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, November 30, 2011

The Anti-Boring Portfolio- Me and My Money Revisited

I am in the process of transitioning from being an active stock picker to a more conservative passive investor. Numerous bloggers and journalists preach passive index investing with re-balancing and little trading. My blog on Monday highlighted the book, The Brilliance of Boring Investing by Marshall McAlister. In that book, Marshall discusses how passive boring investing, through indexes, is the way most investors should design their portfolios.
As I have discussed in prior blogs, stock investing should not be considered entertainment. However, I will admit that personally, I still need a small fix of speculative stocks in my portfolio. When I complete my metamorphosis to a full-fledged boring investor, I will get my stock picking fix by allowing myself to pick individual stocks for the small cap. allocation of my portfolio, which will be 60% of my portfolio (just joking, somewhere between 5-8%).

Last February Larry MacDonald profiled me in The Globe & Mail’s Me and My Money column. In the column I noted many small cap. stocks I held. These stocks only comprised a portion of  my portfolio, but I noted them because, let's face it, it is boring reading about the same 5 ETF's everyone holds. So as my stock picking days fade into the sunset, I let my anti-boring alter ego take over for one last time and discuss how my small cap picks have fared since the February, 2011 Me and My Money column.

I am posting this blog for three reasons: (1) Just for fun, as I can only read so much about index investing (2) to note where these picks came from, and (3) to reflect how risky and volatile small cap stocks are, which is a stark contrast to Marshall's boring investing mantra.

I have stated numerous times in my blogs, that as a chartered accountant I cannot provide specific investment advice and I do not have any regulatory investment licenses or specific training. I actually even felt compelled to check with my regulatory body that I could even be featured in the Me and My Money column, in case my picks were considered as investment advice.

Thus, to be clear, this blog is not to be construed as providing any specific investment advice and in fact I waited to write this blog until I disposed of most of these stocks and I will not disclose which of the two stocks I still own.

All joking aside about boring investing, stock picking is a risky way to play the market and research has shown it to be ineffective for the vast majority of people, and thus, I would not recommend picking individual stocks for the vast majority of people.

The following chart reflects my stock picks (except for Microsoft) in the Me and my Money column on February 11, 2011 and the closing price on November 29, 2011.


Name
Feb 12
Now
Costal Energy Company
7.36
$13.80
Wi-Lan Inc.
6.25
$5.52
Sterling Resources Ltd.
4.70
$1.70
Rainy River Resources
13.12
$7.35
Hathor Exploration Ltd.
3.30
$4.69
Nymox Pharmaceutical Corp.
6.49
$7.53


The Costal Energy pick came from the Investor Village chat forum. Most would think that to be a strange and risky place to obtain a stock pick and I could not agree more. However, I have followed a certain poster on the forums for years and he has selected several winning stocks and he made several compelling posts on why Costal was extremely undervalued. Those posts got me interested in the stock and I researched it further. Costal Energy which operates in Thailand, has been very successful in both finding oil and increasing production since February and the stock price reflects such.

I invested in Wi-Lan after reading about how it was protecting its patent portfolio by initiating litigation for royalty payments against the who’s who of technology companies. Based on my research, I figured it would become a cash cow upon settlement of the litigation. Most companies eventually did settle and the stock price soared to $9.50 or so buoyed by an indirect valuation put on Wi-Lan's patent portfolio by the sale of Nortel’s patents and a New York Stock exchange listing. However, Wi-Lan had some issues with one of its lawsuits and also made a failed hostile bid for Mosaid which deflated its stock price.

Sterling was a pick from a free newsletter I receive called David Pescod’s Late Edition. The newsletter contains many high risk stocks and thus I am not recommending or condoning the newsletter, I am just making you aware of its existence. David Pescod is an investment advisor for Canacord who writes about resource and small cap stocks. Sterling was undertaking some high impact drilling in the North Sea and if successful it was thought the company would explode in price. With some initial success the stock rose to $5, however, subsequent drilling was not as successful as hoped for and they had an issue obtaining drilling permits in Hungary, so unfortunately, the stock price exploded to the downside.

I learned of Hathor through a friend who was keen on Uranium and he provided me his due diligence. By happenstance, Pescod’s Late Edition was also bullish on Hathor since around the $1.90 mark. Hathor is the poster child for small cap stocks. It ran to $4.50 on great drilling results and was rumored to be a takeover candidate. However, as a uranium explorer, the stock price collapsed back to $1.80 after the nuclear meltdown in Japan. Subsequently, Cameco initiated a hostile takeover at $3.75 which has resulted in a bidding war with Rio Tinto, which Rio appears to have won at an offer of $4.70. Hathor shareholders have had quite a wild ride this year, unfortunately for many, they exited the stock after the nuclear disaster.

Rainy River is a gold explorer but, like many gold stocks, it has not participated fully with the exploding price of gold which is a strange phenomenon on its own. I first heard of Rainy on a stock chat board.

