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, April 29, 2013

Ten Financial Lessons We Can Learn from Warren Buffett

As I mentioned last week, I am swamped with the end of tax season (my brain is also mush) and I don’t have the time to write a post today. However, I was sent this Warren Buffett link that I really like and thought I would post it today.

I am often deluged with offers of articles, payments and infographics "for links" to various websites and I always dismiss them. I only post blogs by guest writers that I have worked with personally and have no hidden links (at least that I am aware of). So while the following is promoting online universities, I actually quite like this infographic and have decided to share it anyways.



10 Financial Lessons We Can Learn From Warren Buffett
Source: Best Finance Schools

Monday, April 22, 2013

Confessions of a Tax Accountant -2013- Week 4

This is my last confession for this income tax season. I am now deep in the tax trenches and really looking forward to May 1st. A final reminder, please file your income tax return on time to avoid the 5% late-filing penalty.

This week I discuss the following:
  • Why don't I listen to my own advice?
  • A magic act - how some people make a dividend disappear?
  • The gap in service levels between investment advisors with respect to capital gain reporting.
  • Donations made to U.S. charitable organizations and the related limitations.

Do as I Say, Not as I Do


It is funny how we often ignore the advice we provide to others. I have been thinking about this the last couple weeks as I have been inundated with personal tax returns and the related emails, phone calls, couriers etc. My failure to heed my own advice can be traced back to my November, 2012 blog post on The Income Tax Cost of Working Overtime. In that post I stated that you have no reason to decline new clients or new work based on not wanting to enter a higher tax bracket. However, I went on to say that there are times when work should be turned down.

Those times may include the following:
  1. You have so much work that you are overwhelmed and if you take on the new client/customer your service or product will be sub-par and your reputation will suffer. 
  2. You are working so hard that your family life or health is suffering. In this case the extra dollars may cost you something more important than money.
As I thought about this blog post, I realized I have not listened to my own advice. The nature of tax return preparation has changed in the last 5 years. The late issuance of T3's and T5013's have condensed income tax season into a hellish 3-4 week period, instead of a 6-8 week period. As I contemplated this change, it hit me that I am now compromising my own health and/or taking years of my life. So I am making a public vow that I will be making significant changes to my work environment next year.

Disappearing Dividend Income

It is "cool" to be a dividend investor. Whether you are a do it yourself ("DIY") investor or you are like many of my clients who have investment advisors or private investment firms handling their investments, maximizing dividend income seems to be the "in" thing. The issue is that many of these dividends seem to disappear without a trace and I am often called in to assist in locating the ever elusive dividend.

Inspector Goodfield is called upon when the current year's dividend income on a 2012 return is less than last year's dividend income. I am asked, "Where could these dividends have gone?" Well, there are typically three reasons a dividend can go "poof".

  1. The first reason is one or two of the companies in your investment portfolio have cut their dividend payouts. 
  2. The second is you are missing a T5 or T3 slip.
  3. The most common reason for a decrease in dividends is ...... take a guess?.... Yes, it is not reporting the sale of the dividend yielding stock. Now I am not saying this is an overt attempt at tax evasion, it is just that many people sell stocks early in the year and forget they sold them or just do not properly track their capital gains and losses.


So if you filed your return with lower dividend income than last year or have not yet filed, you should always confirm that any decrease in dividend income reported year over year is the result of a dividend cut or missing T-slip and if not, review your sale transactions for the year.

Investment Advisor Chasm

In last years Confession of a Tax Accountant Week 6 I wrote about the varying quality of assistance investment advisors provide in respect of capital gain/loss reporting and the fact that some advisors feel it is the accountant's responsibility to track the adjusted cost base ("ACB") of all their clients' holdings, a contention almost all accountants dispute. Two weeks ago I discussed an offshoot of this topic, the poor reporting of flow through shares. This week I once again pick on investment advisors and their financial institutions for poor capital gain/loss reporting.

