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.

Wednesday, August 31, 2011

Who is your Wealth Mangement Quarterback?

In Canada, and specifically Ontario, Chartered Accountants (“CA's”) have independence restrictions and other rules that prevent us from providing specific security advice and from buying and selling securities on behalf of our clients. 

However, in Ontario, we are allowed to earn a fee for providing what I will call quarterbacking advice, where we oversee a client’s team of advisors and ensure a comprehensive team plan is put in place and maintained for each client. As financial quarterback, we try to ensure the client’s investment advisor, lawyer, insurance agent, banker, business consultant and accountant have integrated their advice into one efficient, optimum, co-ordinated plan, taking into account the client’s investment, retirement, income tax and successions needs.

In providing that role within my firm, Cunningham LLP, I have seen clients with investment portfolios and financial plans that fail to consider their needs, miss out on crucial income tax savings and clearly lack a strategic vision. Lost opportunities are created when advisors operate in silos and the situation is made worse when advisors operate at cross purposes, and worse still when they are concerned only with their own fiefdom and fees. In this blog I would like to discuss why you may want to consider nominating one of your advisors as the responsible party for co-ordinating and quarterbacking your other advisors, or if you are up to it, tackling the quarterback job yourself.

There are many professionals who can quarterback your team. The two that seem most appropriate are a fee-for-service financial planner and your accountant. In my biased opinion, I would suggest that in many cases, a client’s accountant may be the best suited and most independent advisor because we often have the broadest vantage point of our client’s wealth and financial picture. But, this is not to say your investment advisor, whether a fee-for-service advisor or not, would not be suitable for the task. Some of the issues and reasons you may wish to put one of your advisors in place as your team’s quarterback are discussed below.

In many cases, I have observed that my client's investment advisors pay little or no attention to my client’s actual business affairs; other than to determine how much cash can be transferred from their corporation's to the investment accounts they hold for that client. So why does this matter? Because the client’s business is most often their largest asset and in many cases is the asset with the most risk. For example, two years ago I had a very successful parts supplier who as the recession began, was told by one of his major customers to halt shipments for a time. His business was in a high risk situation. His advisor had a significant portion of his portfolio in equities and never once considered the risk associated with his business in determining his asset allocation. How about a person who makes their money in real estate; should their advisor have any of their portfolio in real estate stocks? Maybe or maybe not, but the lack of diversification and resulting increased risk of holding real estate stocks in this scenario should be considered, and as I say, it is often totally ignored.  In addition, the income tax consequences of investing are such that the investment advisor should always co-ordinate with an accountant.

My client’s insurance advisors are a mixed group. Many are excellent and ensure they speak to me to understand my client’s needs including business structures, succession planning and income tax issues. However, the reality is many an accountant has shot down an insurance policy in their client’s best interest and some agents try to ensure the accountant is not involved when selling a policy to ensure the sale of the policy.

Lawyers are generally used to working with accountants and these professionals typically work together fairly seamlessly, however, they also typically have minimal interaction with the other advisor groups. In addition, many clients have lawyers they used for a real estate transaction or a will, etc. and they assume the lawyer can handle estate planning, US vacation home planning or similar other transactions not in their wheelhouse. I have seen several messy situations caused by real estate lawyers who decide they are probate planners and cause substantial deemed dispositions of real estate assets for income tax purposes. Again, if the lawyer was working as part of a team, they would have known to contact the accountant or tax lawyer before implementing any transaction.

Your financial world is a complicated place and where you have a team of advisors it is essential to get them all on the same playbook. You will typically be better able to achieve your key objectives in this way while ensuring the efficiency of professional fees.  

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, August 29, 2011

The Dividend Gross-up and Tax Credit Mechanism

Most people are convinced they are reading a foreign language when they try to comprehend and understand the meaning of the taxable dividend and dividend tax credit terminology on their T5’s and T3's. Today, I try and make some sense of these terms in a guest blog “The Dividend Gross-up and Tax Credit Mechanism” for Boomer and Echo. Thanks to Boomer and Echo for publishing this blog.