Nymox came from a friend who is in the medical field. It is in phase 3 testing for a pancreatic drug.

Although the above portfolio is only a microcosm of a small cap. ETF or mutual fund, it actually almost performed on key. It had one huge winner (Costal), one big winner (Hathor), two neutrals (Wi-Lan and Nymox) and two flameouts (Rainy River and Sterling). That is why most advisors want some exposure to small caps, potential gains in excess of the market (this mini-portfolio if equally weighted outperformed the TSX by 15% or so), however, advisors try and cover the downside risk by having a large baskets of small caps.

So this is how my stock picks from February have fared.  As I stated earlier, this post should not be construed as advice in any way and I have sold most of these stocks. This post was written in most part for entertainment purposes. Now you can go back to boring investing.

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, November 28, 2011

The Brilliance of Boring Investing & Bloggers for Charity update

I would like to update the Bloggers for Charity initiative and provide some clarifications before I get to my post on the Brilliance of Boring Investing. Firstly, Tim Penner has bid $250 to be a Blogger for a day on The Blunt Bean Counter site, outbidding Bradley Ashley’s generous $200 bid. Anyone want to top Tim?

There seems to be some confusion on the contest and rules, so I clarify:

1. The winning bidder may make their donation to the charity of their choice; it does not have to go to the United Way. My initial post on the initiative stated that the idea for this contest came from a client raising money for the United Way, but there is no charity of choice for the initiative. 

2. Each blogger participating in the initiative is auctioning off one guest post on their blog. The guest post will not appear on all the participating bloggers’ sites. For example, if Tim wins the auction for my site, his guest post will only appear on The Blunt Bean Counter site, it will not appear elsewhere.

3. Bids are made in confidence to each participating blogger’s email, however, the bloggers are encouraged to share the top bid(s) received to date on their site to encourage further bidding. Bloggers must ask permission from the bidder before disclosing the bidder’s full name or they should only use initials or say anonymous.

Although I was hoping for a little more traction this week, many of the who’s who of financial bloggers are participating. It would be great if bloggers of all ilks join the initiative. The following blogs are participating as of today:

Boomer & Echo                     Canadian Capitalist

Michael James On Money      Canadian Finance Blog

Retire Happy Blog                 Financial Highway

Canadian Financial DIY         Where Does All My Money Go

Young and Thrifty               Canadian Personal Finance Blog

The Blunt Bean Counter

The Brilliance of Boring Investing


After reading Jonathan Chevreau’s column titled “Investing is boring: if you want excitement, go to Vegas", in which he quoted Marshall McAlister, the author of the book The Brilliance of Boring Investing, I wrote a blog on the same topic discussing some of my personal experiences.

Based on Jonathan’s column and Jim Yih’s recommendation, I purchased Marshall’s book. For a book on building investment portfolios, it is a relatively easy read, and although it does not have any earth shattering revelations, I think that is the point – keep it simple and boring; it is a book you should consider purchasing.

The Brilliance of Boring Investing was initially intended to be a book for Marshall's clients and thus, the book is very client friendly and understandable. Below is a summary of the final chapter of Marshall's book where he lists seven points, which he calls his 1% solution, to allow investors to take control of their own portfolios.

1. Build a team of qualified professional advisors - investment advisor, tax accountant and estate and will lawyer.

On this point I agree whole heartedly with Marshall. However, as discussed in my Who is your wealth management quarterback? blog, it is not enough to just have a team. You need to appoint one of your advisors as the quarterback responsible for ensuring your advisors are working together to provide a comprehensive and integrated plan and not several disjointed plans. As I suggest in my blog, if you do not have a sophisticated well rounded advisor such as Marshall, your accountant is often a good selection for your quarterback.

2. Discover your sleeping point and ensure your portfolio is composed of enough conservative assets to keep the portfolio at the appropriate level of risk.

This is extremely important advice; however, I am not sure one truly knows if they can sleep at night until they go through a market meltdown. Your sleeping point can theoretically be determined beforehand, but in my opinion, can only be confirmed through actual experience and it may need to be revamped as you recognize what your true level of risk tolerance is after you have experienced a bad market.

3. Recognize the advantage of index based investment tools over that of typical active management in terms of performance, cost and taxes.


Not much needs to be said in reference to this point. Multiple studies have proven only a small portion of active investors actually outperform market indices. If you are a Do-It-Yourself investor ("DYI") and want to take control of your portfolio as Marshall discusses, the ETF options are enormous. Two great resources to help any DYI are  The Canadian Capitalist and The Canadian Couch Potato. Both bloggers have an incredible library of informative blogs on ETF's that not only provide options for your portfolio, but compare many of the alternative ETF’s.

4. Globally diversify your equity portfolio to spread your exposure to as many geographic markets as have merit for inclusion.

Again, pretty much a common investment mantra as global diversification is a key component of any portfolio allocation.