In the last couple weeks I have experienced some terrible capital gain/loss reporting by client's advisors and/or their institutions. I have had up to 75 trades missed, non-reporting on accounts closed during the year, situations where I had to inform the advisor of all the clients accounts for which I expected capital gain/loss reports and huge adjusted cost base variances where advisors moved firms during the year (In these cases I expect the greatest of care and diligence since the cost base of investments often get lost or not carried forward properly on the transition to a new firm).

Being the BBC and not having the greatest patience even at the best of times, I have been less than subtle when expressing my displeasure in respect of this misreporting. However, to my surprise, my client's have been unfazed, they just say "aren't all investment advisors pretty much the same?" I confidently answer no.

For example, an advisor who works for several of my clients reconciles each clients expected interest, dividend, capital gain income and their expected interest expense and management fees. Others are constantly asking if there is anything they can do to help. So the answer is definitely no, all investment advisors are not the same.

Obviously an advisor can be administratively strong but very weak from an investment advice perspective or visa versa. But I would suggest that they very often go hand in hand and if your advisor is not providing the proper level of service either administratively or investment advice wise, you should put them notice or consider finding an advisor who will make you a priority.

U.S. Donations

 

With our close proximity to the United States, many Canadians make donations to U.S. charitable organizations. While I always applaud charity, you may want to consider that for income tax purposes, U.S donations (except for certain Universities and specific exceptions) are not included together with your Canadian donations, but are treated separately and are subject to separate rules. Like Canadian donations, U.S. donations are subject to an overall limitation of 75% of your net income, however, that limitation is based on U.S. source income.

In plain English, if you made a $200 donation to a U.S. organization, you must have $266 in U.S. source income to claim the $200 ($266 x.75). If you have no U.S. source income the donation is wasted, although it can be carried forward for five years.

Thus, before you donate to a U.S. cause, you may want to consider whether you are willing to forgo the income tax credit you would receive on a donation to a similar Canadian organization. If not, consider making the donation to the Canadian organization.

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, April 15, 2013

Confessions of a Tax Accountant -2013- Week 3

I am not sure if you are still receiving late T3 & T5013 slips, but if my clients are any indication, I am sure many of you are. We finish a tax return and then are provided another slip and have to re-run the return. What a waste of time for us and aggravation for the client. This week my confessions touch on four totally unrelated topics.

  • The first topic is whether or not travel expenses to "check on" a rental property, especially in resort locations, are deductible.
  • Unfortunately we have had to file a couple of terminal income tax returns this year for deceased clients or the deceased parents of clients. In preparing these returns, we must discuss with the legal representatives whether it makes sense to opt out of the automatic tax-free transfer to the surviving spouse. I discuss this issue in detail below. 
  • For my third and fourth topics, I briefly touch on which spouse can claim charitable donations and the earned income limitation that restricts certain child care claims.

 

Travel Expenses for Rental Properties


This year I have had a couple of clients ask if they can deduct travel expenses related to their rental properties. The CRA's position is "you might travel to collect rents, supervise repairs, and manage your properties. To claim the expenses you incur, you need to meet the same requirements discussed at line 9281. Travelling expenses include the cost of getting to your rental property. Travelling expenses do not include board and lodging, which we consider to be personal expenses."

Since it is income tax season and I am looking for time saving alternatives, I will direct you to an excellent article written by Andy Wong on Travel Expense Advice for Landlord's. Although slightly dated, it covers many of the issues associated with this topic.

Andy concludes his article by saying "As a rule of thumb, you should claim necessary travel costs such as when you have to be present to supervise contractors or to authorize repairs, particularly after you booted out a difficult tenant. As for claiming travel costs to check on your property annually, that's questionable at best, unless you have a valid reason for having to be there."

I could not have said it any better than Andy. All I would like to add is that there are really two types of travel expenses, those for rental properties in your own city or a couple hours away, such as a cottage and those to visit more remote locations, typically in resort cities such as Florida, Arizona, Las Vegas, Whistler or Banff. Where travelling by car, you should log your mileage or specifically track your gas expenses. For the more remote locations, the CRA will always consider your costs to be personal unless you have hard evidence to the contrary, notwithstanding the case Andy notes in his article.

