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.

Friday, April 29, 2011

Confessions of a Tax Accountant- Week 9- The Cranky Accountant Edition

My confession today is that I am sick and tired of income tax season and specifically, I have had enough of dealing with late received T5013 and T3 forms. I have a sore back from sitting too many hours at my desk, and my finger tips are going numb from pounding the computer too much. How is that for an accountant’s rant? I bet you never thought of accounting as such a physically demanding job. J

Anyways, enough of my whining. I hope the prior eight confession blogs have provided you with some interesting income tax tidbits.

How could my topic for Friday April 29th be anything other than clients who submit their income tax information late? I have no complaints regarding my own clients - the last return I received for a client who does not have the extended June 15th deadline (for those with self-employment income) was April 21st.

However, the same cannot be said for all my partners, and I have had last second “Charlies” in the past. If you are one of those people who brings in your income tax materials to your accountant and thinks it is amusing that you are always the last person of the year, know this: you will not be on your accountant’s Christmas card list, your fee is most likely higher than if you brought in your return earlier, and the quality of work cannot be as good as for those who brought in their returns earlier. Think of a Doctor working a 24 hour shift... When do you want him to work on you?

So Charlie, for you and for the procrastinators out there, here is my last tip of this tax season: send your return by registered mail, and keep the registered receipt. Or, if mailing, get a photocopy of the postmarked envelope. The Canada Revenue Agency occasionally imposes late filing penalties for returns that are filed on time, but arrive after the deadline, which is May 2nd this year. When there is a dispute, the CRA will actually go back and check the envelope, but you should have your own evidence of timely filing.

Whatever happened to personal service?

In keeping with my cranky disposition, I will also throw in a rant today about the poor customer service I received last weekend. I don’t know about you, but how many times do you walk into a store to find two employees talking, and they don’t even acknowledge your presence until they finish their conversation? Last weekend there was not even an employee to not acknowledge me!

Anyways, last Saturday after working until 5:00, I rushed over to one of the large chain stores for Men's Suits, to pick up two suits for my son (he is out of town finishing the school year) before the store closed at 6:00. To preface my rant, I am categorized as a “red” behavioural style, whenever I take personality tests. This means I have limited patience. The last time we took these tests, I was given a little Lego block to put on my desk that says “Be prepared, Be brief, Be Gone” (as an aside, to reflect my softer side during this rant: the coaching provided by Excel Group Development (http://www.growingcoaches.com/) who are consultants to our firm, has actually taught me to understand that because of my behavioural style, I must be more patient and understand not everyone works in the same manner as myself and I actually now work better with my partners and staff who have more social personality styles). Anyways, I digress. So here I am rushing to the store, an accountant who has worked every day for many weeks and a person of limited patience at the best of times.

So, I arrive at the store and three people are waiting in line to pick up their suits. However, there is nobody at the front cashier where we are all waiting. After 5 minutes and a lot of mumbling and complaining amongst the four of us, the cashier comes back. She has been in the back looking unsuccessfully for a suit promised to a customer. So now I at least understand why there is no service person, which does not make it right, but I understand the situation. However, after speaking to the person whose suit she can’t find, she makes an abrupt turn and goes directly to the back of the store to look for his suit yet again and leaves the rest of us waiting.

The line is now increasing in size with customers who have purchased goods. Finally, after a couple more minutes, one of the salesmen comes to the front to start serving. As he is serving the next customer, the cashier returns to explain to the first customer his suit is not ready as promised because the tailor was sick or something like that. He leaves the store less than pleased. At the same time the salesman prepares to serve me, but I inform him I was fourth in line and the person beside me is next (the line got sort of semi-circleish as we all waited). This person thanked me for my consideration (I may have no patience, but I have a strong sense of right and wrong) and he was then served. Finally, the cashier also starts to serve, but what does she do? She starts to serve the last person in line (who because of the semi-circle waiting line is first in front of her). I, in less than a pleasant tone, let her know they are last in line, I have waited ten minutes and I am next to be served. The salesperson and the cashier start apologizing over each other, but I just get my son’s suits and leave mumbling and grumbling.

This rant is not directed at this chain store specifically; the person who served my son when purchasing the suits was excellent. They are just one example of poor customer service; I could have picked ten stores for this rant. 

My issue is service in general. The larger chain stores employees typically do not respect customers, and/or the staff is not properly trained or supervised. I find this issue far less prevalent in US stores, where they seem to be much more customer oriented in general.

Thus ends the cranky accountant edition. I will return on Monday (the last day of tax season) happy as a lark.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

Tuesday, April 26, 2011

Part 3- Is a Corporate Executor the Right Choice?

The first blog in my executor series, discussed the concerns the Globe and Mail had in respect of the estate tax system and in particular, some of the issues surrounding the Paul Penna estate. The problems associated with Mr. Penna’s estate, highlight the importance of considering a corporate executor in certain circumstances. 

