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, June 27, 2012

IRS Sets Forth Amnesty Procedures for U.S. Citizens Living in Canada

Over the last year or so, I have written blog posts on the requirements of U.S. citizens to file both Canadian and U.S. income tax returns and the outrageous penalties that could be assessed for not filing Internal Revenue Service ("IRS") information forms. In addition, I posted on the possibility of a true amnesty for Americans living in Canada after Finance Minister Jim Flaherty jumped into the dual tax filing fray.

Well, that amnesty may now be close at hand. On Tuesday, IRS Commissioner Doug Shulman announced a plan to help U.S. citizens residing overseas, including dual citizens, catch up with tax filing obligations and provide assistance for people with foreign retirement plan issues. As he said in the press release "Today we are announcing a series of common-sense steps to help U.S. citizens abroad get current with their tax obligations and resolve pension issues,".

While some of the details are still forthcoming, the IRS set forth a new procedure in which taxpayers who are considered a "low compliance risk" will be required to file three years of income tax returns and six years of Foreign Information Returns. All submissions will be reviewed and for those low risk taxpayers, the review will be expedited and the IRS will not assess penalties or pursue follow-up actions, although any tax owing must be paid.

Higher compliance risk returns are not eligible for the procedure and will be subject to a more thorough review and possible full examination. In these cases, tax, interest and penalties may be imposed.

The press release says this about compliance risk determination:

“The IRS will determine the level of compliance risk presented by the submission based on certain information provided on the returns filed, and based on certain additional information that will be required as part of the submission. Low risk will be predicated on simple returns with little or no U.S. tax due. Absent high risk factors, if the submitted returns and application show less than $1,500 in tax due in each of the years, they will be treated as low risk. In general, the risk level will rise as the income and assets of the taxpayer rise, if there are indications of sophisticated tax planning or avoidance, or if there is material economic activity in the United States. Additional risk factors include any additional history of noncompliance with United States tax law and the amount and type of United States source income. Additional information regarding the specific factors the IRS will use to assess the level of compliance risk, and how information regarding those factors should be presented in the submission, will be released prior to the effective date of the new procedure.”

The above procedure will also provide for retroactive relief for failure to timely elect income deferral on certain retirement and savings plans (Canadians who have RRSP’s are required to elect to defer the yearly RRSP earnings) where deferral is permitted by relevant treaty will be available through this process. The proper deferral elections with respect to such arrangements must be made with the submission.

Although the concept of “compliance risk” seems to leave the IRS with significant discretion, the new procedure should allow the majority of U.S. citizens living in Canada to comply with U.S. income tax regulations without a significant financial cost. For those with a high compliance risk, the press release does not appear to provide much relief or if it does, you are rolling the dice with the IRS and are at their mercy.

Finally, there is no discussion about whether Canadians who complied with the earlier amnesty programs and paid interest and penalties, can apply to have those funds refunded.

Bloggers Note: As I have no knowledge of how this amnesty will work other than what the IRS press release and procedure states, I will not answer any questions in relation to 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.

Monday, June 25, 2012

Are Accountants Really Boring?

The joke goes like this. "When does a person decide to become an accountant?" Drum roll please. The answer…"When they realize that they do not have the charisma to become an undertaker." Or how about this one? Question: "What does an accountant use for birth control?" Answer: "Their personality."

With a reputation like that, Flo Rida will not be penning any rap songs called Wild One’s featuring accountants. So are we accountants that boring or do we take an unfair rap?

Unfortunately, in general, I think the rap is probably warranted, although perception may be reality. How would us CA’s be viewed if there had been a TV show called LA Accountant, instead of LA Law? Did you know John Grisham got his undergraduate degree in accounting? What if his books had been about accounting firms instead of law firms? Accountants would then be looked upon as cool dudes/dudettes with a conservative bent.

Is it nature, or nurture? I think probably a combination of both. Many accountants by nature are cautious and conservative. Years of training to refine these character traits amplify the situation in non-professional environments. It would probably help if our dress style did not include pens hanging from our dress shirts, pencils behind our ears, or if we occasionally loosened our ties both literally and figuratively. I always had this underlying desire at a cocktail party full of accountants to run about the room and loosen all their ties.

Personally, although I have pride in my profession and my job, I know the boring stereotype precedes me and I try not to advertise the fact that I am a CA upon initially meeting people. You can only have so many people at parties walk away after you tell them you are an accountant before you get a complex.