Terminal Tax Returns - Electing Out of the Tax-Free Rollover to a Spouse


Most people are aware of the general rule that when you pass away, if your assets are left to your spouse or a spousal trust, the property will transfer tax-free at its initial cost base to your spouse, or the spousal trust. The benefit of this rollover is that is defers any income tax upon the death of the first spouse until the passing of the second spouse.

In most cases, the surviving spouse and/or legal representative will want this automatic rollover to apply. However, where a deceased spouse has minimal income on their terminal tax return or has shares of a Qualified Small Business Corporation that qualifies for the $750,000 (soon to be $800,000) capital gains exemption, it may actually make sense to elect out of this automatic rollover.

To do this, the deceased taxpayer's legal representative makes an election in the deceased's terminal tax return under subsection 70(6.2) of the Income Tax Act to opt out of the automatic tax-free rollover to the spouse. By making the election, the proceeds of disposition of the property to the deceased and the cost to the spouse or spousal trust are deemed equal to the fair market value of the property immediately before death.

For example, say Tim died in 2012 and he owned 500 shares of Bell Canada that were worth $40 on the date of his death and had a cost base of only $10. Tim left the shares to his spouse Anne in his will. If Tim's legal representative does nothing, the shares transfer to Anne tax-free with a cost base of $10, deferring the capital gain until Anne passes away. But say Tim had only $10,000 of taxable income because of various deductions he was allowed on death for donations etc. Tim's legal representative could elect to include the shares of Bell Canada in his terminal return. This would result in an additional capital gain on Tim's final return of $15,000 ($40-10 x 500 shares). However, because he has various unused credits the Bell shares would result in minimal to no income tax on Tim's terminal tax return. Anne would then inherit the shares with a $40 cost base instead of the $10 cost base.

The election can be made on a property by property basis. The CRA has stated that "a subsection 70(6.2) election may be made with respect to a partial shareholding of a corporation. For example, where a shareholder owns 1,000 shares of ACo, the election under subsection 70(6.2) may be made in respect of some of the shares, and subsection 70(6) will apply to the remainder of the shares."

Donations - Mine or Yours?


Many clients provide their donation receipts to us in two piles, one for each spouse. I think the reason they do this is that they are unsure whether the donations must be reported individually or as a family.
The answer is that the CRA administratively allows donations to be claimed by either spouse, regardless of whose name is on the receipt is issued.

Since the first $200 of donations only provides a federal credit of 15% and the excess is creditable at 29%, it almost always makes sense to combine family donations, such that you are only subjected to one $200 limitation.


Earned Income for Child Care Expense Claims


In general, child care expenses can only be claimed by the spouse with the lower net income. The child care expense claim is then limited by the lessor of the allowable expense claim and 2/3 of the lower income spouses earned income. This earned income restriction came as a shock to a client who was claiming child care for the first time this year but it has surprised others over the years as well. For all intents and purposes, unless the lower income spouse has employment income or self-employment income, they will have no earned income and not be able to claim child care. Where a family will incur child care costs and one spouse will have little or no earned income (which can happen due to various reasons, most typically where both spouses are owners of a company and are compensated by dividends), consideration should be given to the following:

1. Having that spouse work part-time to earn enough income to cover all or most of the 2/3 limitation.
2. If you have your own business or are self-employed, consider employing your spouse to  undertake administrative or other duties they are qualified to undertake and pay them a reasonable wage.
3. Some employers allow you to hire an assistant. If your employer allows such and will sign a T2200 form, consider hiring your spouse. Again the wage must be reasonable and they must actually work.

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, April 8, 2013

Confessions of a Tax Accountant -2013- Week 2

This week I actually had some income tax returns to review and a few issues arose from those returns. Today I will discuss three of those issues. The first issue is a major pet peeve of mine. That being, how financial institutions misreport or don't adjust their realized capital gain/loss reports for the adjusted cost base reduction on flow-through shares. Another issue that caused some confusion this week was how taxpayers age 60-70 are supposed to deal with CPP contributions. Thirdly, I note a medical expense claim for people who suffer from Celiac disease and are unable to eat gluten. 