In my second blog, I discussed the duties and responsibilities of an executor. These responsibilities can often overwhelm the appointed executor(s); which again leads back to today’s guest blog on whether a corporate executor is the best choice for estates that will have unsophisticated executors?

Today, in the final installment of this series, I have a guest blog by Heni Ashley. Heni is a lawyer with over 20 years experience in the estate and trust industry, who brings a unique perspective to this issue. I thank Heni for her contribution and her advice and guidance on the prior two blogs.

Is a Corporate Executor the Right Choice? (By Heni Ashley)

I have read Mark’s two prior blogs and the Penna estate article with great interest. The Penna estate, in my opinion, was just the type of situation where a corporate executor should have been considered.

What exactly is a corporate executor?  Corporate executor services in Canada are available through incorporated trust companies, which are typically subsidiaries of our national banks.

Had Mr. Penna appointed a corporate executor, his bequests would have been carried out and the estate’s finances would have been tracked diligently and accurately.

In my opinion, a corporate executor provides an estate with the following:

1)    Professionalism, knowledge, expertise.  Knowledge in the area of estate, trust and tax law is invaluable, as is expertise in asset gathering and valuation, property management, investing and accounting.

2)    Impartiality.  A corporate executor can manage conflicting interests (i.e. second marriages), difficult personalities and bring an objective, unemotional approach to the estate administration.

3)    Availability.  The corporate executor is always there.  There is no need to worry about an out of town executor, or an executor dying or becoming incapacitated or physically unable to carry out the task. 

4)     Ease of administration.  There is no worry about unduly burdening a family member, friend or associate as the job of an executor can be difficult (depending on the size of the estate and the personalities of the beneficiaries) and time-consuming (depending on the nature of the assets).

5)    Continuity/permanence. A corporate executor can provide the continuity needed for certain family situations such as an ill or incapacitated spouse or minor or disabled children where there is a need for long term trusts and financial care.

6)    Cost efficiency.  The personal executor can charge the same fee as a corporate executor.  Often a fee agreement can be negotiated with a corporate executor at the time that the will is drawn.  Also, a corporate executor often eliminates the need to hire additional outside experts, which results in a cost savings to the estate.

Notwithstanding the above, had the deceased in the Penna case given thought to using a corporate executor, there are a few reasons why he might have decided against it:

1)          Impartiality (which can sometimes be viewed as indifference to family):  Some people are concerned that a corporate executor will be indifferent to the needs of the beneficiaries. This objection, however, can be overcome by jointly appointing a corporate executor together with a personal executor who can shed some light on the personal circumstances of a deceased’s family.  The two executors can then act as a check and balance against each other.  Another way to deal with this is to leave a detailed memo together with the will, explaining to all executors the reasons for certain bequests and discretionary powers (i.e. to help a child get established in business, to see a particular charity get off the ground, to provide the best of care for a sick spouse, etc.)

2)          Knowledge: A testator (the person making a will) may have a knowledgeable professional relative, friend or colleague who is willing to act as an executor (although Mr. Penna thought he had such a person).

3)          Cost: While a personal executor can take the same fee as a corporate executor, in many cases he/she will not take the maximum fee because he/she feels it is excessive (the fee can be as high as 2.5% of the assets coming in and 2.5% of the assets going out as well as a fee on income earned by the estate and a care & management fee).

I would suggest it does not make sense to engage a corporate executor in the following circumstances:

1.     Where the estate is very small,
2.     Where there are only a few well defined beneficiaries,
3.     Where the gifts are all outright (i.e. no long term trusts to be administered), and
4.     Where the assets are all very straightforward (e.g. one or two bank accounts or brokerage accounts, no real estate).

In summary, each situation is as unique as the individual parties involved.  Some beneficiaries are never happy no matter what, whether it is with their bequest, with someone else’s bequest, with the choice of executor, the manner in which the estate is administered …  Often childhood jealousies surface to complicate matters – families can be difficult and the job of an executor is rarely an easy one!

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

Thursday, April 21, 2011

Confessions of a Tax Accountant- Week 8-T5013 ACB & Medical expenses

Today, I will discuss an income tax issue that arose during this week, make a recommendation on a very good medical expense article, discuss a dysfunctional income tax filing situation amongst spouses or common-law partners and put forth an interesting point made by a reader.

The Cracker Jack T5013 Surprise

Many clients purchase flow-through limited partnerships each year. See my blog Are you a flow-through junkie? for more details.

These partnerships are one of the last standing tax shelters condoned by the Canada Revenue Agency ("CRA"). This week a few clients received an unpleasant surprise. The surprise at the bottom of the box (box 70 of the T5013 slip) was a capital gain and not a toy surprise.