5. Understand the risk and return trade of Value Investing and incorporate the appropriate level of Value Stocks to match your return objectives.

Marshall notes that a great company may have an extremely high stock price that precludes it from being a good investment, yet a so-so company that is moving towards greatness may have better value. As Marshall is from Edmonton, I had never met him or spoke to him. However, this week we talked on the telephone about this blog and I was confused on this point. If you want a so-so company moving towards greatness, is he not suggesting being a stock picker as opposed to a index investor? Marshall said this was a good question (probably just being polite) and said this can be accomplished through pooled and private funds that specialize in this area.

6. Understand the risk and return trade off of Small Company investing and build in the needed exposure to small companies to further diversify and increase potential return.

Historically small cap stocks have delivered a higher return than large companies; however, the risk associated with owning small cap stocks is very high. That is why a small cap. ETF that has a large basket of small cap stocks works; it ensures spectacular flame outs do not decimate your small cap fund.

7. Recognize that as humans we are not always wired to be great investors. Commit to keeping your emotions in check by holding course to the detailed wealth management plan that has been designed for you.

Definitely under the easier said than done category. I would suggest the key to this point is finding your sleeping point under #2.

That’s it for today; on Wednesday I contrast Marshall's proper portfolio construction with the anti-boring portfolio I discussed when I was profiled by Larry MacDonald in Me and My Money.

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, November 23, 2011

Steve Jobs or Bill Gates- Who should be on the pedestal?

On Monday I started the Bloggers for Charity initiative. In keeping with the charity theme, today I will discuss how a person’s charitable intentions may affect how they are viewed by society when their life is looked at in totality. There is no better comparison to illustrate the significance of philanthropy when looking at the impact an individual has on the world than comparing Bill Gates and Steven Jobs.

Before I get to my post, a quick public service announcement. Bradley Ashley (permission granted to use his name) has bid $200 to be a guest Blogger for a day on The Blunt Bean Counter. If you want to top Bradley's bid, please email me at bluntbeancounter@gmail.com.

A few days after Steve Jobs passed away, the adulation faded in some quarters and some critics began to note his poor track record in regard to charitable causes, especially when compared to his contemporary, Bill Gates.

When talking around the water cooler with colleagues at work, this topic arose often in the week or two following Mr. Jobs death. People were reading that not only did Jobs personally not donate to charity, but that he had eliminated all corporate philanthropy programs at Apple. However, since Jobs was quoted as saying he did all his charitable acts privately, one will never know without reviewing his personal income tax return how philanthropic he was or was not. In this Washington Post article , Bono of U2 supports Jobs’ when he is criticized for his poor philanthropic efforts.

On a personal basis, I have always found this issue intriguing. I have often wondered if I was super-rich, would I be more like Bill Gates or more like Steve Jobs. How much money is enough once you are extremely wealthy? Personally, I would like to think I would be more like Bill Gates.

Based on the above discussion, I found this article, taken from the Harvard Business Review, posted on Business Week.com by Maxwell Wessel extremely interesting. The premise of Mr. Wessel’s article is that although both leaders are highly admirable, and in fact Mr. Jobs may have been our generation’s most important leader in the world of business, Bill Gates has used his talents in ways that stretch beyond the business world.

Mr. Wessel states “As much as I love Apple, Inc., I would happily give up my iPhone to put food on the plates of starving children. Steve Jobs turned his company into a decade long leader in the truly new space of mobile computing. Bill Gates decided to eliminate malaria. Who do you think we should be putting up on a pedestal for our children to emulate?”

I must say that I tend to agree with Mr. Wessel. However, the Jobs philanthropic legacy is far from over, as supposedly his wife Laurene Powell Jobs, is very philanthropic in nature and the apple may turn :).

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, November 21, 2011

Bloggers for Charity

Bensimon Byrne one of my firm’s clients and a very successful advertising agency, deserves recognition for raising almost $100,000 for the United Way over the last four years. Every November they have a variety of events to fund raise on behalf of the United Way. One of the events includes an auction where friends, clients and suppliers of the firm donate services or goods that are then auctioned off.

Our firm having no goods to offer donates services; last year bidders could win a free tax planning and wealth meeting with yours truly, one of the most prized auction items :). This year, I considered auctioning off a free Guest Blogger spot on my blog, which got me thinking, why not have other bloggers do the same thing Canada wide, to raise money for charity?

I have thus enlisted the help of five of the best known financial bloggers in Canada; Boomer & Echo, Canadian Capitalist, Michael James On Money, Canadian Finance Blog and the Retire Happy Blog. Each of them have agreed to participate in Bloggers for Charity (see downloadable badge below) and tomorrow will nominate five other bloggers to join the Blogger for a Day effort. All bloggers, should feel free to join the effort (this initiative is not limited to financial bloggers) whether nominated or not and encourage their blogger contacts to join the Bloggers for Charity initiative.

