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.

Tuesday, May 31, 2011

The benefits of undertaking Scientific Research and Development in Canada

The Canadian government's Scientific Research & Experimental Development (“SR&ED”) program has been controversial at times, with some pundits calling for action to tighten the program and its eligibility requirements. However, the SR&ED program has been a lifesaver for a couple of my clients. These clients were cash starved in their formative years and were able to soldier on and to grow into substantial companies, thanks in part to the funding from the Federal and Ontario SR&ED programs. These companies now pay income tax and employ a significant number of people.

In this blog, I will not delve into the criteria required to make a SR&ED claim, nor all the machinations of the income tax calculations. However, I wish to draw attention to the substantive nature of the SR&ED claims available to those businesses with qualifying expenditures. These benefits are best illustrated through an example.

Assume Research in Lotions Inc. (“RIL”) a company trying to develop an anti-aging formula for men spends $10,000 in SR&ED wages and has various overhead expenses. Since the tracking and identification of overhead SR&ED costs was problematic for most companies, the government provided an alternative election known as the Prescribed Proxy amount. If a company elects to use the proxy, it does not need to track its SR&ED overhead costs, but can simply multiply the $10,000 in SR&ED wages by a predetermined ratio of 1.65. Thus, if a RIL incurs $10,000 in wage costs, it is actually allowed to claim $16,500 ($10,000*1.65) in qualifying expenditures for purposes of the Investment Tax Credit (“ITC”). The $16,500 is then reduced by approximately $2,320 in Ontario SR&ED incentives as discussed below, leaving a balance of eligible expenditures for the ITC of $14,180.

Generally, a Canadian-controlled private corporation ("CCPC") can earn an annual refundable ITC of 35 percent on its first $3 million of qualified expenditures for SR&ED carried on in Canada, and a 20 percent ITC on any excess amount ( 40% of the 20% ITC is refundable). The ITC would be refundable in cash to RIL, or would be applied against any income tax owing by RIL. Non-CCPC's can earn a non-refundable ITC of 20 percent of qualified expenditures for SR&ED carried out in Canada.

So continuing with our example, RIL would be eligible to claim an ITC of $4,963 ($14,180 x 35%). It should be noted that RIL would have to addback the $4,935 to income in the following year.

In Ontario, most companies are eligible for an additional 10% refundable Ontario Innovation Tax Credit. So again following our example, a further refundable credit of $1,650 would be earned ($16,500 x 10%). In Ontario there is also a research and development tax credit of 4.5% that can be applied against income tax, but is not refundable (this credit can be waived, which in certain circumstances makes sense).

For SR&ED incentives in other provinces see this link.

I have simplified the SR&ED tax credit process, as it is extremely complex. The key take away here is that if RIL incurs $10,000 in SRED cost, it would potentially be entitled to SR&ED refunds by the Federal and Ontario governments totaling $6,613 ($4,963 Federal and $1,650 Ontario), making the net cost to RIL of undertaking SR&ED only $3,387. In my opinion, this is a significant incentive for any company to undertake SR&ED, despite the complexities in filing and tracking expenses.

SR&ED Wages Incurred
$  10,000
Federal Investment Tax Credit
$ (4,963)
Ontario Innovation Tax Credit
$ (1,650)
Out of pocket SR&ED Cost
$    3,387


On Thursday I will have a guest post that clarifies several points of confusion in regard to the SR&ED program and provides examples of qualifying SR&ED in industries you would not expect to be eligible to make a SR&ED claim.

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, May 26, 2011

Covered Calls

Investors are always looking to reduce their risk in owning a specific stock. One method to reduce that risk is to use a covered call strategy.

Selling covered calls is a strategy in which an investor sells a call option contract while at the same time owning an equivalent number of shares in the underlying stock. It is considered to be one of the safest option strategies in the market.

In simple terms a covered call means you sell a call option to another investor which entitles them to purchase a stock you already own at a specified price. The concept is best illustrated by an example.