As background, in 2009, these clients purchased a flow-through limited partnership for $25,000 a unit. For each unit, they received approximately $25,000 in oil and gas exploration income tax deductions last year. Thus, they saved approximately $11,500 in income tax at the high rate in 2009, making their out of pocket cost per unit around $13,500. The adjusted cost base of each unit was also ground down to zero.

Back to the surprise...my clients were less than pleased to note their 2010 T5013 for their 2009 flow-through partnership reflected a capital gain of approximately $15,000 per unit. As consequence, they now have to pay income tax on a $15,000 gain per unit, for which they have not received any proceeds. This 2010 taxation allocation is sort of ironic, as most flow-through investments are bought, at least partly, for an income tax deferral and these clients are being forced to pay income tax upfront on monies they have not received.

Ignoring the income tax cash flow issues, these capital gains are actually indicative that many of the 2009 flow-through funds have increased in value from the original purchase price, as many of these funds were purchased when oil was in the $40 to $50 range. Although counter intuitive for a tax shelter, this is actually a good thing, buying a fund and having it increase in value.

These capital gains arise because the partnership investment managers actually sold the underlying stocks within the flow-through partnership (due to the robust market for resources in 2010) and these realized gains are allocated to each limited partnership partner. This is very similar to the mutual fund issue where holders are allocated capital gains each year, but not the cash to pay the tax on these gains.

The moral of the story is simple; most investors in flow-through investments are sold by their advisors on the tax deferral\savings and the downside protection afforded by these investments, but they do not take the time to understand exactly what they purchased or more accurately, their advisors do not take the time to explain what they have sold in many cases. This is not to say I don’t think there is a place for these type investments, just that many people do not fully understand the income tax implications.

The Cracker Jack box does contain one more surprise, that being the capital gain that must be reported actually increases the cost base of the flow-through back to $15,000 from nil (i.e.: original cost is $25,000, which is reduced to nil by claiming $25,000 in resource deductions in 2009, but the $15,000 capital gain allocation then is added back to the cost base).

Medical Expenses

I was quoted last week in an excellent article by Larry MacDonald entitled Medical expenses can pay off at tax time. Notwithstanding the fact I was quoted, I think this is an excellent article on medical expenses and should be read, especially if you or someone you know, incurs costs caring for a disabled person. In addition, Dianne Nice this week also had an informative article on tax programs for the disabled.

Spouses or Common-law Partners Using Different Accountants

We have a few clients for whom we prepare one spouse or common-law partner’s income tax return and the other spouse or partner uses another accountant. I don’t usually ask the client for the reason why we are preparing only one spouses return; however, I assume it is because they wish to keep their finances separate, have secrecy issues or each person may just really like their accountant.

If you are one of these people, I would suggest this is dysfunctional from an income tax perspective, and  you should reconsider using the same accountant. If secrecy is the issue, you can institute a Chinese wall of secrecy so that there is no passing of information between spouses or partners.

Where spouses or partners use different accountants, they may not maximize medical and donation credits, they may incorrectly file child care claims and may miss a multitude of child related credits or worse yet, may claim them twice. Just as importantly, family income tax planning is neglected.

In conclusion, if you use a separate accountant then your spouse or partner, you should reconsider this practice for the reasons noted above.

Readers Point

A reader sent me an email this week asking "why does the CRA not issue T5s for interest income?". That is an interesting question. Many people get those little notes on their notice of assessments or reassessments that "your refund includes refund interest of $x. Since this interest is taxable in the year your receive it, you must include it as income on your 2010 tax return." Who the heck ever remembers to include this unless your accountant picks it up? It would sure make more sense for the CRA to issue a T5.

[Bloggers Note: In my Confessions of a Tax Accountant blogs, I will discuss real income tax issues that arise, but embellish or slightly change facts to protect the innocent, as the saying goes.]

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

Tuesday, April 19, 2011

Transferring the Family Cottage-There is no Panacea-Part 3

In the final blog of my guest three blog series for the Canadian Capitalist; I discuss some of the alternative strategies available to mitigate or defer income taxes that may arise upon the transfer of the cottage to your children.

Tomorrow, I return to the regular scheduled programming, with Confessions of a Tax Accountant-Week 8.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

Monday, April 18, 2011

Transferring the Family Cottage-There is no Panacea-Part 2

In the second blog, of my three blog guest post for the Canadian Capitalist; I discuss the income tax implications of transferring or gifting a cottage to your children. Many people are unaware these gifts or sales, often create an immediate income tax liability.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

Sunday, April 17, 2011

Transferring the Family Cottage-There is no Panacea-Part 1

The final blog in my three part series on Executors; ”Is a Corporate Executor the Right Choice?" will be posted next week.