For my readers, I know many of you have latent writing aspirations, so please feel free to bid and let the writer in you free. Please send your bid to my email at bluntbeancounter@gmail.com.

Here are the so-called rules:

1. Each blogger will auction off the opportunity to write a guest post on their blog.

2. All bids will be made in confidence to the blogger’s email account. The blogger at their discretion can email back bidders the current top bid or note the amount of the leading bid on their blog to encourage bidding.

3. The auction will close on December 16, 2011. The blogger will notify the winning bidder by email.

4. The winning bidder will be required to send the blogger a copy of a donation receipt, dated between December 17th and December 31st (personal information can be blacked-out) to confirm the donation has been made. (This donation will be tax deductible to the winning bidder as long as the donation is made to a registered charity).

5. For unanimity amongst bloggers, it is suggested that January 17, 2012 be the date all the Blogger for a Day posts are posted.

6. The winner can write a post on any topic (subject to censorship by the particular blogger), although in the spirit of the contest, it would be great if the winning bidder wrote about a charity or charitable experience, but that is not a requirement. The only rule is that the guest post cannot be a marketing piece. However, at the bottom of their post, the guest blogger can provide their name, name of their company and a brief description of their company and its products. Alternatively, the guest blogger can remain anonymous.

7. All bloggers who participate are asked to email my assistant Lynda at Lynda@cunninghamca.com to note their participation and then to email Lynda with their winning bid so I can tally the donations received. All individual donation totals will be kept confidential.

8. Bloggers participating in the Bloggers for Charity initiative can download a badge (see below) to denote their participation.

9. All participating bloggers will be noted below as they join the initiative.

LIST OF BLOGGERS


Boomer & Echo                           Canadian Capitalist

Michael James On Money            Canadian Finance Blog

Retire Happy Blog                        Financial Highway

Canadian Financial DIY                Where Does All My Money Go

Young and Thrifty                         Canadian Personal Finance Blog

The Blunt Bean Counter

GET BUTTONS


Cut and paste the following script, starting with <a  and ending with </a> into a custom html widget on your sidebar, or into the html editor of of your blog CMS.
 
300 x 150  Bloggers For Charity

<a href="http://www.thebluntbeancounter.com/2011/11/bloggers-for-charity.html"><img class="alignleft" src="http://bit.ly/vu9Ffd" alt="Bloggers For Charity" width="300" height="150" /></a>


180 x 150  Bloggers For Charity

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More Bloggers For Charity buttons in different sizes coming soon.

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, November 16, 2011

Ontario Probate- You may want to plan to Die in 2012

I have discussed probate fees, now known in Ontario as the Estate Administration Tax (“EAT”) in several blogs. Probate Fee Planning is now a cottage industry in Canada, as Canadians strive to minimize this provincially mandated tax.

The EAT (what an appropriate acronym) is paid on the value of a deceased person’s estate when their executor(s) apply for a certificate of appointment of estate trustee (better known as “letters of probate”). Anyone who has had the unfortunate experience of being an executor can attest that without these letters of probate, you have no authority and the various financial institutions will not even to talk to you.

In Ontario, upon applying for the certificate of appointment, the executor must provide a list of the deceased’s assets and their fair market value and pay the EAT on those assets. In Ontario these fees are $250 on the first $50,000 and $15 per $1,000 of assets thereafter. Thus, the EAT on $100,000 would be $1,000 and on an estate of $1,000,000, the fees would be $14,500 . 

Although executors spend hours upon hours compiling the list of assets for the application to get the certificate, the Ontario government often accepts the tax paid without question and often does not follow up or audit the list and valuation of the deceased’s assets.

I recently attended the Ontario Tax Conference where there was some discussion about changes to the EAT legislation. These changes are summed up in this newsletter published by the law firm Cassels Brock titled “Taxed to Death: Heightened Audit for Ontario Estate Administration Tax”.  In this newsletter, the authors Ambie K. Edgar-Chana and Lindsay Ann Histrop discuss the audit and verification powers, as well as assessment powers, that the Ontario Ministry of Revenue will have beginning January 1, 2013. Ontario estate auditors will now have four years from the date the EAT is payable to assess or reassess the tax.

As a consequence of the increase in verification powers, the valuation of assets disclosed in the application will be subject to far greater scrutiny. Executor(s) will be required to assist the Ontario Ministry of Revenue and answer questions regarding the valuation of the estate’s assets. Executors will have to be extremely diligent in obtaining and documenting how they came to the valuation of assets reported on the application. In addition, beginning in 2013, executors will have to be extremely cautious in distributing assets before the end of the four year period, as they could be held liable for any additional probate taxes owing.

The heightened audit requirements in 2013 will likely result in increased liability for executors and will likely be a catalyst for even more probate planning to ensure the value of the estate is minimized for the EAT.