You purchase 100 shares of Research and Motion for $58/share and agree to sell it for $60 on the third Friday of the following month.  You receive $4/share for selling this call option. The return calculation is as follows:

Cost of 100 shares at $58/share                        $   5,800
Call premium received – 100 @ $4  ****                     400      - 7% return immediately

If the stock price is above $60 at strike
date, investor receives another $2 ($60-$58)               200      - 3% return

Total return on investment is                                    $600      - 10%

**** The $400 call premium is a capital gain in the year it is received and is not a reduction in the cost base. See my comment to Anonymous in the comment section below for the income tax treatment

If the stock price is below $60 at strike date, the stock will not be called and you will keep the $400 time premium.  However, you have lowered your out of pocket cost of your investment to $5,400 and you still own the stock. Please note that you must hold the stock until the call is exercised or expires.

The downside to using this strategy is that if the stock price rises above $60 you do not participate in any of the upside above $60. Therefore, using a covered call may be more risky for a stock like Research in Motion which can swing dramatically, than for a stock like the Royal Bank, but that would be reflected in the premium you get for selling the call.

In the case of a stock such as Bell Canada that pays dividends, one has to be aware that the  call holders may want to capture the dividend and that has to be factored in.

As often happens in blogging, someone else covers the topic of your blog before you post it. An excellent  detailed step by step summary of the mechanics of writing a covered call are covered in this blog by The Million Dollar Journey.

Please understand that I am in no way recommending a covered call strategy. I am only discussing the concept so you are aware of its existence. The use of a covered call is complex and you should consult with your investment advisor before undertaking such a strategy or if you trade yourself, ensure you grasp the complexities 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.

Tuesday, May 24, 2011

Dealing with the Canada Revenue Agency- Part two

In part one of my blog, "Dealing with the Canada Revenue Agency", I discussed some of the more "confrontational" situations in which you may deal with the Canada Revenue Agency ("CRA"), including notices of reassessment, audits and notices of objection. In this second blog, I discuss the two main "relief" provisions available to taxpayers.

Taxpayer Relief Provisions

The taxpayer relief provisions, previously known as the fairness provisions, may provide relief from interest and penalties owing by taxpayers who because of circumstances beyond their control, were unable to meet their income tax obligations. The provisions are applicable for ten years back from the application date ( ie: a request filed on or after January 1, 2011, must deal with an issue related to a taxpayer's 2001 return or later).

The above link for the taxpayer relief provisions is very detailed and well laid out by the CRA, so I will not go into any further detail here, other than to say the following are situations where the provisions may be applied:

1. The CRA may waive or cancel penalties and/or interest when they result from circumstances beyond a taxpayer's control (ie: natural or human made disasters, illnesses, deaths, postal strikes etc);

2. The CRA may also waive or cancel penalties and/or interest when they result primarily from the actions of the CRA (ie: processing delays, errors in CRA publications, etc.); and
3. The CRA may also waive or cancel interest when taxpayers cannot pay amounts owing because of circumstances beyond their control (ie: loss of employment etc.)
Voluntary Disclosure Program.
The Voluntary Disclosures Program (VDP) allows taxpayers to come forward without fear of penalty or prosecution, as long as they have initiated the process. If you come forward after the CRA initiates contact, the VDP will be denied. The VDP may be utilized by taxpayers for issues as varied as not reporting foreign income, to coming forward to report cash transactions, to reporting omitted capital gains transactions. While this provision may require a substantial payment of past income taxes, it provides relief from penalties, criminal prosecution and as I have been witness to, stress relief.
While I am being slightly whimsical saying a VDP provides stress relief, I cannot understate how important that has been to a couple clients I have had in the past. Some people almost worry themselves "to death", unable to sleep and losing weight and making a VDP lifts an extreme weight from their shoulders.
A valid disclosure must meet four conditions:
  1. The disclosure must be volunatary.
  2. The disclosure must be complete
  3. The disclosure must involve the application or potential application of a penalty and
  4. The disclosure must generally include information that is more than one year overdue.
The CRA realizes many taxpayers are reticent about the VDP process and thereby offer a no-name filing option. Under this option, you can provide the CRA full disclosure of your situation without providing your name, the name of your company or other names that could be traced back to you; however, the details of the disclosure must be exact and complete. The CRA will then provide their opinion on the consequences of the VDP and whether it would be accepted. This opinion is not binding until you provide your true name, however, assuming the facts provided are complete, I have never seen the CRA renege.
The CRA has some discretion in VDP disclosures and depending upon the situation may reduce the related interest charges or not require some years to be filed where there are multiple year omissions. Any additional relief is a bonus- the fact the VDP removes any penalties and criminal prosecution is why taxpayers come forward in the first place.