Boomer and Echo, who started their blog only a month or so before mine have achieved rapid success and critical acceptance in one short year. I guess two bloggers are better than one :).

I have not had the pleasure of talking or corresponding with Boomer, but I have had several email exchanges with Echo (Robb). As an accountant who has met hundreds of young entrepreneurs, I have developed a sixth sense as to which ones will probably be successful and based on Robb’s thought process and comments, I can see why Boomer and Echo has become successfull so quickly. Please check out my guest blog and Boomer and Echo’s blog if you have not already done so.

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, August 24, 2011

A Baby Boomer’s view of Social Media


My blog's mission statement is to discuss income tax and money issues and to blog about anything else that crosses my mind. It was suggested to me by some, that I stick to the tax and money issues; because that is the reason they were coming to my blog. I have thus kept my rants, off-topic blogs and restaurant reviews to a minimum. However, today I will inflict upon you an off-topic blog on my views of social media.

As a baby boomer, I think it is fair to say I have embraced social media to a large extent compared to many of my generation. I have this blog, a Twitter account, a LinkedIn account and I even hired a social media expert to help my firm Cunningham LLP.

Despite embracing social media, I am a partner in an accounting firm and I am often asked by my partners "how is this social media stuff translating into practical results in terms of clients and opportunities". (Hey, you cannot take the numbers out of an accountant). Anyways, since I am now a reformed bean counter, I explain that one must be cognizant that social media can also provide less measurable and intangible benefits, such as firm branding and/or personal recognition. I am not sure they buy it, but it sounds good so they leave me alone; although I must say, in some cases, such as Twitter, I still don’t get the point. I discuss my views on some of the key social media mediums below.

Blogs


This topic is near and dear to my heart. I probably broke every blog rule when I started this blog. For all intents and purposes, I started the blog because I put my hand up at a partner retreat. At our retreat last summer, our marketing consultant told us we were sorely lacking in social media and I volunteered to do a blog, since I like to write. Thus, I had no clear objective other than getting our firm started on the social media road. Mostly through luck and a little self-marketing, I got some early recognition from other kind bloggers and the Globe and Mail, which has translated into a nice steady following. The blog has evolved into a more practical tax and money blog, than the originally envisioned, “What’s on Mark’s mind blog.” However, that is fine and I will still have the occasional rant and personalize the blog when the mood strikes.

Although some of my partners want to look at whether the blog results in potential clients, I write because I enjoy writing and educating and the blog does bring some recognition to the firm and me personally, which is the intangible benefit. Hopefully, to get my partners off my back, at some point the blog will result in a few corporate clients coming on board with Cunningham LLP. In fact, I had one lead from a reader for which I thank them.

LinkedIn



My blog routine is to publish my blog, Tweet about the blog posting and then my Twitter account automatically updates my LinkedIn status. LinkedIn is a true business site. Some people swear by LinkedIn while others have not seen much benefit.

I like LinkedIn because if I need to utilize someone’s services I can go to their LinkedIn account to see if I know any of their connections. If we have a common connection I can vet the proposed service provider through these contacts. On the flip side, when I get a lead on a client or customer, if they are on LinkedIn I can see if any of their connections are people I know, and if so, I may be able to use a common connection to provide a warm referral to the prospective client/customer. Recently, I received a referral from LinkedIn when a banker I had lost touch with, found me on LinkedIn and referred a client.

It is also possible one of your connections has a contact you would like to meet and you can use them to arrange a meeting. LinkedIn allows you to see (details depends upon your LinkedIn status) who is viewing your profile, which is useful information.

The downside to LinkedIn is being bothered by people you do not want as connections and some people have concerns their customers/clients will be poached, so they turn off their connections. All in all, I find LinkedIn as a very useful social media site.

Facebook


I do not use Facebook personally, although our firm has a page. I do not consider Facebook a business site. I know many people love it as a personal social site. The only redeeming feature of Facebook for me is I get to see the crazy pictures my kids take in University while drunk. Actually, I would see them if they granted me access, but I have my sources :).