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, November 14, 2011

Tax-Loss Selling-Everything you always wanted to know but were afraid to ask

I would suggest that the best stock trading decisions are often not made while waiting in line to pay for your child’s Christmas gift. Yet, many people persist in waiting until the third week of December to trigger their capital losses to use against their current or prior years capital gains. To avoid this predicament, you may wish to set aside some time this weekend or next, to review your 2011 capital gain/loss situation in a calm methodical manner. You can then execute your trades on a timely basis knowing you have considered all the variables associated with your tax gain/loss selling well in advance.

This blog will take you through each step of the tax-loss selling process. In addition, I will provide a planning technique to create a capital gain where you have excess capital losses and a technique to create a capital loss, where you have taxable gains.

Reporting Capital Gains and Capital Losses – The Basics


All capital gain and capital loss transactions for 2011 must be reported on Schedule 3 of your personal income tax return. You then subtract the total capital gains from the total capital losses and multiply the total net capital gain/loss by ½. That amount becomes your taxable capital gain or net capital loss for the year. If you have a taxable capital gain, the amount is carried forward to the tax return jacket on Line 127. For example, if you have a capital gain of $120 and a capital loss of $30 in the year, ½ of the net amount of $90 would be taxable and $45 would be carried forward to Line 127. The taxable capital gains are then subject to income tax at your marginal income tax rate.

Capital Losses


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



Planning Preparation


I am posting this blog earlier than most year-end capital loss trading articles because I believe you should start your preliminary planning immediately. (Tim Cestnick also agrees with early planning and he beat me to this topic with his article last week). These are the steps I recommend you undertake:

1. Retrieve your 2010 Notice of Assessment. In the verbiage discussing changes and other information, if you have a capital loss carryforward, the balance will reported. This information may also be accessed online if you have registered with the Canada Revenue Agency.

2. If you do not have capital losses to carryforward, retrieve your 2008, 2009 and 2010 income tax returns to determine if you have taxable capital gains upon which you can carryback a current year capital loss. On an Excel spreadsheet or multi-column paper, note any taxable capital gains you reported in 2008, 2009 and 2010.

3. For each of 2008-2010, review your returns to determine if you applied a net capital loss from a prior year on line 253 of your tax return. If yes, reduce the taxable capital gain on your excel spreadsheet by the loss applied.

4. Finally, if you had net capital losses in 2009 or 2010, review whether you carried back those losses to 2008 or 2009 on form T1A of your tax return. If you carried back a loss to either 2008 or 2009, reduce the gain on your spreadsheet by the loss carried back.

5. If after adjusting your taxable gains by the net capital losses under steps #3 and #4 you still have a positive balance remaining for any of the years from 2008 to 2010, you can potentially generate an income tax refund by carrying back a net capital loss from 2011 to 2008, 2009 or 2010.

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

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

Basic Use of Losses


For discussion purposes, let’s assume the following:

· 2011: realized capital loss of $30,000

· 2010: taxable capital gain of $15,000

· 2009: taxable capital gain of $5,000

· 2008: taxable capital gain of $7,000

Based on the above, you will be able to carry back your $15,000 net capital loss ($30,000 x ½) from 2011 against the $7,000 and $5,000 taxable capital gains in 2008 and 2009, respectively, and apply the remaining $3,000 against your 2010 taxable capital gain. As you will not have absorbed $12,000 ($15,000 of original gain less the $3,000 net capital loss carry back) of your 2010 taxable capital gains, you may want to consider whether you want to sell any “dogs” in your portfolio so that you can carry back the additional 2011 net capital loss to offset the remaining $12,000 taxable capital gain realized in 2010. Alternatively, if you have capital gains in 2011, you may want to sell stocks with unrealized losses to fully or partially offset those capital gains.

Creating Gains when you have Unutilized Losses


Where you have a large capital loss carryforward from prior years and it is unlikely that the losses will be utilized either due to the quantum of the loss or because you are out of the stock market and don’t anticipate any future capital gains of any kind (such as the sale of real estate), it may make sense for you to purchase a flow-through limited partnership.

Purchasing a flow-through limited partnership will provide you with a write off against regular income equal to the cost of the unit and any future capital gain can be reduced or eliminated by your capital loss carryforward.

For example, if you have a net capital loss carry forward of $75,000 and you purchase a flow-through investment in 2011 for $20,000, you would get approximately $20,000 in tax deductions in 2011 and 2012, the majority typically coming in the year of purchase. Depending upon your marginal income tax rate, the deductions could save you upwards of $9,200 in taxes. When you sell the unit, a capital gain will arise. This is because the $20,000 income tax deduction reduces your adjusted cost base from $20,000 to nil (there will be other adjustments to the cost base). Assuming you sell the unit in 2013 and you have a capital gain of say $18,000, the entire $18,000 gain will be eliminated by your capital loss carry forward. Thus, in this example, you would have proceeds of $27,200 on a $20,000 investment. For a more detailed analysis of flow-thoroughs including the investment risk, see this blog I wrote for the Retire Happy Blog.