Classic Bean Counter
Unlike many accountants, I don’t advertise my profession with a vanity licence plate with the initials MG CA. Although I am considering getting one saying “The BBC” [The Blunt Bean Counter]), but I am concerned everyone will just think I am just a British public television expatriate.

When I am outed as an accountant, I always say I am a tax accountant or the managing partner to make my job sound sexier. Although my naturally boring nature often gives me away, many of my other characteristics are non-accountant like and I enjoy surprising people when they find out this blunt, sometimes arrogant, sometimes confrontational and very occasionally humorous person is an accountant. My happiest social outings are not when a good looking girl stares at me, but when someone says, “Wow, I would never have thought you to be an accountant”.


So, are any of my kind not boring? I did a search of famous accountants and came up with this list. For those of you old enough to remember the Bob Newhart Show, Bob Newhart the namesake and star was a former accountant. Now I am not sure Bob helps our cause. He was funny, but in a boring deadpan style, certainly was not stylish and definitely was no Chris Rock. 

To my surprise I found a musician who started life as an accountant. You figure any musician would break the stereotype as they lead crazy drug induced lifestyles. I found out Kenny G, a great saxophone player, is our exception. However, although Kenny is a great musician, I typically hear his music in my  dentist's office and as far as I know, he did not have a Playboy Playmate as a girlfriend like so many rock stars. 

I was about to give up when a beacon of light shone and led me to Paul Beeston. Finally, an accountant with attitude! Beeston, who was a CA with Coopers and Lybrand, became the President and CEO of the Toronto Blue Jays and later the President and COO of Major League Baseball. Paul  is a cigar chomping, fun loving, non-sock wearing CA. Yes, there is one out there (Unfortunately I could not find a picture I could legally download of Paul).

There you have it, proof that there is an accountant out there who does not fit the stereotype. Anyways, if you ever meet me, I will be easy to spot. I am the outgoing accountant who will be looking down at your shoes instead of staring down at my own shoes. J

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, June 19, 2012

Should Your Corporation’s Shareholder be a Family Trust instead of a Holding Company?

I am often asked by clients incorporating a new company, whether they should hold the shares of the new corporation directly or whether they should utilize a holding company or a family trust.

The exact same question often arises a second time, years later, when a business has been successful and the shares of the corporation have been held by the client and/or their spouse directly and the client is now contemplating whether it makes sense to introduce a holding company or family trust into their corporate ownership structure, for creditor proofing and/or estate planning purposes.

I have discussed utilizing a holding company and introducing a family trust as a shareholder of a private corporation in prior blogs. Today I will discuss these alternative structures in context of a newly incorporated business and a mature business.

When a person decides to start a new business and incorporates (see my blog on whether to start a business as a proprietorship or corporation ) there is often a level of uncertainty as to whether the new venture will be successful and cost control is often paramount. Thus, most people opt to keep their corporate structure simple (which really means, they do not want to spend money on lawyers and accountants to set-up holding companies and trusts) which is very understandable.

However, if you have the resources upon incorporation, you may wish to consider having a family trust own the shares of the private corporation rather than directly owning the shares or using a holding company from the outset. The two reasons you may wish to consider this corporate structure are as follows: (1) you can have a holding company as a beneficiary of a family trust which can provide all the benefits of a direct holding company; and (2) a family trust provides the ultimate in tax planning flexibility.

There are several benefits to having a family trust as a shareholder of your private company (I am assuming your corporation is an active company, not an investment company, for which the above is problematic). If the company is eventually sold, a family trust potentially provides for the multiplication of the $750,000 lifetime capital gains exemption on a sale of qualifying small business corporation shares. That is, it may be possible to allocate the capital gain upon the sale to yourself, your spouse, your children or any other beneficiaries of the trust, resulting in the multiplication of the exemption and creating substantial income tax savings. For example: where there are four individual beneficiaries of a family trust, the family unit may be able to save as much as $700,000 in income tax if a corporation  is sold for $3,000,000 or more. In addition, where your children are 18 years of age or over, the family trust can receive dividends from the family business and allocate some or all of the dividends to the children. The dividends must be reported in the tax return of the child, but in many cases, the dividends are subject to little or no tax (if a child has no other income, you can allocate almost $40,000 in dividends income tax-free).

Finally, where you have surplus earnings in a corporation and you wish to creditor proof those earnings, but do not want to allocate those funds to your spouse or your children, you may be able to allocate those funds tax-free to the holding company if it is a beneficiary of the trust. This provides for an income tax deferral of the personal taxes until the holding company pays a dividend to its shareholders.