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, May 19, 2011

Investment Websites of Note

Whether you are a stock picker or just want to follow the companies your advisor has recommended, information is always king. The following websites are some of my favourites for providing that all important information.

Canadian Insider - This site reflects insider activity in regard to the sale and purchase of shares and the issuance and exercise of options and warrants and it is very easy to navigate. It is always comforting to know insiders feel the stock price is a bargain and are buying stock in a company you have invested in. Alternatively, the selling of shares by insiders can be a red flag for stock ownership.

Sedi - This site is similar to the Canadian Insider in that you can obtain insider trading activity, but Sedi has far greater detail and provides issuer information. This site is not as user friendly as Canadian Insider, but if you require more detail or historical information, it is an alternative to Canadian Insider.

Sedar - If you are investing yourself, you must utilize this site. Sedar provides all public documents issued by publicly traded companies. You get financial statements, Management Discussion and Analysis, Management Information Circulars and press releases. In addition, you often get documents such as financing agreements that provide interesting tidbits if you are willing to do the reading.

Stockwatch - This site provides a 30 day trial subscription, but requires a paid subscription thereafter. Stockwatch provides information on short positions (always valuable to know if sophisticated investors consider the stock overvalued and are shorting) and option pricing amongst several other features.

Stockchase - This site tracks the opinions of the so called experts that appear on BNN. This site can be used as a final check before purchasing a stock to see what the experts have to say or as a check on the stocks you are holding.

Vantage Wire - This site provides free real time quotes, a unique feature, as most sites have delayed quotes.

The are multiple other sites available and several stock forums that discuss specific stocks, however, the first three sites should be ‘go to’ sites for any serious investor.

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, May 17, 2011

Dealing with the Canada Revenue Agency

I discuss below, the six typical circumstances by which an individual may end up dealing with the Canada Revenue Agency (“CRA”) during the year. 

The least worrisome of the six situations is where you initiate contact with the CRA to report a late income tax slip (such as a T3 or T5 slip), or you realize you missed a deduction or credit (such as a donation slip, medical expense or RRSP receipt). These situations are very straight forward and relatively painless. You or your accountant file a T1 adjustment request using form T1-ADJ E to report the additional income or claim the additional expense or credit. You would typically attach the receipt to the form and most of these requests are processed without further query from the CRA.

The second circumstance is where you receive an information request from the CRA. These requests often strike fear into my client's hearts, but are typically harmless. In this situation, the CRA usually sends a letter asking for back up relating to a deduction or credit claimed on the return. Generally these requests by the CRA are to provide support for items such as a donation tax credit, medical expense claim, a child care expense claim, a children's fitness tax credit claim or an interest expense claim. These requests are fairly common and more often than not, relate to personal income tax returns that are efiled. You have 30 days to respond to these requests, however, time extensions are typically granted if you call the CRA and request such.

The third situation, and a step up on the anxiety meter, is the receipt of a Notice of Reassessment (“NOR”) from the CRA. A NOR may be issued for numerous reasons such as; not responding to an information request, the receipt by CRA of a T3/T4/T5 slip that was not reported in your return, or a reassessment based on an audit or review of your return as discussed below.

The fourth circumstance is typically not pleasant. Under this scenario, the CRA has selected you for an audit, either randomly or because you have come to their attention for some reason. An audit can take the form of a desk audit which is less intrusive or a full-blown field audit. Desk audits are typically undertaken to review a specific item that the CRA finds unusual in nature and you have 30 days to respond.

A full-blown audit could encompass a review of self-employment expenses, significant expense or deduction claims, or a full review of your personal or corporate income tax filings for a specific year or multiple years. In this situation, you will be sent a letter requesting certain information and you will be required to provide such to a CRA auditor. This process could take months, and if the CRA auditor is not satisfied by your documentation, or reasons for claiming certain expenses or deductions, they will issue a revised NOR.