Superficial Losses


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

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


In certain cases you can use the superficial loss rules to your benefit. As per the discussion in my blog Capital Loss Strategies if you plan early enough, you can essentially use the superficial rules to transfer a capital loss you cannot use to your spouse. A quick blog recap: if you sell shares to realize a capital loss and then have your spouse repurchase the same shares within 30 days, your capital loss will be denied as a superficial loss and added to the adjusted cost base of the shares repurchased by your spouse. Your spouse then must hold the shares for more than 30 days, and once 30 days pass, your spouse can then sell the shares to realize a capital loss that can be used to offset your spouse’s realized capital gains. Alternatively, you may be able to just sell shares to your spouse and elect out of certain provisions in the Income Tax Act. However, both these scenarios should not be undertaken without first obtaining professional advice.

Settlement Date


It is my understanding that the settlement date for stocks in 2011 will be December 23, 2011. Please confirm this date with your broker, but assuming this date is correct, you must sell any stock you want to crystallize the gain or loss in 2011 by December 23, 2011.

Summary


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

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, November 9, 2011

Joint Bank Accounts-Documenting your Intention

In my blog Probate Fee Planning-Income Tax, Estate and Legal issues to consider, I talk about how holding assets in joint tenancy can be problematic post the Supreme Court decision in Pecore v Pecore.

I further discuss that many parents who put funds in joint accounts with a child/children to save on probate taxes (sometimes creating substantial income taxes as result) are often not clear as to their intention in regard to the funds: i.e. is it the parent’s intention that the funds held jointly with one child belong to that child, or do they belong to all their children with an understanding that the child on the account will share with their siblings?

The Pecore decision states that where assets are transferred without consideration (such as to a child to avoid probate), the presumption of a resulting trust will operate in almost all cases save transfers from a parent to a minor child. This means that when a parent transfers assets into a joint account with one child, there must be evidence of the intention to make a gift to that specific child or the joint account is presumed to be held in trust for the parent’s estate and the proceeds are divided pursuant to the parent’s will. In certain cases it may have been the parent’s intention to share the funds with all their children equally; however, in other cases the parent may have wanted a specific allocation to a specific child.

In order to avoid the presumption of a resulting trust post Pecore, lawyers have been yelling from the rooftops that people need to document their intention in regard to joint accounts. Well, the enterprising law firm of Fish & Associates has tried to come to the aid of Canadians with The Joint Asset Planning Kit.

For $45 the firm will sell you a 15 page document that, according to the website, “allows a parent to clearly express his or her intentions regarding joint parent-child accounts. If a parent wants the assets in a joint account to go to the joint owner, then this is spelled out clearly in the document.”

On the Jointasset.com website, Barry Fish states that he took “pains” to ensure that The Joint Asset Planning Kit can't override a will. “We've been very, very careful to ensure that, under no circumstances, do we ever want this document to be construed as a revocation of a prior will or testamentary disposition.”

I want to be clear of two things at this point. Firstly, I have never met Barry Fish or any of his associates (although we were quoted together in this article on estate planning for the black sheep child) and I am not receiving any compensation for discussing their website. Secondly, I can only rely on Mr. Fish’s assertion that this kit will stand up in a court without having any effect on a prior will.

If you have a lawyer, I suggest you consider meeting with them to draft a document stating your intention in regard to any joint bank accounts (this is the case whether you want a joint account to be shared equally by your children or not). If you do not have a lawyer, you may wish to consider purchasing The Joint Asset Planning Kit, but be clear, I am not endorsing such, just noting the kits existence for your consideration.

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, November 7, 2011

Proprietorship or Corporation - What is the Best for Your (New) Business?

I am often asked by readers and clients, whether they should incorporate a new business or start as a proprietorship? A logical follow-up question for those that have already started their business as a proprietorship is: when should they convert their proprietorship into a corporation? I will address both these questions today.

Corporation – Non-Tax Benefit


The number one non-tax reason to incorporate a business is for creditor proofing. Generally, a corporation provides creditor protection to its shareholder(s) through its limited liability status, a protection not available to a proprietorship. (It is important to note that certain types of professional corporations while protecting your personally from corporate liability, do not absolve the individual professional from personal professional liability). Where an incorporated business is sued and becomes liable for a successful claim, the only assets exposed to the creditors are the corporate assets, not the shareholders personal assets.

In order to mitigate the exposure that a potential claim could have on corporate assets, a holding company can be incorporated. Once the holding company is incorporated, the active corporation can transfer on a tax-free basis the excess cash and assets to the holding company (as discussed in my blog creditor proofing corporate funds) to insulate those assets from creditors. The assets in the holding company cannot be encroached upon if there is a lawsuit against the operating company unless there was some kind of fraudulent conveyance.

The inherent nature of certain businesses leads to the risk of lawsuits, while other business types have limited risk of a lawsuit. Thus, one of your first decisions upon starting a business is to determine whether your risk of being sued is high and if so, you should incorporate from day one.

