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.

Monday, January 7, 2013

Credit Cards - Tax, Budget and Repayment Issues

Today I want to talk about credit cards. In particular, I intend to discuss three issues.

1. The first issue being why you should consider having more than one credit card, despite the added annual card fees.

2. The second being how despite the credit card companies best intentions, they often come up short when trying to help their cardholders track their spending habits.

3. Finally, the ludicrous minimum balance repayment reminder.

I currently have three credit cards in my wallet. I use a CIBC Aerogold for my personal expenses and to accumulate Aeroplan points. I also have an American Express card I use for any expenses I consider business in nature that my firm does not reimburse me for (such as auto). Lastly, I have a BMO MasterCard that I use strictly for my firm Cunningham LLP’s business related expenses. 

Income Tax Simplification

The main rationale for having three credit cards is that they stream my expenses neatly into personal expenses that are not deductible for income tax, personal expenses that are deductible for income tax and business expenses that are deductible for income tax. Should I be audited, I will simplify the auditor’s life and hopefully give them no reason to re-assess me. If you do not have your own business, you may still want to consider a second card if you have significant employment or commission expenses you wish to segregate.

Many of my clients are mesmerized by their Aeroplan or similar travel plan points and use one card for their personal, employment and/or business expenses. This is an audit nightmare waiting to happen and will cause most auditors to automatically get their backs up that you are trying to expense personal expenses, even if that is not the case. Thus, I always suggest that my clients stream their expenses through multiple credit cards or at minimum two cards. The obvious downside to this attempt to keep the taxman happy is that it is detrimental to your point accumulation; although as per this blog on taxable benefits, you must be careful to adhere to the CRA rules.

The same concept holds for Lines of Credit (“LOC”). Where possible, always obtain two LOC’s, one for personal use like home renovations, trips and cars and one for investment or similar loans. The clear streaming minimizes audit time and potential reassessments. If you cannot obtain two LOC’s, ensure you clearly track and breakdown all advances between personal and investment uses and allocate the interest based on what proportion of the total LOC owing is investment use.

Tracking Credit Card Spending

On my Aeroplan card, Visa has attempted to help me, by categorizing my expenses for the month on the last page of my statement. I think this could be a very useful and practical idea, but only if Visa took the categorization a step further and provided a few more categories. For example, my wife and I always want to know how much we spent on groceries in any given month, but the grocery costs are lumped together with retail purchases and not easily determinable. Anything in $US is considered foreign currency; however, within the foreign currency category, I really want to know how much is travel or vacation spending versus retail purchases. Hotel, entertainment and recreation are also lumped together. Stuff like this drives me crazy. It is so close to being useful, but just far enough away to be useless. I would like to know if Visa asked its users for input on devising the categories, as just four or five more would have made this a useful report – at least for me.

Minimum Payment Information

Lastly, has anyone looked at the reminder on the last page of their Visa statement? On a recent Visa bill which included the costs of my 25th anniversary vacation, I noted a reminder on the last page that said “If you only make the minimum payment every month, it will take approximately 95 years and 9 months to pay the entire balance shown on this statement.” Talk about long-term debt! (Blogger's Note: In the comment area below, Sacha Peter, who is the blogger behind the Divestor blog, notes that the minimum payment information became a statutory requirement for credit card companies in 2010).

For some people, ensuring they maximize their travel points is an obsession. However, I suggest you consider the benefits of free travel rewards against a potential tax reassessment and the time and aggravation of an audit the next time you use your only credit card. As for the budgeting aspect, the credit card companies need to go back to the drawing board; in my case I can wait 95 years until they get it right.

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.

5 comments:

  1. The history of the "time to pay off the credit card bill using minimum payments" on the credit card statements were effective on September 2010 as a result of federal regulatory changes. Credit card statements much now include the time it will take to pay off the account using minimum payments. This is presumably for people that are less astute than yourself that have a lesser appreciation for the financial impact of such a decision to make minimum payments.

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  2. Sacha, Happy New Year. Thx for the clarification. If you are old enough to remember Roseanne Roseannadanna, the character played by Gilda Radner on Saturday Night Live in the late 1970’s--Never Mind !!!

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  3. The good news is that Personal finance management tools (PFM) are coming around! RBC already offers an online banking tool for categorizing and tracking spending. Central1 is currently developing a similar system for member credit unions. Both are powered by Yodlee.

    http://thefinancialbrand.com/12372/rbc-canada-myfinance-tracker-pfm

    http://www.central1.com/thinkingforward/news/2012/Central1PartnersWithYodlee

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  4. Interesting ideas, and yes, I find the "how long to pay this off" part of the statement quite amusing. I guess you might have to wait till your 120th anniversary to go on a vacation again, if you stick with the minimum payments for this one.

    I also agree that the spending breakdowns could be improved. On the card we buy our gasoline with, it lists all sales from that company as fuel sales: even the sandwiches, coffee and pay-as-you go cell phone time! This isn't terribly useful to me. Luckily I can spot the fillups fairly easily and I track them myself. (We do not use the car for business, so we don't have to worry about an audit.)

    Belated congratulations on your anniversary!

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