So you may be asking “Mark, why would I ever not choose a family trust? Some of the reasons are as follows:

1. The initial accounting and legal costs may be as high as $7,000 - $10,000.
2. You may not have children or, if you do have children, they are young and you cannot allocate them dividends without the dividends being subject to the “Kiddie Tax” (a punitive income tax applied when minors receive dividends of private companies directly or through a trust).
3. You are not comfortable with allocating to your children any capital gains from a sale of the business and/or any dividends since legally that money would belong to them.
4. If the business fails, it may be problematic to claim an Allowable Business Investment Loss (a loss that can be deducted against any source of income) that would otherwise be available if the shares of the company were held directly by an individual.
5. There are some income tax traps beyond the scope of this blog post when a holding company is a beneficiary.

As discussed in the opening paragraph, once a business is established and has become successful, clients often again raise the issue of whether they should introduce a holding company or a family trust into the corporate ownership structure. At this stage, a holding company can easily be introduced as a shareholder. The mechanics are beyond the scope of this blog but the transaction can take place on a tax-free basis. However, the holding company essentially only serves one purpose, that being creditor proofing. A holding company is also often problematic, as the level of cash the holding company holds can put it offside of the rules for claiming the $750,000 lifetime capital gains exemption if the business is sold in the future. Thus, you may wish to consider utilizing a family trust, unless you do not have children or do not anticipate being able to sell the corporation.

If one waits until the business is successful to introduce a family trust, as opposed to introducing one as an original shareholder when the business is first incorporated, the value of the business as at the date of the reorganization must first be attributed to the original owner(s) utilizing special shares (typically referred to as an estate freeze). This means the beneficiaries of the trust only benefit from the future growth of the corporation (ie: if the corporation is worth $2,000,000, the parent(s) are issued shares worth $2,000,000 and the children will only benefit on any increase in value beyond the $2,000,000). The costs of introducing a family trust with a holding company beneficiary as part of an estate freeze could be as high as $15,000 -$20,000 as a business valuation is often required.

The above discussion is very complex. The key takeaway should be that having a holding company as a direct shareholder of an operating company, may not always be the most tax efficient decision. A family trust with a holding company beneficiary may be the more appropriate choice depending upon the circumstances.

In any event, believe it or not, the above discussion has been simplified and you should not even consider undertaking such planning without consulting a professional advisor to understand the issues related to your specific fact situation to ensure the planning makes sense and that you are not breaching any of the hidden income tax traps.


Top Canadian Investing Blogs


If you are still reading at this point (yes, I know, I break every rule about having a maximum of 400 words per blog), Jeremy Biberdorf of www.modestmoney.com has been kind enough to nominate my blog in his poll for the top Canadian Investing Blogs (not sure my blog fits that category, but I appreciate the consideration anyways). If you have a minute, please visit this link and vote for me. My goal is to escape last place :).

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

Tuesday, June 12, 2012

The Blunt Bean Counter noted in The Globe and Mail

Thanks to Preet Banerjee for referencing me today in his Globe and Mail column. His column today is titled "Share your family fortune now to reap the rewards". Preet is a well-known financial expert, who writes a column for the Globe and Mail, is the money expert on the W Network and is the blogger behind the blog WhereDoesAllMyMoneyGo.com. I am not sure if he still has another real job :)

I would also like to give Preet props for participating in my Bloggers for Charity initiative, in which he raised $5,000 for charity. He is obviously an altruistic financial guy; yes, I know that term is usually an oxymoron.

This is the fifth time that I know of, that one of my blogs has been at least in part an inspiration for a newspaper column. Preet's column today quoted from my blog "A Family Vacation- A Memory worth not Dying for". Personally, it is self-satisfying when my blogs provide an inspirational thought or idea for others, given the time and effort required to create many of the blog posts.

I am particularly pleased that only one of the inspired newspaper columns has been an income tax based article. I look at my income tax blogs as loss leaders. I write income tax blogs since they show a professional competence (or incompetence) and they fill an information void since I think there is only one other mainstream blogger (Canadian Tax Resource) doing such that I am aware of. 

However, what I really enjoy writing are my blog posts on how money and finances impact families, relationships and the psyches of individuals. After 25 years of practice as a CA, I have seen most of what is to be seen in that regard, so I write from a perspective of experience.

Since I have severe restrictions on site advertising as a Chartered Accountant, I am not blogging for financial gain (although I do get the occasional client from my blog), but mostly because I enjoy doing so and as such, I appreciate it when columnists such as Preet, Roma Luciw, Rob Carrick and other financial bloggers, most notably Boomer & Echo, Canadian Capitalist, Big Cajunman, Michael James, Jim YihMy Own Advisor and Money Sense Online appreciate my blog posts whether as an inspiration for a column or as a recommended read. Thanks!