Corporation – The Tax Benefits


There are several substantial income tax benefits associated with incorporation:

1) The Lifetime Capital Gains Exemption

If you believe that your business has substantial growth potential and may be a desirable acquisition target in the future, it is usually suggested to incorporate. That is because on the sale of the shares of a Qualifying Small Business Corporation, each shareholder may be entitled to a $750,000 capital gains exemption. So for example, if you, your spouse and your two children are shareholders of the family business (often through a family trust), you could potentially sell your business for $3,000,000 tax-free in the future. It should be noted that typically businesses that are consulting in nature, have limited value, since the value of the company is the personal goodwill of the owner.

Where you start your business as a proprietorship, it is still possible to convert the proprietorship into a corporation on a tax-free basis and to multiple the capital gains exemption going forward. A couple of points are worth noting here: (1) incorporating a proprietorship after the business has been operating for a few years may result in substantial legal, accounting and valuation fees; and (2) the value of the business up to the date of incorporation will belong to you and will be reflected in special shares that must be issued to you (assuming you will include other family members as shareholders in the new corporation).

For example, let's say you operate a successful business which you started as a proprietorship because you were unsure of whether it would be successful. The business has taken off and you have engaged a valuator to value the business prior to incorporating. The valuator has determined that the fair market value of your business today is worth $500,000. Upon incorporation, the $500,000 of value would be crystallized in special shares that would be owned by you. The new common shares that would be issued would only be entitled to the future growth of the business above and beyond the $500,000 and thus, any future capital gains exemptions for the new common shareholders would only accrue on the value in excess of $500,000.

2) Income Splitting

A corporation provides greater income splitting opportunities than a proprietorship. With a corporation it is possible to utilize discretionary shares that allow the corporation to stream dividends to a particular shareholder or shareholders (e.g. a spouse or a child 18 years of age or older) who are in lower marginal income tax brackets than the principal owner-manager.

Dividends are paid with after-corporate tax dollars from the business, whereas salaries, the alternative form of remuneration, are paid with pre-tax dollars and are generally a deductible business expense. The deductibility of a salary by a business is subject to a “reasonability test”. In order to deduct a salary from the business’ income it must be considered “reasonable”. Unfortunately, there is no defined criteria as to what is considered “reasonable”; however, paying a family member a salary of $50,000/annually who has little or no responsibilities within the business is likely not “reasonable”. However, with dividends there is no such “reasonability test”, so paying a family member a dividend of $50,000 even though she/he may have little or no responsibilities within the business is perfectly acceptable. Salaries to family members can be paid in an incorporated business or unincorporated business; however, the dividend alternative is unique to a corporation. Sole proprietors cannot pay themselves a salary; they receive draws from the proprietorship.

3) Income Tax Rate

The first $500,000 of active business income earned in a corporation is currently subject to an income tax rate of only 15.5%  in Ontario. Since the personal rate on income can be as high as 46%, income earned within a corporation potentially provides a very large income tax deferral, assuming these funds are not required personally for living expenses. This potential 30% deferral of income tax allows you to build your business with pre-tax corporate dollars. It should also be noted that once you take the money from the corporation, in many cases you essentially pay the deferred 30% tax as a dividend.

Corporations – The Fine Print


1) Expenses

Many people want to incorporate their business because they feel they will be able to deduct many more expenses in a corporation. In a general, that is an income tax fallacy. For all intents and purposes, the deductions allowed in a proprietorship are virtually identical to the deductions permitted in a corporation.

2) Professional and Compliance Costs and Administrative Burdens

The costs to maintain a corporation are significantly larger than for a proprietorship. There are initial and ongoing legal costs and annual accounting fees to prepare financial statements and file corporate income tax returns. These costs can be significant in some cases and can even outweigh some of the tax benefits in certain situations.

In addition, the administrative burdens for a corporation are far greater and drive many a client around the bend. For example, in a proprietorship or partnership, the owner(s) can take out money from the corporation without payroll source deductions. This is not the case when the owner(s) take out money in the form of a salary from a corporation.

So Why Start as a Proprietorship?


If you do not have legal liability concerns and you cannot avail yourself to the enhanced income splitting opportunities with family members a corporation may provide, starting as a proprietorship keeps your costs down and reduces your compliance and administrative issues. More importantly, since most people need whatever excess cash their business generates in its early years to live on, there is generally little or no tax benefit from incorporating a business initially. Finally, a proprietorship essentially provides for an initial test period to determine the viability of the business and if there are business losses, the owner(s) can generally deduct these losses against his or her other income.

When to Incorporate your Proprietorship?


In my opinion, you should incorporate your proprietorship once it has proven to be a viable business and once it has begun to generate cash in excess of your living requirements, so that you can take advantage of the 30% tax deferral available in a corporation.