Twitter


As I noted, I Tweet my blogs and that is about it. I may use Twitter in the future to announce Federal and Provincial budget information, but I do not understand Twitter. When I go to Twitter, which is very infrequently, I see multiple Tweets by people I follow, most of which seem to be Tweets for Tweets sake. I just don’t see how anyone has the time to follow Twitter and I don’t see how 99% of the Tweets are useful, but maybe I am showing my age here.

In conclusion, I think social media can be very effective even for us baby boomers, if you are selective and strategic with its use.

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, August 22, 2011

The Income Tax implications of purchasing a rental property


Many people have been burned by the stock market over the past decade and find the stock market a confusing and complex place. On the other hand, many people feel that they have a better understanding and feel for real estate and have far more comfort owning real estate; in particular, rental real estate. While both stocks and real estate have their own risks, some proportion of both these types of assets should typically be owned in a properly allocated investment portfolio. In this blog, I will address some of the income tax and business issues associated with purchasing and owing a rental property. For a discussion of some of the non-tax issues you should consider in purchasing a rental property, The Wealthy Canadian has posted the first of a two part series on rental properties titled Tangible Assets .




The determination of a property’s location and the issue as to what is a fair price to pay for any rental property is a book unto its own. For purposes of this blog, let’s assume you have resolved these two issues and are about to purchase a rental property. The following are some of the issues you need to consider:

Legal Structure


Your first decision when purchasing a rental property is whether to incorporate a company to acquire the property or to purchase the property in a personal/partnership capacity of some kind. If you are purchasing a one-off property, in most cases, as long as you can cover off any potential legal liability with insurance, there is minimal benefit of using a corporate structure.

In 2011, in Ontario, there is no tax benefit to purchasing the property in a corporation given the fact that the corporate income tax rate for passive rental income is identical to the highest personal marginal income tax rate, 46%. Given their is no income tax incentive to utilize a corporation, when you include the cost of the professional fees associated with a corporation, in most cases, the use of a corporation does not make sense.

In addition, if the property is purchased in one’s personal capacity, any operating losses can be used to offset other personal income. If the property runs an operating loss and is owned by a corporation, those losses will remain in the corporation and can only be utilized once the rental property incurs a profit.

If you decide to purchase a rental property in your personal capacity, you must then decide whether the legal structure will be sole ownership, a partnership or a joint venture. Many people purchase rental properties with friends or relatives and/or want to have the property held jointly with a spouse. Where it has been determined that the property will be owned with another person, most people fail to give any consideration to signing a partnership or joint venture agreement in regards to the property. This can be a costly oversight if the relationship between the property owners goes astray or there is disagreement between the parties in terms of how the rental property should be run.

One should also note that there are subtle differences between a partnership and a joint venture. This is a complicated legal issue, but for income tax purposes if the property is a partnership, the capital cost allowance (“CCA”) known to many as depreciation, must be claimed at the partnership level. Thus, the partners share in the CCA claim. However, if the property is purchased as a joint venture, each venturer can claim their own CCA, regardless of what the other person has done. This is a subtle, but significant difference.

Allocation of Purchase Price


Once the rental property is purchased, you must allocate the purchase price between land and building. Land is not depreciable for income tax purposes, so you will typically want to allocate the greatest proportion of the purchase price to the building which can be depreciated at 4% (assuming a residential rental property) on a declining basis per year. Most people do not have any hard data to support the allocation (the amount insured or realty tax bill may be useful) so it has become somewhat standard to allocate the purchase price typically 75% -80% to building and 25% - 20% to the land. However, where you have some support for another allocation, you should consider use of that allocation. Typically for condominium purchases, no allocation or, at maximum, an allocation of 10% is assigned to land.