This week I am going to post links to a three part blog I wrote on transferring the family cottage, which the Canadian Capitalist has kindly posted. For anyone who does not know the Canadian Capitalist, it is one of the preeminent financial blogs in Canada.

The cottage blog series will be broken into three blogs. The first blog will discuss the historical nature of the income tax rules, while the second blog will discuss the income tax implications of transferring or gifting a cottage and finally in the third blog, I will discuss alternative income tax planning opportunities that may mitigate or defer income tax upon the transfer of a family cottage.

I hope you find the cottage series informative. I will post my week 8 Confessions of a Tax Accountant later in the week.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

Friday, April 15, 2011

Confessions of a Tax Accountant-Week 7-Late T3 slips & T2202A slips

Those Straggler T3 slips

This week, a few clients for whom we had already filed income tax returns, received additional T3 slips in the mail.  The receipt of these forms will necessitate the preparation of T1 Adjustment requests in May to account for these missed slips. This is a huge waste of time and energy for our firm and for the Canada Revenue Agency to process these forms, and frustrates our clients to no end.

The receipt of these additional T3 forms raises two questions: the first is “why do clients not realize they have additional slips outstanding”, and the second is, “do they have too many accounts to start with"?

In regards to question one, we find the confusion typically relates to income trusts. If a client has one or two income trusts, it is not very hard to track which T3s are outstanding. But many of our clients have multiple income trust units and it becomes extremely difficult to track what has been received.

The major investment firms attempt to do their part in tracking T3 slips, as they typically include a listing of income trusts for which information is still outstanding. However, as this listing arrives with several pages of administrative papers, many clients do not even keep the list. Even when you have this list, the T3s seem to come in batches, so one T3 may have three income trusts reported, but not include four others. Then you receive another T3 and it includes only one income trust and finally you receive a final T3 that has the final three income trusts reported. In the end, it is very hard for clients, the client’s investment advisors and their accountants to track whether all the income trusts have been accounted for in the tax return. This problem thankfully, should subside next year as many income trusts have converted to corporations.

In respect to the second question, many clients just have too many accounts and deal with too many institutions and/or advisors. This leads to dysfunctional investing and portfolio management. This issue will be a topic for a future blog.

Cyberspace and T2202A tax slips

This week, much like every week prior, I had several clients provide their university/college-aged child’s income tax materials without their T2202A tuition form. In the “old days” this form was mailed, however, these days, the institutions do not mail the receipt, but rather place them on their website and thus the form must be accessed by the student. I would suggest the percentage of students who ever notice or pay attention to this comes in around 10%. Thus, without the parent or accountant requesting this information, it is forgotten and potentially missed as a credit.

The tuition information is important for two reasons. The first reason is that in most cases, the child can transfer up to $5,000 of the tuition, education amount and textbook amount to their parents or grandparents (federally) if these amounts are not required to reduce the child’s taxable income. The second reason is that excess balances of these credits that are not transferred or utilized can be carried forward by the student to be used once they become taxable (i.e. commence full-time employment).

So for example, assume a typical student who pays $6,000 in tuition and attends school for eight months full time. This student will have tuition credits of $9,720 ($6,000 tuition plus $3,720 ($400 +$65 a month x 8), for full time education and text book credits respectively. Assuming $5,000 of this credit is transferred to their parent or grandparent, the student has a tuition credit carryover of $4,720 ($9,720-$5,000). There are  also provincial credits, but they pretty much mirror the federal credit. It should be noted a student can make approximately $11,000 of employment income before the tuition credit is impacted.

Thus, after four years, the tuition credit carryforward  could approach $20,000. When your child files their first income tax return reporting full time employment income, they will potentially have a credit worth approximately $4,000 (being $20,000 tuition carryover times 15% federal credit plus 5.05% Ontario tax credit).

If your son or daughter is in a specialty business school or similar professional school and pays say $20,000 a year in tuition, the federal tuition credit carryover could potentially be $18,720 ($23,720 less $5,000). This size credit could potentially lead to a refund of almost $19,000 in their first year or two of full-time employment.

[Bloggers Note: In my Confessions of a Tax Accountant blogs, I will discuss real income tax issues that arise, but embellish or slightly change facts to protect the innocent, as the saying goes.]

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

Wednesday, April 13, 2011

Employees Hiring a Family Member as an Assistant- Some Considerations

Tim Cestnick recently wrote an article in the Globe and Mail entitled “Little-used deduction could shave dollars from your tax bill”. The gist of this article was, that if you as an employee, negotiate with your employer the requirement to hire an assistant, obtain a Form T2200 from your employer and then proceed to hire a family member as your assistant, you can income split with the family member who performs the assistant duties.