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, June 11, 2012

Cactus, Mountains and Air Canada


In the last month or so, I have posted on some heavy duty topics such as can you control your estate from the grave and Alzheimer's in the digital era. In addition, I have had some very detailed tax blogs on such topics as how to calculate the adjusted cost base of cottages and the the business and income tax issues in selling a corporation. Thus, today I thought I would lighten things up a little (and write a post that did not require much mental energy) and consequently, I am posting a mini travel review and a rant against Air Canada U.S. baggage fees.
View from balcony of Copper Wynd

Following the conclusion of income tax season, I quickly escaped for some R&R with my wife and two kids to Phoenix. We decided upon Phoenix because we like hiking (for those who have never been to Arizona, there are a surprising number of mountains such as Camelback Mountain), the golf is great and there is some excellent shopping and restaurants.

Previously, my wife and I stayed at the Boulders Resort just outside Scottsdale in Carefree, a high-end resort with two great golf courses on the premises and excellent spa facilities. I would definitely recommend the Boulders if you are willing to spend the money (since we go in May, the prices are typically reduced substantially).

This trip we stayed at the CopperWynd Resort, again outside Scottsdale in Fountain Hills. The pricing for this resort was more affordable than the Boulders, but the service and amenities are not at the same level as the Boulders. Unlike the Boulders, there are no golf courses on CopperWynd’s premises; however, SunRidge Canyon and the very highly rated We-Ko-Pa golf clubs are just minutes away. My wife reports the spa facilities were very good, but not as extravagant as the Boulders. We had an excellent dinner, but the dining room is only open for dinner. A huge plus for us was that at the Copper Wynd you could walk out of your hotel room door and be climbing a mountain within minutes. In addition, the view from our balcony was spectacular. Both these resorts have their pluses, but if you are the type of person that needs to be pampered and wants all your amenities self-contained, the Boulders would probably be your choice. However, if you are willing to drive ten minutes to the golf course and do not need a valet for your car, the Copper Wynd is a great, more cost effective alternative.

Anyways, the above was just a quick travel review for anyone considering Arizona; now to my Air Canada rant.

Sedona
The cost of our flight to Phoenix, which we booked a couple months in advance, was in my mind fairly reasonable for a Toronto departure, at $542 return. The usual surcharges, fees and taxes for the four tickets were another $575, essentially the cost of another flight, but I am not telling you anything you do not know already.

About ten days before the flight I remembered to call Air Canada to inform them that I was taking two sets of golf clubs (Air Canada always tells you to inform them you are taking golf clubs, but I am not sure what happens if you do not call in advance). I was expecting to pay $50 or so for the two sets of clubs each way. However, as I age, I tend to forget certain facts that I don’t want to remember. One of those little facts that slipped my mind was the fact Air Canada charges a baggage fee for U.S. flights. The baggage fee for four suitcases (one for each of us) and two golf bags came to $168 dollars each way, for a total of $336 return. So, we had to pay an additional 42% in various fees and baggage charges on top of our four flight purchase. (I realize that if I flew from Buffalo, the cost of the flight and fees would probably be less and on Westjet, the first bag to the U.S. is free).

For those fees we received the following:

  1. Mechanical issue delaying Toronto take-off about 50 minutes.
  2. A further 20 minute delay after the mechanical delay waiting for two passengers to be escorted off plane. I was told by other passengers who were seated in the area that one passenger had a severe peanut allergy and was not allowed on the plane for some reason. I have no idea if that was true or not, but all I know is we were over an hour delayed leaving.
  3. Upon arrival in Phoenix, there was a problem with the bridge door (a Phoenix issue, not an Air Canada issue) which would not open, so we had to be towed to another door. At this point I was now going to be nip and tuck to make my first golf game.
  4. The return flight was uneventful until we were informed there was a problem with the baggage door, it could not be opened; and we waited another 40 minutes to get our baggage.
All in all, we had an excellent family vacation. However, it would have been nice to not have wasted a few hours on various flight issues and the baggage fees are just a cost that is hard to accept.

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, June 5, 2012

Business and Income Tax Issues in Selling a Corporation

The sale of your business/corporation is typically a once in a lifetime event. Thus, in most cases, you will never have experienced the anxiety, manic ups and downs, legal and income tax issues, negotiating stances, walk-away threats and all the other fun that comes with the experience.