Flow-Through Limited Partnership Misreporting


I have discussed the merits of investing in flow-through shares (typically investments in limited partnership units, not shares) on a couple of occasions, including this guest post I wrote for the Retire Happy Blog, titled "How to Save tax with a Flow-Through Shares. As I noted in the guest post, the adjusted cost base ("ACB") of a flow-through share is generally "ground-down" to nil after claiming the initial resource exploration and development expenses. For the purposes of this post, I will ignore that some limited partnerships may allocate capital gains and investment income to the investors such that their ACB will often increase from the ground down nil value. As noted in my introduction, many institutions provide capital gains reports that do not reflect the ground-down ACB and thus, understate their client's capital gains.

This issue is best explained by using an example. Let's assume I purchased 1000 units of the BBC Flow-Through Limited Partnership in 2011 for a cost of $10,000. In 2011 and 2012 I received $10,000 in exploration and development deductions which I wrote-off on my tax return. Assuming the BBC Flow-Through did not allocate me any capital gains or investment income or business income/losses, the ACB of these units at January 1, 2013 is nil. Say the BBC fund is rolled into a mutual fund in 2013 and I then immediately sell the fund for $9,500. My capital gain in 2013 should be $9,500, since I have a nil ACB.

However, I have already received two capital gain summaries for clients where the ACB reflected by the investment institution is relected as the $10,000 initial investment amount, not the ground-down value of zero. Continuing with my example, the summaries have reflected a $500 capital loss, not the actual $9,500 gain. Since my client's may purchase $25,000 to $50,000 of flow-through shares at a time, this error has the potential to be significant.

Our firm is always on the look-out for incorrectly reported capital gains/losses on flow-through shares, as we have seen this issue numerous times over the years. You would think the investment brokers would have internal controls such that the proper amount is reported and accountants don't have to find these errors (which can be easily missed when you have 15 pages of capital gain reporting to scan through). However, what we typically get is a general disclaimer that the institution is not responsible for the accuracy of the capital gain/loss statement, despite the fact they compiled the report.

CPP Contributions for People 60 - 70 Years Old


Over the last couple years, there have been various changes made to the Canada Pension Plan ("CPP") legislation. These changes and the resulting confusion manifested itself last week. I discuss the two issues that arose below.

Self-Employed People

If you are between the age of 65 and 70, receive CPP benefits and earn self-employment income, you have to elect not to contribute to the CPP on your 2012 income tax return. This election is made on Schedule 8. The election remains valid until you revoke the election or turn 70. If you do not make the election, you will be subject to CPP contributions on self-employment income.

Employee

This week I had a client's bookkeeper ask why the CRA had reassessed my client's company for the employer's share of CPP and the client's share of CPP not reported on their 2012 T4, when the client was already receiving CPP retirement benefits.

I informed the bookkeeper that starting in 2012, CPP contributions became mandatory for employees age 60 to 70 who work while receiving a CPP retirement pension. These contributions go toward the new Post-Retirement Benefit (PRB), which is effective January 1 of the year following the employee’s PRB contribution. This additional benefit is added to the employee’s current retirement benefit, gradually increasing his or her retirement income.

However, if you are between 65 and 70 and receiving CPP benefits, you can elect out of CPP by completing form CPT30.

I have been informed that the CRA as an administrative concession for 2012 maybe allowing late-filed CPT30's for those aged 65-70 caught by the new 2012 rules. Supposedly, this administrative concession will be applicable only for the transition year 2012. For 2013 and subsequent years, the election must be filed. I will update you when I can confirm this administrative policy or can provide more details.

Medical Expense Claims for Gluten-free Products


For people who suffer from Celiac disease, the Income Tax Act provides a medical expense claim for the incremental costs of purchasing gluten free foods. For example, if a loaf of bread costs $3 and gluten free bread costs $7, you can claim the $4 the difference as a medical expense. Over the year, the additional cost can add up to a significant number. For more details, see this CRA link.

As medical expenses are only creditable to the extent they exceed 3% of your net income, many people who suffer from Celiac disease seem to think the effort to track the incremental costs are in many cases not worth the effort. That is an unfortunate result; however, if you already exceed the 3% threshold, there is no reason not to undertake this tracking exercise.