Repairs and Maintenance


If you are purchasing a property and it is not in a condition to rent immediately, typically, those expenses must be capitalized to the cost of the building and depreciation will only commence once the building is available for use. When a building is purchased and is immediately available for rent or has been owned for some time and then requires some work to be done, you must review all significant repairs to determine if they can be considered a betterment to the property or the repairs simply return the property back to its original state. If a repair betters the property, the Canada Revenue Agency’s ("CRA") position set forth in Interpretation Bulletin 128R paragraph 4, is that the repair should be capitalized and not expensed. This is often a bone of contention between taxpayers and the CRA,

CCA


CCA (i.e. depreciation for tax purposes) is a double-edged sword. Where a property generates net income, depreciation can be claimed to the extent of the property’s net income. Generally, you cannot create a rental loss with tax depreciation unless the rental/leasing property is a principal business corporation. The depreciation claim tends to create positive cash flow once the property is fully rented, as the depreciation either eliminates or, at minimum, reduces the income tax owing in any year (depreciation is a non-cash deduction, thereby saving actual cash with no outlay of cash). Many people use the cash flow savings that result from the depreciation claim to aggressively pay down the mortgage on the renal property. The downside to claiming tax depreciation over the years is that upon the sale of the property, all the tax depreciation claimed in prior years is added back into income in the year of sale (assuming the property is sold for an amount greater than the original cost of the rental property). This add-back of prior year’s tax depreciation is known as recapture.

People who have owned a rental property for a long period, sometimes reach a point in time where they have such large recapture tax to pay, they don’t want to sell the rental property. Personally, I do not agree with this position, since it is really a question of what will be your net position upon a sale and are you selling the property at a good price. However, recapture is always an issue to be considered, especially for older properties that have been depreciated for years.

Also, if you have taken tax depreciation on a property and you decide at some point in time to move into the property, you will not be able to defer the gain under the “change of use” rules in the Income Tax Act. I discuss these "change of use" rules in a guest blog "Your principal residence is tax exempt" I wrote for The Retire Happy Blog.

Reasonable Expectation of Profit Test


Previously, if a rental property historically incurred losses for a period of time, the CRA may have challenged the deductibility of these losses on the basis that the taxpayer had no “reasonable expectation of profit”. Fortunately, the CRA's powers with respect to the enforcement of this test have been severely limited. The test has been reviewed by the Supreme Court of Canada and their view is that where the activity lacks any element of personal benefit and where the activity is not a hobby (i.e. it has been organized and carried on as a legitimate commercial activity) “the test should be applied sparingly and with a latitude favouring the taxpayer, whose business judgement may have been less than competent.” Consequently, concerns previously held in respect to utilizing losses from rental properties, even if the properties are not profitable for some period of time, are now mitigated.

Purchasing a rental property requires a considerable amount of thought and due diligence prior to the actual acquisition. Having a basic understanding of the income tax consequences can assist in making the final determination to purchase the rental property.

Bloggers Note: I will no longer answer any questions on this blog post. There are 294 questions and answers in the comment section below. I would suggest your question has probably been answered within those Q&A. Thanks for your understanding.

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, August 17, 2011

Common Investment Errors

I am involved in wealth management for some of my clients as their wealth quarterback, co-ordinating their various professional advisors to ensure they have a comprehensive wealth plan. In that capacity, as well as in my day to day capacity, I see several common issues arise in relation to my clients’ investments whether they have professional management or manage their own investments. Here is a short list of some of the issues that I see on a consistent basis.

Duplication of investments

Duplication or triplication of investments, which can sometimes be interpreted as diworsification is where investors own the same or similar mutual funds, ETF’s or stocks in multiple places. A simple example is Bell Canada. An investor may own Bell in their own “play portfolio,” they may also own it in a mutual fund, they may own it in a dividend fund and they may own it again indirectly in an index fund. The same will often hold true for all the major Canadian banks. Unless one is diligent, or their advisor is monitoring this duplication or triplication, the investor has actually increased their risk/return trade off by overweighting in one or several stocks.

Laddering

This is simply ensuring that fixed income investments such as GIC’s and bonds have different maturity dates. For example, you should have a bond or GIC maturing in 2011, 2012, 2013, 2014, 2015 and so on, out to a date you feel comfortable with. However, many clients have multiple bonds and GIC’s come due the same year or group of years. The risk of course is that interest rates will spike creating a favourable environment for reinvesting at a high rate and you will have no fixed income instruments coming due for reinvestment. Alternatively, rates may drop and you have all your fixed income instruments coming due for reinvestment locking you in at a low rate of return. With the current low interest rate environment, you may wish to shorten your ladder, however, that ladder should still have maturity dates spread out evenly over the condensed ladder period.