Upon the receipt of the reassessment, you will have to determine, likely in conjunction with your accountant, whether the CRA’s assessment is justified. If you don’t feel it is justified, you need to consider if the amount of reassessed tax is significant enough to warrant the time and energy to fight the reassessment. If you decide to "fight" the reassessment, you and/or your accountant would file a Form T400A Notice of Objection. In this fifth situation, the Notice of Objection would state the facts of your situation and the reasons that you object to the CRA’s reassessment. The objection will then be reviewed (probably months later) by a CRA representative and you can make and support your case as to why the CRA has incorrectly assessed or reassessed you.

It is very important to make sure that you file a Notice of Objection on a timely basis. For an individual (other than a trust) the time limit for filing an objection is whichever of the following two dates is later: one year after the date of the returns filing deadline; or 90 days after the day the CRA mailed the reassessment. For corporations, the time limit is 90 days.

Finally, the sixth and final situation, and last resort, is to go to tax court because your Notice of Objection was not successful. There is an informal tax court procedure if your income tax owing is less than $12,000. Where the income tax owing exceeds $12,000, the process becomes formal and is costly and time consuming.

The above summarizes the various circumstances and situations under which you may deal with the CRA in any given year. Hopefully if you have any contact with the CRA it is only in connection to situation #1 or #2.

Next week I will discuss two other ways you may deal with CRA, but these are the relief provisions and not assessment or audit related.

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, May 11, 2011

The Blunt Bean Counter Cartoon Video

In my blog entitled Who says Accountants don't have a sense of Humour, I highlight a US CPA who uses video to market his practice. They say imitation is the sincerest form of flattery; so I now offer my own video direct from The Blunt Bean Counter movie studio in Toronto. If you compare the cartoon character to my picture on the blog, you will note the producer has reflected a full head of hair, one of the perks of being blogger, producer and chief bottle washer. :)





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, May 10, 2011

Accessing RRSPs before Retirement- the Holy Grail Revisited via life events

In searching the Internet for statistics on another matter, I recently stumbled upon a December, 2004 Statistics Canada Perspective document written by Philip Giles and Karen Maser on “Using RRSPs before retirement”.  Although this paper is now over six years old, is very apropos given my blog in March “The Kid in the Candy Store: Human Nature, RRSPs Free Cash and the Holy Grail.”. Mr. Giles and Ms. Maser examine the financial implications of seven life events and how these events might precipitate the removal of funds from an RRSP.

Before I move on with the details of the above noted paper, I want to reference the tremendous statistical effort by Mike Holman in his blog entitled Canadians Are Not Withdrawing From RRSPs At An Alarming Rate. Whereas I attempted to anecdotally reflect that RRSPs are the Holy Grail, Mike breaks down the statistics to reflect RRSP withdrawal rates are not as alarming as some purport.

Anyways, back to the 2004 document. I feel the statistics in this document speak in part to my conclusion that RRSPs are often accessed under financial duress in response to “life events”, and are not necessarily being used to supplement income or being used for discretionary purchases.

The authors listed the following as life events that could precipitate RRSP withdrawals and explored whether these life events did in fact contribute to RRSP withdrawals:

Death of a spouse: The paper concludes that the death of a spouse had the greatest effect on RRSP withdrawals. The authors note “The death of a spouse is a unique event in that it is generally unexpected and may often occur before adequate financial planning has taken place. In such a situation, RRSPs could provide a needed or useful source of funds.”

Separation or divorce: The impact of separation and divorce was smaller than for most of the other life events.

Involuntary job loss, starting a business: The authors surprisingly note that there was not an appreciable effect on RRSP withdrawals for those who lost their job, whereas starting a business was a factor. However, where these events resulted in an RRSP withdrawal, the withdrawal is large.

Birth of a child: This event has little effect.

Buying a house: Withdrawals under the Home Buyers Plan were excluded for purposes of the study. The purchase of a new house had only a slight effect on RRSP withdrawals, although, were money was withdrawn; it was of a more substantial nature.

Returning to school full time: For the major income earner, this event had little effect on RRSP withdrawal behaviour, except if a spouse was returning to school.

The reasons Canadians withdraw funds from their RRSP are varied; however, I am still convinced, most withdrawals are made from a position of need and this document reflects the life events that have the greatest effect upon RRSP withdrawals.


The Money Index

I would like to thank Tom Drake of the Canadian Finance Blog for including my blog on his Money Index listing. The Money Index was recently nominated for the Globe and Mail’s best Canadian investing blog, even though technically it is an updated directory of various blogs.