In the article, Tim makes reference to the court case, Longtin v The Queen (2006). Tim mentions that Mr. Longtin’s wife performed many tasks, including taking phone calls, replying to email and faxing documents. I think by referencing the duties performed by Mrs. Longtin, Tim is correctly implying that in order to undertake this type of planning, your spouse or other family member, must actually perform certain tasks. It is thus imperative, that if you undertake this type of income splitting, the family member must actually perform the tasks and duties an assistant would be expected to carry out. In addition, it is also extremely important that the compensation for these tasks and duties must be “reasonable” in the circumstances. The Canada Revenue Agency ("CRA") and the Tax Courts have generally accepted that what is “reasonable” is what you would otherwise pay an arm’s length third party to perform the same duties.

I am not as optimistic about this strategy as Tim. I would suggest that most employers will outright dismiss any attempt to negotiate an assistant requirement into an employment contract unless; this is a requirement of the job in the first place. Employers are loathe to take any position that the CRA may challenge or audit, especially when there is no direct benefit to them. Notwithstanding the Longtin case, many employers were burned by a prior income tax fad, namely turning employees into contractors, and they have become gun-shy in relation to employee income tax planning.

Finally, it has also been my experience that if you hire a family member as an assistant, the CRA may actually interview your spouse or child, and ask them to describe in detail the duties they provide. This type of pressure may create problems in one of two ways:     (1) If the family member has not necessarily performed all the duties they were hired to undertake; she/he may feel pressure to embellish their assistant duties and/or may not really be able to explain their duties properly; or (2) she/he may be uncomfortable being interviewed, may not know how to handle themselves with a CRA auditor and depending upon the answers given and the manner in which she/he carries him or herself may cause more harm than help to your position.

Tim has provided an interesting income tax planning nugget, however, I would suggest that anyone contemplating taking this position, understand the documentation requirements and implications in doing such.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

Monday, April 11, 2011

You Have Been Named An Executor- Part 2- Now What?

As I noted in the first installment of this series, I have been an executor for three estates. I have also advised numerous executors in my capacity as the tax advisor/accountant for the estates of deceased taxpayers. The responsibility of being named an executor is overwhelming for many; notwithstanding the fact many individuals appointed as executors had no idea they were going to be named an executor of an estate. In my opinion, not discussing this appointment beforehand is a huge mistake. I would suggest at a minimum, you should always ask a potential executor if they are willing to assume the job (before your will is drafted), but that is a topic for another day.

So, John Stiff dies and you are named as an executor. What duties and responsibilities will you have? Immediately you may be charged with organizing the funeral, but in many cases, the immediate family will handle those arrangements, assuming there is an immediate family in town. What’s next? Well, a lot of work and frustration dealing with financial institutions, the family members and the beneficiaries.

Below is a laundry list of many of the duties and responsibilities you will have as an executor:

  • Your first duty is to participate in a game of hide and seek to find the will and safety deposit box key(s).  If you are lucky, someone can tell you who Mr. Stiff's lawyer was and, if you can find him or her, you can get a copy of the will. Many people leave their will in their safety deposit box; so you may need to find the safety deposit key first, so you can open the safety deposit box to access the will.
  • You will then need to meet with the lawyer to co-coordinate responsibilities and understand your fiduciary duties from a legal perspective. The lawyer will also provide guidance in respect of obtaining a certificate of appointment of estate trustee with a will ("Letters Probate"), a very important step in Ontario and most other provinces. 
  • You will then want to arrange a meeting with Mr. Stiff's accountant (if he had one) to determine whether you will need his/her help in the administration of the estate or, at a minimum, for filing the required income tax returns. If the deceased does not have an accountant, you will probably want to engage one. 
  • Next up may be attending the lawyer’s office for the reading of the will; however, this is not always necessary and is probably more a "Hollywood creation" than a reality. 
  • You will then want to notify all beneficiaries of the will of their entitlement and collect their personal information (address, social insurance number etc).
  • You will then start the laborious process of trying to piece together the deceased’s assets and liabilities (see my blog Where are the Assets for a suggestion on how to make this task easy for your executor). 
  • The next task can sometimes prove to be extremely interesting. It is time to open the safety deposit box at the bank. I say extremely interesting because what if you find significant cash? If you do, you then have your first dilemma; is this cash unreported, and what is your duty in that case? 
  • It is strongly suggested that you attend the review of the contents of the safety deposit box with another executor. A bank representative will open the box for you and you need to make a list on the spot of the boxes contents, which must then be signed by all present.
  • While you are at the bank opening the safety deposit box, you will want to meet with a bank representative to open an estate bank account and find out what expenses the bank will let you pay from that account (assuming there are sufficient funds) until you obtain probate. Most banks will allow funds to be withdrawn from the deceased’s bank account to pay for the funeral expenses and the actual probate fees. However, they can be very restrictive initially and each bank has its own set of rules. 
  • As soon as possible you will want to change Mr. Stiff's mailing address to your address and cancel credit cards, utilities, newspapers, fitness clubs, etc. 
  • As soon as you have a handle on the assets and liabilities of the estate, you will want to file for letters of probate, as moving forward without probate is next to impossible in most cases. 
  • You will need to advise the various institutions of the passing of Mr. Stiff and find out what documents will be required to access the funds they have on hand. In one estate I had about 10 different institutions to deal with and I swear not one seemed to have the exact same informational requirement. 
  • If there is insurance, you will need to file claims and make claims for things such as the CPP benefit. 
  • You will need to advertise in certain legal publications or newspapers to ensure there are no unknown creditors; your lawyer will advise what is necessary.
  • It is important that you either have the accountant track all monies flowing in and out of the estate or you do it yourself in an accounting program or excel. You may need to engage someone to summarize this information in a format acceptable to the courts if a “passing of accounts” is required in your province to finalize the estate. 
  • You will also need to arrange for the re-investment of funds with the various investment advisor(s) until the funds can be paid out. For real estate you will need to ensure supervision and/or management of any properties and ensure insurance is renewed until the properties are sold. 
  • A sometimes troublesome issue is family members taking items, whether for sentimental value or for other reasons. They must be made to understand that all items must be allocated and nothing can be taken.  
  • You will need to arrange with the accountant to file the terminal return covering the period from January 1st to the date of death. Consider whether a special return for “rights and things” should be filed. You may also be required to file an “executor’s year” tax return for the period from the date of death to the one year anniversary of Mr. Stiff's death. Once all the assets have been collected and the tax returns filed, you will need to obtain a clearance certificate to absolve yourself of any responsibility for the estate and create a plan of distribution for the remaining assets (you may have paid out interim distributions during the year).
The above is just a brief list of some of the more important duties of an executor. For the sake of brevity I have ignored many others (see Jim Yih's blog for an executor's checklist).

