides tactical options including: reducing employee headcount, optimizing shifts that employees work, reducing store hours to match customer shopping behaviour, reducing costs in other areas of the business and finally raising prices, which in effect, passes the wage increase onto the consumer.

In Ontario last week, there were widely reported cases where well known franchise owners scaled back work breaks, benefits and banned employees from accepting tips in an attempt to try and offset the minimum wage increase. These reports led to a huge outroar and publicity. These cases should cause business owners pause for thought; in that, tactical changes must also consider how your customers will react if the changes become public.

Strategic Options


The BDO report notes strategic options range from expanding technology beyond the self-checkout, optimizing government incentives, outsourcing non-core functions, and by giving the consumer more for their money.

In this article by Brenda Bouw in The Globe and Mail titled “Ontario small-business owners raising prices to cover minimum wage hikes”, the author considers the connection between tactical (price increase) and strategic (better client service) when she quotes retail consultant Doug Stephens of the Retail Prophet. Mr. Stephens says if prices are increased; “businesses could also view it as an opportunity to boost their customer service, by giving them more for extra money”. He goes on to say businesses should view this as “a watershed moment to design better and more enjoyable customer experiences that are actually worth more to their consumers”.

Issues Are Not Always Black and White


I have and have had, many small business clients who bend over backwards to never fire employees and to assist them as much as possible and some have even made 100% retention of their employees a condition of them selling their company. Often business owners are portrayed as heartless and just chasing the almighty dollar, yet, I have found many small business owners are the exact opposite and they care deeply about their employees. But, people are in business to make money, so while they may be conflicted in their actions and concerned for their employees, in most cases, their bottom line will influence their decisions.

Increasing the minimum wage has significant consequences to both a provinces employees and employers. Hopefully the economy is strong enough the next few years to absorb these increases, but in the end, only time will tell how these wage increases will impact Ontario and Alberta and whether the governments policy and intention will be served.

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. Please note the blog post is time sensitive and subject to changes in legislation or law.

Monday, January 1, 2018

The Revised Tax On Split Income Rules

On December 13, 2017 the Liberals released a new and improved version of their income sprinkling/tax on split income (“TOSI”) proposals. The government’s backgrounder stated, “the revised draft legislative proposals include changes to better target and simplify their application”. I can agree with the targeted assertion; as some overly expansive drafting was corrected, but simplification, not in my world.

The new rules while more objective than the previous version, are still very subjective. In my opinion these revisions will just create more angst among the small business owners caught by these proposals and will result in court cases for years. Add in that these rules were released the week before the Christmas holidays and not issued in conjunction with the passive income rules that are supposedly to come in the next budget (planning for dividends may be dependent or intertwined with the final passive rules) and I don’t think the Finance Minister will be winning any politician of the year awards from any private business associations.

In my opinion, all these TOSI rules would not be necessary if the government would have simply disallowed income sprinkling for anyone under age 25 that that does not work full-time in a business and for all Canadians (whether business owners or not) started taxing spouses as a single-family unit. But then, nobody asked me.

Today, I will summarize whom I see as the winners and losers of these new proposals and those caught in the grey area. Finally, I will provide some details on the revisions to the TOSI rules.

As this legislation is new and will likely still require some clarification, I want to make it clear that this post is solely for general information purposes. You should consult with your professional advisor, so they can review these proposals based on your specific fact situation.

Scorecard


Winners


1. Business owners over 65

2. Individuals who inherited shares of a small business

3. Businesses where shares, votes and value are allocated evenly among family members and are not service businesses

4. Canadians who work at least 20 hours a week on a regular and continuous basis in the family business

5. Retired owners that were caught under the initial rules because they were considered related even though an arm’s length person now ran the corporation

Losers


1. Beneficiaries of shares held by Family Trusts

2. Professionals

3. Small businesses that provide services and do not sell products

4. Estate freezes recently undertaken and/or where there is large redemption value remaining in the preference shares issued upon the freeze

Unclear


1. Families were shares have already been distributed from a trust or were purchased upon incorporation and the parents have voting control

2. Estate freezes where most shares have been redeemed

The New Rules


The new rules are very detailed and I do not intend to regurgitate all of them here. I will summarize the rules only at a high level. For details and FAQ’s, please see this CRA link  (scroll half-way down the page to related products and you will see guidance and other more technical material).