Once you satisfy the above two criteria and incorporate, you will then benefit from creditor protection and the potential income splitting opportunities with other family members (assuming you want to include other family members as shareholders) and potentially the capital gains exemption or multiplication of the capital gains exemption if you include other family members in the corporation.

There is no “one shoe fits all” solution in determining whether to incorporate a new or ongoing business; however, the answer should become clearer once you address the issues I have outlined in this blog.

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, November 4, 2011

Things that make you go hmmm- If Greece was California

I have been reading furiously trying to grasp the complexities of the Greek bailout and to understand why the European leaders do not just let Greece default. To be brutally honest, I just do not have enough knowledge to comment intelligently about the topic. Many articles discuss a Credit Default Swap (“CDS”) crisis, a product and concept that is very hard to grasp when extrapolated worldwide.

I have read that a Greek default could cause CDS counterpart failure, much of it possibly in the U.S., and also could cause massive deficits in the Eurozone amongst other catastrophic events.Yet, I still ponder; if 50% of Greece’s debt has already been written off, why not just cut Greece loose? Greece is a basket case no matter how you paper the mess. Is it only a question of an orderly disaster vs. a disorderly disaster?

Striving to better understand this situation, I went to one of my retired partners who is fairly sophisticated on worldly matters, and during our conversation he said, “Why bail out Greece if the U.S. doesn’t bail out California? It took me a second to grasp where he was going with this, but what an interesting comment.

I went back to my desk and did some quick comparisons. California is the 8th largest economy in the world, while Greece is only the 32nd largest economy in the world.

For all intents and purposes, both California and Greece are bankrupt.

I wonder how keen the other U.S. states would be to bail out California and whether the American people would have an appetite to do so. We do know the American government has shown no reluctance to do such for large American companies.

As noted above, I am no world economist or political pundit, and although California and Greece have numerous complex issues particular to each, one can also argue they are shockingly close in similarity. Think about that.

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, November 2, 2011

Retirement- Are you a Nevertiree through choice or necessity?

Jim Yih of the Retire Happy Blog has provided me with some pearls of blogging wisdom since I began my blog just over a year ago. Jim dropped one of his pearls of wisdom upon me a while back when he said "Mark, there are very few original ideas to blog about, most have been covered somewhere else”. As I pride myself on creating some original blogs and blog concepts I was shattered. So, when I noticed a trend amongst my clients who had previously told me they planned to retire early, suddenly informing me they had changed their retirement plans and did not intend to retire or only partially retire, I thought I had an original blog in the making. I was going to write on how those who had the means to retire early were now not considering full retirement. I also thought to myself, I would show Jim, I just needed to come up with a pithy concept for this change in retirement philosophy.

As I considered various catchy phrases for this concept, Jim's words came back to haunt me when Michal Nairne the president of Tacita Capital Inc.,a private family office and investment counselling firm in Toronto (that advises some of my clients no less), wrote an article in the Financial Post titled Working to a ripe old age. In his article he discusses how affluent people now see themselves as “Nevertirees” rather than retirees. Wow, not only did he beat me to the punch in writing on the topic, he had come up with a very pithy description of the concept.

I loved the term "Nevertirees" and was about to call Michael to congratulate him on his originality, when in reading his article, I discovered that Barclay's Wealth had either coined the term or used it in their Barclay's Wealth survey that stated that 60% of high net worth individuals in the UK want to keep working and will never retire. Jim should have told me not only are there no original ideas to blog about, but there are no original terms to coin.


Anyways, enough of my ego issues, getting back to the point of this blog, Michael also discussed a Merrill Lynch study that found that Baby Boomers expect to spend a significant portion of their retirement working. This study was however not restricted to high net worth people. These people wanted to work for mental stimulation, but also in many cases needed to continue working for money and health benefits.

The mental stimulation noted in the Merrill Lynch study is a constant reason cited by my clients who have decided to continue working rather than retire. They have read various reports in the media that if they stop working, their odds of dying earlier are higher than those people who continue to work in some capacity. This concept is discussed in a Forbes.com article titled Why retirement is bad for you by Stephen Berglas Ph.D.

However, the ‘keep working to live longer’ mantra has been contradicted by other studies such as this Boeing study by Dr. Sing Lin Ph.D. Since I have no idea which study is right, I just put these studies out there for your consideration.


As briefly noted above, the final reason that the average (non-high net worth) person plans to become a nevertiree is necessity. The weak stock markets, poor employment and business conditions of the last several years have knocked back retirement funds and many potential retirees need a growing pool of capital and not the depleted puddle they have right now. An article by Tavia Grant, published just last week in the Globe and Mail titled Canadians Holding off on Retirement discusses this issue in part.

For whichever of the plethora of reasons noted above, many people do not expect to be sitting back (at least not full-time) and sipping their Pina Colada’s in retirement. They expect, or need, to continue at least part-time work and with the work force shrinking as the baby boomers age, they may have the opportunity to do just that.

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.