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, May 2, 2011

Tuition in Canada -At least my Kid does not go to School in the States

I am back, in a less cranky mood than on Friday (as today is the last day of income tax season). Today will also be my last blog for a week or so, as I am off for some R&R later in the week. Over the next few weeks, I need to refine the focus and purpose of this blog. To date, I have been pleased with the response to the blog, but I know I cannot commit to being a four or five day a week blogger. I do know that I want to try and have more original pieces than comment pieces, so I have a direction, it just needs need refinement. Anyways, enough navel gazing. For those of you with kids in university, or more specifically, saving to send your children to university, read on; although you may want to keep an air sickness bag nearby when you read the numbers detailed below.

Tuition in Canada -At least my Kid does not go to School in the States

I cannot believe the university school year is already over and my kids are returning home. This year I officially became an empty nester as my daughter marched off to university joining my son who just finished his third year. While my wife and I had different feelings upon my daughter leaving – my wife was sad and I was ecstatic - sorry kids if you are reading this, but I can only listen to you tell me that I know nothing for so long - my wife and I were both in sync on our reaction to the combined tuition bill, total shock.

You see, my son had switched at the last moment from a general science program to the Ivey business program at Western. The combined cost for my son and daughter including rent and food was in excess of $50k. My RESP quickly looked a little light. 

For a child living in residence at most Ontario schools you are looking at around $16-18,000 a year for residence, food, books and tuition. Computers add an additional cost. As for Ivey, they even warn you of the estimated cost of $37,000 for academic and living expenses on their website.

So for a child who does two years of undergrad and an Ivey HBA (I won’t even tell you what my son’s ultimate university plans are), the cost is in the range of $110,000. For a four year undergrad only, the cost is around $70,000.

I am putting the numbers out here because; I have found many parents really do not grasp the cost of a university or college education in Canada (let alone the United States, where the undergraduate cost approaches $50,000 a year in many cases). I think because many parents paid minimal tuition and in many cases went to university in the city we grew up in, we don’t grasp the magnitude of today's tuition fees, even though the media publicizes it, accurately and often.

So how does one fund their children's post secondary education? Ignoring the small percentage of Canadians that have private incorporated businesses and make their children beneficiaries of a family trust and fund their education in whole or in part through dividends, there is no magical answer.

The first building block is utilizing your RESP. Under current rules, you can contribute a grant eligible $2,500 a year and the government will provide a grant of $500 for a total of $3,000 a year. The total lifetime contributions per child are $50,000 and the total lifetime grant is $7,200. Click here for an excellent discussion of RESPs by Mike Holman who wrote the book on RESPs.

Assume you have $2,500 per child available each year to fund their RESPs up to the $50,000 lifetime maximum contribution and the RESP receives the $7,200 maximum grant limit. If the RESP earns 5% a year, you could have upwards of $90,000 in each child’s RESP. This would go a long way towards covering most children’s university or college costs. However, the reality is that between covering day to day living costs, paying down mortgages, contributing to a TFSA or making RRSP payments, etc., many parents don’t have $2,500 per child to contribute, especially in the early years. But no matter what you can afford to contribute; the RESP should form the building block for funding your child’s education.

As parents, two alternative ways to provide the discipline to fund RESPs are: (1) use your monthly Universal Child Care Benefit cheques and/or (2) your tax refund or a portion of the refund.

With the huge wealth transfer taking place in Canada, some parents may receive an inheritance. In this situation you might consider opening a separate account with some of the money you inherited to supplement the RESP, or even open an account in your child’s name (There is no attribution if the child has capital gains in that account).

Where there is no potential inheritance and money is tight, attending university or college in your home town makes any undergraduate program at least somewhat affordable. To the extent you can send your child to another city, even for a year, I would suggest doing such. It is a tremendous opportunity assuming they partake in the university experience (that means activities other then just drinking).

Many parents, whether they have the money or not, feel their child should work to pay for some if not all of their university costs. Whether this is a necessity or your philosophy, this discussion should be held when your child starts high school so they are aware of your expectations and they can plan around those expectations.

Finally, there are various student loan programs to finance your child’s education; however, family income can sometimes disqualify the child.

As noted above, this blog contains no magical solutions. This blog is meant to try and make parents more cognizant of the true costs of university and college in Canada.

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.