The job of an executor is demanding and draining. Should you wish to take executor fees for your efforts, there is a standard schedule for fees in most provinces. For example in Ontario, the fee is 2.5% of the receipts of estate and 2.5% of the disbursements of the estate.

Finally, it is important to note that executor fees are taxable as the taxman gets you coming, going and even administering the going.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

Friday, April 8, 2011

Confessions of a Tax Accountant- Week 6-Spousal RRSPs & Foreign reporting

As of today, 70% of my client’s income tax returns have been submitted; that is a 30% increase in the last week. This sudden surge, directly correlates to the fact that this week, my clients finally started receiving their T3 slips and some T5013 slips. This is the last blog in which I will bore my readers with income tax return statistics. Suffice to say, I think I have proven my point, that the March filing deadline for T3's and T5013's wreaks havoc upon accountants and taxpayers who wish to file their income tax returns on a more timely basis.

This week, two issues arose that I will discuss. The first issue, spousal RRSP contributions, is much discussed in financial blogs and financial publications and the second issue, foreign income reporting is not necessarily on everyone's radar.

Every year, at least one client over-contributes to their RRSP. Typically, this is caused when a client makes a contribution to their RRSP and then makes a second contribution to a spousal RRSP, assuming the spousal contribution is based on their spouses RRSP limit, not their own RRSP limit.

When you contribute to a spousal RRSP, the plan and the plan assets are controlled by your spouse. Notwithstanding the control issue, a spousal RRSP contribution is an RRSP contribution made by you in your spouse's name, it is not a RRSP contribution made by your spouse. Your spousal RRSP contribution, when combined with your personal RRSP contribution, may not exceed your personal RRSP deduction limit.

A second issue that arose this week was whether a client had to check the box on the front page of their income tax return in response to the question “Did you own or hold foreign property at any time in 2010 with a total cost of more than CAN$100,000?”. In the case at hand, my client had a Florida condominium from which they were earning rental revenue and a question arose as to whether they were required to report the property on Form T1135 or whether the property was excluded from filing.

The uncertainty in regard to this issue arises because you are not required to report the condominium on Form T1135 if it is held primarily for your personal use and enjoyment. However, where a foreign rental property is used to earn rental income, it may have to be reported on Form T1135 (see questions and answers on page 3 of  the T1135 link above).

The answers on page 3 of the form above are meant to provide clarification of the issue, but actually blur the issue. The term "primarily" usually means greater than 50%. However, in stating the facts for this question, the CRA states in part (B) of the question if "rented out ...with a reasonable expectation of profit". So, what happens if you only rent out your condo say 40% of the time (thus primarily for personal use), but you earn large rental income, such that you have an expectation of profit? Is the condo now a reportable entity or not. Personally, I would advise clients to err on the side of caution and report the condo on Form T1135.

Another foreign reporting issue is noted in a blog by the Canadian Capitalist. Many taxpayers are not aware that if they own US stocks, even if they are held in a Canadian brokerage account, these US stocks are subject to these rules and you may possibly have to file Form T1135.       