The new rules have four key exclusions: 1. An excluded share test 2. Excluded business test 3. Reasonable rate of return test and 4. Retirement and inheritance exclusion.

I will summarize them below and discuss how they may affect you.

Excluded Shares- The share ownership test


The TOSI rules will not apply where you have attained the age of 25 and all of the following conditions are met:

  • You own at least 10% of the outstanding shares of a corporation in terms of votes and value and the corporation meets all the following conditions:

(a) It earns less than 90% of its income from the provision of services

(b) It is not a professional corporation

(c) All or substantially all its income is not derived from a related business

At first blush, this test seems like a god-send for private corporations where family members are shareholders and have attained the age of 25. However, in many cases the parents have the majority of the voting rights and may have significant value in preference shares as result of a prior reorganization or estate freeze. Where the issue is only votes, you may be able to reorganize your corporate share structure to meet this condition as the government has stated that even though the rules are applicable January 1, 2018, you have until December 31, 2018 to get your corporate house “in order”.

This rule will essentially preclude the use of family trusts for income splitting purposes other than the capital gains exemption. It is important to note, that the TOSI rules will not apply to capital gains on the sale of qualified farm or fishing property and to the sale of qualified small business corporations (“QSBC”). Most private corporation owners reading this blog post have shares that either qualify as QSBC shares, or can be made to qualify for the capital gains exemption through a purifying transaction (see this post I wrote on this topic). The exclusion for the sale of these shares is not age dependent (however, where an individual is under 18 and the sale is to a related party, the exemption will be problematic). Not that I want to look a gift horse in the mouth, but we have all these complex rules to prevent income sprinkling and you are still allowed to allocate the 2018 exemption amount of $848,252 to a minor?

Professional corporations are excluded, as they have been one of the main targets of the Liberals throughout this whole debacle. However, pay careful attention to the word “services”. At first glance you think services is just another arrow aimed at professionals, but services as written (it is not defined anywhere) would seem to include the services of a barber, gardener, massage therapist, computer consultant etc. Many small businesses may not meet this exclusion if they don’t earn at least 11% of their revenue from the sale of products. In my opinion, this provision may “blow-back at the government once it is better understood; assuming the literal interpretation is the proper reading. It should be noted that if you and your spouse/children 18 years old and over meet the labour criteria for the excluded business test based discussed below, then having a service business will not in itself preclude you from income sprinkling.

The related business in (c) above is just a provision to ensure a service business does not impose another business between it and the family member to get around the rules, although, some tax observers are concerned this provision could accidentally cause issues where shares are held through a holding company. This is one area that the Liberals will need to clarify.

Excluded Business –The labour test


The TOSI rules will not apply where you are 18 or over and have been employed by an excluded business, which is “a business in which the individual is actively engaged on a regular, continuous and substantial basis in the taxation year of the individual in which an amount is received or in any five previous taxation years". The CRA states that “To access the exclusion in respect of five previous years of labour contributions, it is not necessary that the five previous years be consecutive or after 2017. Any combination of five previous years would satisfy the test”. The test will also account for businesses’ that are seasonal, such that the test will apply to the seasonal period

Finally, the CRA says “To provide greater certainty (but without limiting the generality of the test), an individual who works an average of 20 hours per week during the part of the year that a business operates will be deemed to be actively engaged on a regular, continuous and substantial basis for the year. If an individual does not meet the 20-hour threshold, then it will be a question of fact as to whether the individual was actively engaged in the business on a regular, continuous and substantial basis. However, even if an individual aged 25 or older does not meet the regular, continuous and substantial threshold, the TOSI will apply to amounts derived from a related business only to the extent that they are unreasonable (i.e., only the unreasonable excess will be subject to the TOSI)”.