In order to navigate the sale minefield and to come up with a fair negotiated deal, you will require a team that includes a strong lawyer(s), accountant and maybe even a mergers and acquisitions consultant. 

With all that to look forward to, I figured I would provide some of the meat and potato issues you will also have to solve and negotiate.

Assets vs. Shares


In general, the sale of shares will yield a better return for the seller than the sale of assets, especially if the vendor(s) have their $750,000 Qualifying Small Business Corporation (“QSBC”) capital gains exemptions available. However, the purchaser in most cases will prefer to purchase the assets and goodwill of a business for the following two reasons: (1) The purchaser can depreciate assets and amortize goodwill for income tax purposes, whereas the cost of a share purchase is allocated to the cost base of the shares (2) the purchaser does not assume any legal liability of the vendor when they purchase assets and goodwill; whereas under a share purchase agreement, the purchaser becomes liable for any past sins of the acquired corporation (of course, the purchaser’s lawyer will covenant away most of these issues as best they can).

Consequently, the purchaser typically wishes to buy assets whereas the seller wishes to sell shares and thus, the first negotiation point. Whichever way it goes, the buyer knows why you want to sell shares and will typically discount the offer when buying shares instead of assets.

Working Capital (“WC”)


WC is the difference between current assets and current liabilities and measures the liquidity of a company. In simple terms, working capital is cash plus accounts receivable and inventory less accounts payable. WC can be a huge bone of contention in any sale, but especially in an asset sale. The purchaser in most cases blissfully assumes they will keep all the WC and also get a multiple of the corporation's earnings as the sale price. The purchaser typically wants enough WC left in the business such that they will not need to finance the business once they have made the initial purchase and contributed whatever cash or line of credit they feel is required upon the initial purchase.

The WC is a very esoteric concept at best and very hard for most sellers to grasp. Thus, it is vital to deal with this issue upfront and not leave it to the end where it can derail a deal, something I have experienced first-hand.

Valuation


Most sellers have valuation multiples dancing around in their heads like little sugar plum fairies. However, most industries have standard valuation multiples. For most small businesses the multiple is somewhere between 2 and 4 times earnings, with a higher multiple for strategic acquisitions, especially where the purchaser is a public company, since they themselves may have a 15 to 20 multiple.

For many acquisitions, especially by public and larger corporations, the multiple is based on Earnings before Interest, Taxes and Amortization (“EBITA”). However, in addition to EBITA, there will be adjustments to the upside for management salaries in excess of the salary that would be required to replace the current owner (typically you are adding back bonuses paid to the seller in excess of their monthly wages and any other family wages). Occasionally the adjustment could be to the downside, but that is typically only in situations where the business is a technology company or similar that is just starting to make money or finalize a desired product, and the owners wages have not yet caught up to market value. Finally, there will be other additions to EBITA for things like car expenses, advertising and promotion, etc. that a new owner would not necessarily need to incur upon the sale.

Where a purchase is made by a private company, instead of EBITA, the price may be based on a capitalization of normalized after-tax earnings or discretionary cash flows.

Retention


In most cases, the purchaser will require the seller to stay on for a year or two to ensure a smooth transition. The owner will thus be entitled to a salary for that period in addition to the sales proceeds. The retention period can go several ways, some blow up quickly, some end after the year or two, but often the former owner stays on as the business is now growing due to additional funds or more sophisticated management and they enjoy remaining with their baby without the stress of ownership.

Continued Ownership


It is not uncommon for a purchaser to require that the seller maintain some ownership in their company so that they still have some “skin” in the game, especially when they will be staying on with the business. This is also the case where the purchaser is consolidating several similar businesses with the intent of going public. In these cases, we counsel our clients to assume the worst (i.e. that the new owner will make a mess of the business) and to ensure they receive proceeds equal to or only slightly less than they initially desired. We have seen several disasters in consolidation purchases where the seller ends up with minimal proceeds after keeping significant share positions with the lure of the consolidated entity going public and the consolidated company just does not have the expected synergies.

Tax Reorganizations


Where the deal is a share purchase, often the current corporate structure is not conducive to utilizing the QSBC capital gains exemption, especially where a holding company is in place or the company being sold has a large cash position. It is thus vital to ensure at least some initial income tax planning is done so that if the deal moves forward, proper consideration has been given to the income tax planning and the planning is not a wild last minute scramble.

I have only touched on a few of the multitude of issues you encounter upon the sale of your business. As noted initially, it is vital to understand the process and how stressful it may be from the start, and to assemble the proper team to help you navigate through the sale process.

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.