Failure to file Form T1135 could result in a penalty of $25 a day up to $2,500.               

[Bloggers Note: In my Confessions of a Tax Accountant blogs, I will discuss real income tax issues that arise, but embellish or slightly change facts to protect the innocent, as the saying goes.]

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

Wednesday, April 6, 2011

Who says Accountants don't have a sense of Humour

From what I can tell, Kerry Freeman a US accountant, has created a series of animated videos to market his accounting practice. In this video made by Kerry, there are two animated characters, one a young problem client wanting a "big tax refund" and the other a frustrated accountant, trying to explain you just don't automatically get a "big refund" by filing. I have actually met people like this over the years.

Keeping this blog on the lighter side, here is a link to the top ten wackiest income tax deductions taxpayers have claimed in filing their US income tax returns.

Oblivious iPod Listeners

In the past two weeks, I could have easily hit three different people with my car if I was not paying attention. All three of these individuals were totally oblivious to me and their surroundings as they listened to their iPods. One person walked across the street unaware that the light had turned green and two others walked across the parking lot in my building while I was driving to my parking space. I figured this was not a unique experience and got multiple hits when I googled the topic including this article in the Washington Examiner.

As noted in the article, iPod users need to start paying attention to their surroundings, or risk becoming "street pizza".

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

Monday, April 4, 2011

So You Want to be an Executor?


Today’s blog will be the first in a series of three blogs dealing with executors. In this blog, I will briefly discuss the estate of Paul Penna, the details of which were recently reported by the Globe and Mail; but I will delve into one issue that the reporters did not pursue. In the second blog instalment, I will deal with the duties and responsibilities of being named an executor and in the third and final blog; I will post a guest blog by a former corporate executor discussing the advantages and disadvantages of naming a corporate executor.

The Globe and Mail recently published an article by Jacquie McNish and Paul Waldie titled The dark side of Canada’s inheritance system which recounts the fascinating betrayal of Mr. Penna by a close friend who was named executor of his estate.

As a three time executor, I was mesmerized by the Penna story relayed by Ms. McNish and Mr. Waldie.  If you have not read the article, please click the above link. The article revolves around the will of Paul Penna, founder of Agnico-Eagle Gold Mines Ltd. Mr. Penna left an estate valued at approximately $24 million to charity (except for $1-million set aside for his wife).  Mr. Penna named three executors to manage his estate, a trusted long-time colleague Barry Landen, Agnico Eagle Chairman Charles Langston and his wife Lorraine.

There is no point in regurgitating the article, so I will quickly summarize. Following Mr. Penna’s death, the lawyer for the estate called a meeting of the executors, where it was supposedly decided, to not probate the will. By avoiding probate, an estate does not have to pay the significant probate fees in Ontario and  supervision of the estate becomes less than transparent. It is alleged that Mr. Landen with no supervision and very little, if any, oversight by the other executors and professionals surrounding the estate, plundered the estate for his own purposes and the charities have not received their bequests.

The article, besides relaying a fascinating story, offers a warning about the weakness of the estate system and a caution against naming friends as executors. While I agree with these warnings and cautions, very few estates where assets are not “staying in the family” are not probated. In my opinion, the only omission in the article was glossing over the fact the estate was not probated, yet somehow, Mr. Landen had access to Mr. Penna’s funds.

In two of the estates for which I was an executor, I obtained probate, since I was advised by the estate lawyers that the banks and brokerages would request such (although it may not be a requirement depending upon the institution). In dealing with the banks and brokerage houses, they were exceedingly fastidious in ensuring I provided a copy of the letters of probate (technically called a“certificate of appointment of estate trustee with a will), and death certificates amongst a plethora of other documents to satisfy them of the legality of the estate and the executors. It is therefore curious that Mr. Landen seemingly was able to access the estate's funds so easily. I have canvassed various estate professionals and the best guess is that Mr. Landen most likely had a power of attorney already in place prior to Mr. Penna’s death, or he used a corporate veil/network of some kind. I had some other guesses, but they are best not speculated upon.

So while I agree with the authors warnings and concerns about the estate system and I agree there is room to strengthen the system, it has been my experience that once you get into the probate system, it is a fairly strong system. In my opinion, most of the issues highlighted in the article would be solved by requiring a mandatory notice of a gift to all beneficiaries. Whether this notice would be triggered by the estate's lawyer, or by an institution that receives a request for funds, is a matter for regulators to determine; whatever the mechanism, it should be required.

A mandatory notice would most likely result in transparency for most estates. The lingering question would be how do you protect an estate where an executor has a power or attorney or some kind of financial access already in place prior to the death of the individual? This situation would prove more problematic. My first thought is that there should be some kind of yearly documentary process, but I don't think that would be practical; possibly a maximum cumulative withdrawal limit on power of attorney withdrawals could be utilized. In any event, I raise the issue; the regulators would have to institute the safeguards. 