This labour test is a fairly clear bright-line test; you must work over 20 hours per week for at least five previous years or you get into a subjective reasonability test that will likely result in most amounts being in excess of reasonability.

The CRA provided some guidance in the materials stating that records such as timesheets, schedules and logbooks will be sufficient to confirm the hours a person worked.

Reasonable Return on Capital Test


There are two tests within this exclusion:

1. Safe Harbour Test

2. Reasonable return test

Safe Harbour Test


Where an individual 18-24 years of age has contributed capital, and does not qualify for the excluded share or excluded business exclusions, they may still qualify for a “safe harbor exemption” (No that does not mean you take your money and hide it in a safe harbor in the Turks and Caicos).

It means that you will be provided an exclusion from TOSI income to the extent of your capital contribution x a prescribed rate (currently only 1%). i.e. If you contribute $100,000, you multiply the $100,000 x 1%=$1,000 and you can exclude $1,000. To be a blunt bean counter, this exclusion is pretty much useless, since a) The reality is that in probably 95% of the cases, most shareholders only contribute $100 or less to purchase their shares and b) as noted above, the low prescribed rate means even if you did contribute a fair bit of capital, such as $100k, your exclusion is still a meager $1,000.

Reasonable Return Test


For those 25 years of age and older, this very subjective test says that a reasonableness test is to be applied to such factors as:

  • Work performed 
  • Risks assumed by the individual in the business 
  • Any other factors that may be relevant

Your guess is as good as mine as to how this would be applied. Consider Mr. A who is a shareholder and works full time in his business. His daughter also a shareholder, is a computer science student who comes up with a software application that leads to over one million dollars in new revenue for the business. What is her "reasonable" entitlement to dividends?

Retirement and Inheritance


The initial drafting of the proposals appeared to have inadvertently caused the TOSI rules to apply to retired private corporation owners and Canadians who had inherited private corporation shares. The new proposals have addressed these concerns.

The new TOSI rules provide the following exemptions:

1. Where an active owner-manager (someone who met the labour contribution rules) reaches age 65, the TOSI rules will not apply to their spouse (no matter their age). Note: these rules do not mean you can split your dividends like you do your pension income. They only allow you to pay dividends to your spouse who is not excluded by any of the provisions and avoid the TOSI rules where you are 65 or over.

2. If you are over 18 and inherit shares in a private corporation from someone who met the TOSI one of the TOSI exclusions, those shares will continue to be excluded.

Salary


The new rules do not apply to salary. However, there has always been a reasonableness test for salaries paid to family members vis a vie what would you pay an arm’s length persons and that rule will still apply.

Prescribed loans


The new rules do not appear to prevent the use of prescribed loans where you purchase public securities. See this blog and speak to your advisor about whether this strategy would be advisable for your situation.

At this time, I am not entirely comfortable answering questions on these proposals, until we have further clarity. So, if you ask a question or provide a comment on this post, I may not answer the question or will couch the answer. So please don’t expect definitive answers if you ask a question.

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. Please note the blog post is time sensitive and subject to changes in legislation or law.

Monday, December 18, 2017

The "Hole" In Life Insurance - Part Two


This is my last post for 2017 and I wish you and your family a Merry Christmas and/or Happy Holidays and a Happy New Year. I will comment on the recent Liberal revisions to the "income sprinkling" proposals in my first blog post in January. The timing of these proposals (just before the Christmas holidays), the subjectivity still remaining in these rules and the fact the passive income rules are still apparently a couple months away has left the small business community seething and still pretty much paralyzed (in many cases, dividend planning is intertwined with the future passive income rules). 

Last week in Part one of this two part series on Life Insurance, Doug Leyland and Jordan Matters two Chartered Professional Accountants who deal full-time in insurance solutions for Leyland Insurance Solutions Inc, discussed the basics of Term and Permanent insurance and in which situations you would typically utilize these two types of insurance.