Utilization of Capital Gains and Capital Losses

Most advisors and investors are very cognizant of ensuring they sell stocks with unrealized capital losses in years when they have substantial gains. However, many investors get busy with Christmas shopping or business and often miss tax loss selling. Even more irritating is that I still occasionally see clients paying tax on capital gains as their advisors have not reviewed the issue with them and crystalized their capital losses.

Taxable vs. Non-Taxable Accounts

There are differing opinions on whether it is best to hold equities and income producing investments in your RRSP or regular trading account. The answer depends on an individual’s situation, however, the key is to review the tax impact of each account. For example, if you are earning significant interest income in your trading account and paying 46% income tax each year, should some or all of that income be earned in your RRSP?  Would holding equities in your RRSP be best, or do you have substantial capital losses you can utilize on a personal basis? There is not necessarily a one-size-fits-all answer, but this issue must be examined on a yearly basis.

Tax Shelter Junkies

I have written about this several times, but it bears repeating, I have observed several people who are what I consider "tax shelter junkies" and continuously buy flow-through shares or other tax shelters, year after year.  I have no issue with these shelters, however, you must ensure the risk allocation for these type investments fits with your asset allocation.


Beneficiary of Accounts

This is not really an investment error, but is related to investment accounts. Where you have a life change, you should always review who you have designated as beneficiary of your accounts and insurance policies. I have seen several cases of ex-spouses named as the beneficiary of RRSP’s and insurance polices.

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, August 15, 2011

Speak to your Executor-surprise only works for birthday parties, not death

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

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

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

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

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

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

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

I have observed so many executors who were in over their heads, that I am now considering offering my services as an executor, or some kind of executor assistance to my clients, but I digress.

The take away from today’s blog is: (1) you must seriously consider your selection of an executor and their personal characteristics and (2) once you have made your selection, I would strongly suggest you discuss their appointment with them.

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, August 8, 2011

Common Personal Income Tax Errors

In today’s blog, I will discuss some of the more common personal income tax planning and personal income tax tracking errors I observe as a tax chartered accountant. Most of these planning and tracking errors are very subtle in nature. Many taxpayers utilize income tax software programs to prepare their personal income tax returns; I would suggest that these programs would not necessarily bring these matters to your attention, as the issues are not input based.

The following are common errors I observe on a consistent basis:

Transfer of investments with unrealized losses to a RRSP


Where you transfer an investment with an unrealized loss to your RRSP as a RRSP contribution, the capital loss on the disposition to your RRSP is disallowed. For example, if you bought shares of Research in Motion for $50 and transferred it from your non-registered trading account to your RRSP when the value was $35, the $15 capital loss would be denied. I have seen taxpayers claim this capital loss when they are not entitled to do so. Thus, you should be extremely careful to ensure you do not transfer any investments with an unrealized capital loss to your RRSP.

Spousal RRSP


A spousal RRSP counts as a contribution by the contributor. If Jennifer has a RRSP contribution limit of $18,000 and contributes $18,000 to her husband Tom’s RRSP, she receives the $18,000 income tax deduction and cannot contribute to her own RRSP. If Jennifer contributed $12,000 to Tom’s RRSP, she can only contribute up to $6,000 to her RRSP. The combined total cannot exceed her $18,000 RRSP limit. However, I often see people misinterpret these rules and make total contributions that exceed their RRSP contribution limit.

T3 income tax slips


These tax slips may contain an amount indicated in Box 42. This box relates to the return of capital on income trusts and similar investments. The amount in Box 42 indicates the amount of tax-free distributions received during the year and must reduce the adjusted cost base of the related investment. Many people do not keep track of their reduced adjusted cost bases. For example, if you purchased an income trust or similar investment for $14 in 2010 and the amount in Box 42 in the 2010 T3 slip is $1.50, the new adjusted cost base of that investment would now $12.50. If you were to sell the investment in 2011 for $15, the capital gain would be $2.50, not $1.