This series will continue next week, when I examine the duties and responsibilities of being named an executor.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

Friday, April 1, 2011

Confessions of a Tax Accountant-Week 5- Taxing the Family Unit -Harper almost got it right

It is April 1st, and I still only have 40% of my clients' income tax returns submitted. However, one client did receive a T5013 on Tuesday, two days before the supposed deadline for issuing such. This sighting of a T5013, was rarer than sighting the Ivory-Billed Woodpecker.

Sarcasm aside, for this week, I am scrapping the usual income tax issues of the week. Today I want to discuss the concept of taxing the family unit. As many are aware by now, this week the Conservative Party announced as part of their election platform that, if elected, and only when the budget is balanced in four or more years from now, they would allow families with dependent children under 18 to split up to $50,000 of income for Federal income tax purposes. Ignoring the fact that this proposal requires the Conservatives to be re-elected and, implementation is dependent upon a balanced budget, I believe that this type of proposal should not have restrictions related to dependent children, but apply to any family unit (I will not address the taxation of single parent families in this blog). In my opinion, the Conservatives almost have the concept correct, although the application may be wanting.

As a tax accountant who has prepared US income tax returns in the past, I fully understand the concept of taxing a family unit, and how the current Canadian system can be punitive where two families have the exact same family income, but the allocation amongst the spouses is different. With this thought in mind, I ran a few numbers to illustrate how the current system is flawed.

Say what? My family income is the same?

To illustrate the income tax disparity caused by our current taxation system, I first looked for discrepancies. The following examples assume a married or common law couple (we will call them Ward and June Weaver) with two children (Theodore and Wally) living in Ontario.

Assume Ward had a great year in 2010, earning $150,000 in commissions selling Beaver Tail franchises. During 2010, June stayed at home taking care of Theodore and Wally. The income tax payable for the Weaver family after claiming the spousal and child income tax credits is approximately $47,200. However, if Ward has only earned $100,000 and June had worked from home and made $50,000, the 2010 Weaver family income tax bill would have only been approximately $36,000. A difference of $11,200 for the same family earning the same total income.

This difference is further illustrated if Ward earned $125,000 and June had no earnings. The total family income tax bill would be approximately $35,600. However, if Ward and June each earned $62,500, the tax bill would only be $25,300, a difference of $10,300 on the same family income.

Equivalently Un-equivalent

After looking at the discrepancies, I then turned it around and looked for equivalent income tax burdens, with very un-equivalent earnings.

Say Ward was the sole wage earner making $100,000, the Weavers would pay approximately $24,800 in income taxes. This is the same income tax burden another family, the Haskells (who also have 2 children) would have where Teddie, the husband earned $80,000 and Thelma, the wife, earned $42,000. The Haskells have earned $22,000 more in income, yet pay the same income tax as the Weavers.

What would happen in the US if these families filed joint income tax returns? The Weavers would owe $10,900 in US Federal income tax (I will ignore US state tax since it varies from nil in some states such as Florida, and goes as high as 10% in some states such as California).

The Haskells would owe $16,400 in US Federal tax. Clearly the US grasps the concept that if total family income is higher, you should pay more income tax.

Finally, if June was earning $140,000 and Ward was a stay at home dad, the Weavers would pay approximately $42,500 in income tax. If both Teddie and Thelma each earned $86,000, the Haskells would have approximately the same income tax liability as the Weavers, yet their family unit would have made $32,000 more.

In the United States, the Weavers would have a Federal income tax liability of approximately $21,000 while the Haskells would have a Federal income tax liability of approximately $29,000.

The above is summarized in the chart below.




Weavers
Haskells
Income
Ward
100,000
-

June
-
-

Teddie
-
80,000

Thelma
              -
   42,000
Total Family Income

 100,000
122,000
Income Tax Canada

   24,800
  24,800
Income Tax USA

  * 10,900
  *16,400






Weavers
Haskells
Income
Ward
-
-

June
140,000
-

Teddie
-
86,000

Thelma
              -
   86,000
Total Family Income

 140,000
172,000
Income Tax Canada

   42,500
  42,500
Income Tax USA

  * 20,900
  *29,000




* Excludes any applicable US state tax

So what lessons can be learned?

The Conservatives conceptually have the correct idea, that the current system is punitive; however, they should be proposing taxing the “family unit”, not worrying about income splitting.

The US clearly grasps the taxation of a "family unit" concept, but it also grasps the concept that the "family unit" should pay more income tax as the family income rises, no matter the allocation of income between spouses or partners.

[For further discussion of family taxation, taxation of single parents and how Harper's proposal is beneficial for the rich, see the Canadian Capitalist's  blog this week].

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.