Today, Doug and Jordan move from your insurance needs to possible insurance strategies for Permanent Insurance. I thank Doug and Jordan for their insightful posts.

As noted last week, please keep in mind that these two posts are Doug and Jordan's opinion and there may be insurance advisors and accountants who may have differing opinions on whole life insurance.

The “Hole” in Whole Life Insurance

By Doug Leyland and Jordan Matters

Last week we left off just after we explored some of  the various needs for permanent insurance. Today, we conclude with planning for the appropriate strategy and product, once your needs have been determined.

When illustrated and presented, Par permanent insurance strategies definitely look attractive. However, in our opinion, a deeper dive into the workings of a Par policy exposes some often-aggressive assumptions that will most likely lead to actual outcomes being materially lower than illustrated. Where the strategy’s goal is to solve a specific need, or maximize an estate, a fully guaranteed UL contract provides a better option in our opinion.

We can spend a lot of time reviewing the inner workings of Par policies, but that’s for another day (if Mark invites us back). In short, the performance of a Par policy is highly dependent on the dividend scale applied by the insurer. Dividend scales for insurers across the board have been on a steady decline because of the low interest rate environment.

If we were to present historical charts for the various insurers, they would reflect a declining trend of dividend scale being paid to their own Par policies. In the early nineties, dividend scales were over 10% and today they are around 6%, depending on the insurer. We believe that this downward trend will continue and this belief is backed-up by literature published by various insurers.

The uncertainty of future dividends creates a problem when trying to position a Par contract into a life insurance strategy designed to solve a specific need.

When considering a Par policy, it is essential to illustrate the projected values at the current dividend scale, current -1%, and current -2% in order to understand the variability associated with the policy.

Typically, you already have enough risk in your traditional investments and business interests – why add risk to your insurance contract?

We strongly recommend the use of minimum funded UL contracts in strategies that require the guaranteed outcome that UL insurance provides, including funding a future tax liability, estate maximization, estate equalization, or share redemption.

When structured properly, UL insurance contracts pass all investment risk to the insurance carrier and can be illustrated on a guaranteed worst-case scenario basis.

From a Cost Perspective


In almost every scenario we have considered, premiums for Par are more expensive than guaranteed UL when comparing the same guaranteed death benefit and funding time horizon. Therefore, you can fund a specific estate need at the lowest cost through UL. The savings in premiums can be invested in your existing portfolio at your direction.

Whether you are a successful business owner or individual, you have worked extremely hard to accumulate and preserve your wealth and it is likely that you would like this wealth to benefit future generations. It’s no secret that the two guarantees in life are death and taxes, because the government will always want their pound of flesh. Upon passing, wealth is allocated among three beneficiaries: 1) Your heirs, 2) Charity, 3) Canada Revenue Agency. A properly structured permanent life insurance strategy can minimize the amount of your wealth allocated to the CRA in favour of your heirs and those organizations you care about.

We always advise clients to consider the permanent life insurance policy in concert with their overall asset mix as an estate bound investment, whether it is UL or Par. As with any investment, it is essential to fully understand the associated risks. Mark comment: I have been told by some very astute investors, that they consider "investment" money they put into a life insurance policy as a fixed income component of their portfolio. i.e. They don't worry about the insurance cost of the policy as long as the return after policy costs/funding is superior to that in which they can receive on other fixed income products.

Doug Leyland CPA, CA, MBA & Jordan Matters CPA, CA work together at Leyland Insurance Solutions Inc. in Burlington, Ontario. They assist their clients with insurance based tax and estate planning strategies. If you would like to get in touch with Doug or Jordan, their emails are dleyland@leylandinsurance.com and jmatters@leylandinsurance.com or you can call them at 905-331-2885.

The above blog post is for general information purposes only and does not constitute legal, insurance or estate planning or other professional advice of any kind. Readers are advised to seek specific legal, insurance or estate planning advice regarding any specific 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. Please note the blog post is time sensitive and subject to changes in legislation or law.