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, April 1, 2013

Confessions of a Tax Accountant -2013- Week 1

In March of 2011, a rare idea pulsed through my brain - the brainwave? To create a series of posts called Confessions of a Tax Accountant, which would highlight contentious and/or interesting personal income tax issues that arise in my practice during income tax season. Now in my third year of confessions, I must confess, I have little to confess to. I have received so few income tax returns to date, that I have little to discuss. Ironically, the lack of returns provides one of my topics for today. Another is actually somewhat of an unusual issue, yet it is an issue everyone will most likely encounter at least once in their lifetime and has already arisen twice this year. The third issue is essentially a warning I have shared numerous times in this blog, but I think it worth repeating.

Tax Slip Deadlines

 

As of today, I have received 34% of the tax returns I will file this tax season, of which 11% came in the last 3 days and have not even been started. My reality is I still have to file 85-90% of my most complicated returns in the next 4 weeks. This year we are experimenting with using a portal for personal tax clients; while this makes things easier and quicker for our clients, we have had to develop and learn a whole new process. I know, you are thinking: Mark, stop whining, it's just April 1st. However, I am making these comments in the context of why have the CRA and professional accounting bodies not addressed the annual tax filing crunch?

Although many people do not gather their tax information until after the Easter weekend (no matter the date), many others cannot finish compiling their tax information as they are still waiting for their T3's for their mutual funds and income trusts and their T5013's if they have partnership income. Many of these forms have just arrived or are still in the mail.

The preparation of T3's and T5013's are often dependent upon the receipt of T5 information (February 28th deadline) before they can be completed. So I ask, why not simply move the T4 and T5 filing deadlines to Feb 15th and the T3 and T5013's to a March 15th deadline? I would suggest 80-90% of the T5's issued are from financial institutions that just need to press a button and the T5 is ready for mailing. Even if I am oversimplifying the process, a February 15th deadline is very reasonable. Just saying, this crunch could easily be eliminated to accommodate taxpayers who wish to file early and at the same time, help ensure their accountants are alive and healthy to pay taxes to the CRA. A win-win for everyone. I guess it makes too much sense.

CPP Death Benefits

 

When someone passes away, their estate can apply for a CPP death benefit. The benefit is paid as a lump sum and can be as high as $2,500. This benefit is paid to the estate. Twice this year I have been asked whether the estate or beneficiary reports this income. It is actually a very good question.

The CRA states on this information page that, "If you received this amount and you are a beneficiary of the deceased person's estate, you can choose to include it on line 114 of your own return or on a T3 Trust Income Tax and Information Return for the estate. Do not report it on the deceased person's individual return. The taxes payable may be different, depending on which return you use."

Where an estate will be required to file a T3 return because it has various assets to distribute and will have income, in almost all cases it will make sense to include the death benefit on the T3 return, as a testamentary trust is taxed at marginal income tax rates (at least until the government changes this as per last weeks budget proposals). But if the deceased had few assets and/or the assets were in joint ownership and there will be no need to file an estate return, the beneficiary and executors have to determine if the hassle of filing a T3 return is worth the income tax savings of filing a T3 trust return. The answer in most cases is yes.

20% Penalty

 

I have written several blog posts about how if a taxpayer fails to report income twice within a four-year period then he/she will be subject to a 20% penalty on the income not reported.  I thus urge you to double check that you have received all your income tax slips. If you receive a slip after you file your return, file a T1 adjustment even if the amount is very small. If you ignore that slip and miss a large slip in the subsequent three years, you will incur the penalty.

BBC Tweet of the Week


I tweeted this after last week's budget.

Friday Funny - Latest CRA Job Listing: International Tax Snitch. No experience required. Pays up to 15% of tax collected on liabilities>$100k :)

Thanks to my Readers


Last month my blog had 28,700 page views and almost exactly 15,000 unique views. Considering I typically post once a week, I am quite pleased with the growth in readership of my blog and wanted to take the time to thank you for reading my posts and sharing them with others. 

Comments During April


During April, I will only be answering questions submitted in the comments section of my current blog posts. Questions related to any prior blog posts will have to be answered in May. Sorry, but as discussed above, I just don’t have much time in April.

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.