Depreciation on rental properties


A very subtle but significant error is in connection with rental properties. Many people purchase rental properties with friends or relatives and do not give any consideration to signing a partnership or joint venture agreement in regards to the property. This is a complicated legal issue, however, for income tax purposes, if the property is a partnership, the capital cost allowance [(“CCA”), known to many as depreciation for tax purposes] must be claimed at the partnership level and thus, the partners share in the CCA claim. However, if the property was purchased as a joint venture, each venturer can claim their own CCA, regardless of what the other person has done. (I will discuss this issue in greater depth in an upcoming blog on the income tax implications of owning a rental property).

Joint bank accounts


Many spouses arbitrarily open bank and investment accounts in the names of both spouses even though only one spouse may have earned and contributed all or the majority of the funds. This may lead to incorrect tax reporting results. For personal income tax purposes, technically, the spouse who earned and contributed the money to the account originally should report 100% of the interest, dividends or capital gains that are earned in that account on the original amount (there is no attribution back to the contributing spouse on the income earned on the income (i.e. “secondary” income). This is not necessarily what I see happening in reality.

Car expenses and home office related to employment


Many employees require their cars for work or are required to maintain a home office. Should you fall into either of these categories, you should ensure you get your employer to sign Form T2200, which will enable you to deduct these costs as employment expenses. Often, when I ask whether a taxpayer if they have obtained the Form T2200, they answer no.

Interest expense


Many people use their line of credit to borrow to make investments. The interest on these monies is typically deductible for income tax purposes. However, many people also use their line of credit for personal expenses, thus, mixing non-deductible personal interest expense with deductible investment interest expense. Where this is the case, you should track the amount the principal amount of the line of credit used for the investments on an excel spreadsheet for back-up in case of an audit by CRA. For example, if you took out $15,000 on your line of credit to make an investment, and the total line of credit balance is $100,000, you should allocate 15% of that month’s interest to your deductible interest expense. Any repayments to the line of credit must be prorated between the personal and non-personal amounts outstanding and cannot be allocated in whole to one or the other. Taxpayers often believe that they can apply the full repayment to the personal portion of their line of credit and therefore can claim a higher interest expense deduction for personal tax purposes.

1994 capital gains election


In 1994, the $100,000 capital gains exemption was phased out. However, individuals were eligible to make an election on their 1994 personal tax return to bump the value of their capital properties by up to $100,000. Many people made this election on their cottages and stock investments and never informed their children. Where the parent ages and forgets about this election or in some cases passes away, the children may not be aware of this election and the estate can pay more income tax than is necessary.

Tax planning does not always mean NO tax


The errors noted above are actual physical income tax planning errors. However, the biggest error committed by many people, is more mental than physical; when they attempt to reduce their income tax bill at any cost. As discussed in my blog The Income Tax Planning dog, wagging the Tax Dodge, this philosophy can often be at a significant personal detriment. 

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, August 4, 2011

Boring is good when investing

Jonathan Chevreau of the National Post recently wrote a column titled “Investing is boring; If you want excitement, go to Las Vegas”. The premise of the article is that “successful investing should be boring, which may explain why so many excitement-seeking investors suffer disappointing returns.” Mr. Chevreau goes on to discuss a self-published book by Edmonton-based wealth counselor Marshall McAlister, titled The Brilliance of Boring Investing: An Academic Approach to Portfolio Design. Chevreau notes the book begins with a quote from Nobel laureate Paul Samuelson: “Investing should be dull. It shouldn’t be exciting.” He then goes on to note that there’s a paradox, in that McAlister notes “the portfolio process that requires less work from investors can actually deliver the best long-term investment returns.”

John Heinzl of the Globe and Mail also recently had a column advocating a passive portfolio. The article asks “What is the biggest threat to your portfolio?” and the answer is “you.” One of the self-defeating behaviours he notes is “You thrive on excitement.” Heinzl says investing is not supposed to be entertaining, but the 24/7 flow of information, really over-information, and conflicting reports cause many to buy and sell constantly. He notes the important thing is to have a focused strategy, instead of trying to know absolutely everything about an investment.

I am not surprised by the assertion that boring investing brings forth the best returns and that passive investing beats active investing. (I wrote this blog a few weeks ago, but this week there has been a discussion on passive investing by the Canadian Capitalist, Michael James On Money and the Canadian Couch Potato). I however, will not focus on the passive investing issue per se, but on John Heinzl's observation of personal behaviours.

Mr. Heinzl’s comments about over- information ring true to me personally. I am an information hound. At times using Sedar, Canadian Insider, reading financial statements, management discussions and analysis, frequenting stock bulletin boards and listening to conference calls and so on. However, lately I have stepped back from active investing to some extent and I have been able to view other active investors with a more dispassionate view. I am astounded, especially in reading stock chat boards, at the amount of information constantly dug up by posters. They often drive each other crazy with this over-information, especially in quiet periods, when the company they are invested in does not release pertinent information. It is quite eye-opening viewing this information feeding frenzy from the outside.

Some investors are able to filter this morass of information into coherent research and due diligence and thrive on information, however, most investors are not able to process over-information dispassionately. Personally, I enjoy having a few speculative stocks, my Las Vegas as Mr. Cheverau would say; however, I agree, you need a lot of Iowa and North Dakota to be a successful investor in most cases.

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, August 2, 2011

CEO compensation-Does any human being deserve that much money?

Janet Mcfarland recently had a special report in the Globe and Mail on Canada’s highest paid chief executive officers. The Globe and Mail review of executive pay for the l00 largest companies reflected a 13 percent jump in compensation for 2010.

In March, United Auto Workers President Bob King had this to say about Ford President Alan Mulally, "I think Alan Mulally is a great CEO, but I don't think any human being in the world deserves that much money. I think it's outrageous." King went on to say "I like Alan Mulally, but I just think it's morally wrong," referring to Mulally's compensation package for 2010, which included 3.8 million shares of company stock.

Ignoring the union versus company bias, I think Mr. King captures the mindset of many shareholders and observers of CEO compensation.

The compensation issue is multi-layered. At the simplest level, are CEO’s salaries outrageous? At the next level, should pay be linked to performance? If pay is linked to performance, how do you ensure a CEO is not rewarded when their company’s stock price increases solely because they are in a hot sector and all companies in that sector have outperformed?

Niko Resources Ltd.’s CEO Edward Sampson was the top paid Canadian CEO in 2010 with compensation of $16,500,000, although more than $15,000,000 came from stock option grants. Personally, I think Mr. Sampson is an excellent CEO and Niko a very good company (save Niko's recent bribery charge), yet in 2010 Niko’s stock price only increased 5% from $98.40 to $103.18, hardly the performance you would expect of the top paid CEO.

In my professional capacity I have/had several CEO’s as clients. Some are/were quite brilliant and a couple former clients were far less impressive. I have clients who are owner-managers of private companies who match the intelligence and foresight of some of these public company CEO’s, yet make far less compensation, even when you take into account the value of the corporations they have built and will sell, or have sold. The point being, not all CEO’s are created equally and not all deserve to be put on a pedestal.

That being said, I would group CEO’s into three camps; the builders of value, the enhancers of value and the freeloaders.

The builders, such as a Steven Jobs or Frank Stronach, who start a company from essentially scratch, deserve huge compensation, at least in the initial building and early post building stage.

I consider an enhancer of value to be a CEO who either takes (1) a  mature company and through strategic vision creates more value for the shareholders, or (2) is a turnaround specialist, or (3) is someone who can take a moribund company and changes its direction to make it profitable. These CEO's in my opinion deserve significant compensation.

The problem I have is with the “freeloader” type who earn massive compensation riding economic or cyclical waves while adding very little value to their companies.

In the end, I agree to a large extent with Mr. King. I don’t think any human being deserves the compensation some CEO’s are paid. However, in certain cases as noted above, I believe significant compensation is warranted and that level of compensation should be determined by performance, not the office of the CEO.

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.