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, May 29, 2013

BNN TV Interview & Garbage Lids are Gold

Last week I was interviewed by Kim Parlee, Vice-President of TD Wealth Management and the host of Money Talk on BNN. The topic was Stress Testing your Spouse's Financial Readiness if you were to Die Suddenly. Even with tons of make-up, I still seem to have a face made for blogging. Nonetheless, I really enjoyed the interview and Kim was very welcoming. My only regret is that the time allotted to a boring accountant discussing a morbid topic was somewhat restricted.

Consequently, I did not get to fully discuss two important parts of any financial stress test for spouses. The first, stress testing your insurance policies (you need to have a one or two page listing of every policy you have, the policy number, type of insurance, amount of insurance and broker contact number). I also only got to briefly discuss the key component of stress testing, the preparation of an all-inclusive checklist.

If you have not read my original blog post on stress testing your death or my second all-encompassing stress test for both your current finances and your death, I urge you to do so. If you have read these posts, please follow up – it is one of the most selfless things you can do for your spouse or significant other.

Garbage Can Lids, aka Gold on my Street

 

On a totally unrelated topic, a few months ago when I came home from work, I got out of my car to take in the blue and green bins and the garbage cans. I noticed that one of my garbage can lids was missing. I uttered one or two expletives when I could not find the lid, but did not give it much thought as I figured it blew away. I was however; not very happy when I found out my local Canadian Tire did not sell lids separately.

I was none too pleased when I came home last month and realized a second garbage can lid was missing. This time several expletives came forth from my mouth as I came to the conclusion that my lids were being stolen. Who the heck steals garbage can lids from their neighbours?

Two weeks later on garbage day, I intended to scan the neighbourhood to see if someone had a similar lid on their garbage (my lid had no street number on it, but it did have a broken handle on one side, which made it distinguishable). To my surprise, only 10% or so of the garbage cans appeared to have lids. Either everyone’s lids were being stolen, or people were smart enough not to use their lid on garbage day and to only use their lids to keep their garbage covered during the week. What a surprising revelation; garbage can lids were like gold in my neighbourhood.

My garbage lid saga continued, when two weeks ago I came out to get the morning newspaper and was stunned to spot a lid of the same make as my two lost lids at the end of my driveway. The lid thief must have felt guilty or found their original lid and returned mine. Total garbage lid craziness.

I promptly took the lid into my house and spray-painted my house number on it in fluorescent orange, to hopefully prevent someone from taking it again in the future.


The moral of this blog post? The next time you need to barter for goods, use your garbage can lid – as on my street, one man’s trash lid, is another man’s treasure.

Monday, May 27, 2013

Transferring Property Among Family Members - A Potential Income Tax Nightmare

In today’s blog post, I will discuss the income tax implications relating to the transfer of property among family members. These transfers often create significant income tax issues and can be either errors of commission or errors of omission. Over my 25 years as an accountant, I have been referred some unbelievably messed up situations involving intra-family transfers of property. Most of these referrals come about because someone has read an article and decides they are now probate experts or real estate lawyers have decided they are also tax lawyers. 

Transfers of Property - Why They Are Undertaken


Many individuals transfer capital properties (real estate and common shares, being the most common) in and amongst their families like hot cakes. Some of the reasons for undertaking these transfers include: (1) the transferor has creditor issues and believes that if certain properties are transferred, the properties will become creditor protected (2) the transferor wishes to reduce probate fees on his or her death and (3) the transferor wishes to either gift the property, transfer beneficial title or income split with lower-income family members.

I will not discuss the first reason today because it is legal in nature. But be aware, Section 160(1) of the Income Tax Act can make you legally responsible for the transferor's income tax liability and there may be fraudulent conveyance issues amongst other matters.

Transfers of Property - Income Tax Implications


When a property is transferred without consideration (i.e. as gift or to just transfer property into another person's name), the transferor is generally deemed to have sold the property for proceeds equal to its fair market value (“FMV”). If the property has increased in value since the time the transferor first acquired the property, a capital gain will be realized and there will be taxes to be paid even though ownership of the property has stayed within the family. For example, if mom owns a rental property worth $500,000 which she purchased for $100,000 and she transfers it to her daughter, mom is deemed to have a $400,000 capital gain, even though she did not receive any money.

There is one common exception to the deemed disposition rule. The Income Tax Act permits transfers between spouses to take place at the transferor’s adjusted cost base instead of at the FMV of the capital property.

This difference is best illustrated by an example: Mary owns shares of Bell Canada which she purchased 5 years ago at $50. The FMV of the shares today is $75. If Mary transferred the shares of Bell Canada to her brother, Bob, she would realize a capital gain of $25. If instead Mary transferred the shares of Bell Canada to her husband, Doug, the shares would be transferred at Mary’s adjusted cost base of $50 and no capital gain would be realized. It must be noted that if Doug sells the shares in the future, Mary would be required to report the capital gain realized at that time (i.e. the proceeds Doug receives from selling the shares less Mary’s original cost of $50) and Mary would be required to report any dividends received by Doug on those shares from the date of transfer.

As noted in the example above, when transfers are made to spouses or children who are minors (under the age of 18), the income attribution rules can apply and any income generated by the transferred properties is attributed back to the transferor (the exception being there is no attribution on capital gains earned by a minor). The application of this rule is reflected in that Mary must report the capital gain and any dividends received by Doug. If the transferred property is sold, there is often attribution even on the substituted property.

We have discussed where property is transferred to a non-arm’s length person that the vendor is deemed to have sold the property at its FMV. However, what happens when the non-arm’s length person has paid no consideration or consideration less than the FMV? The answer is that in all cases other than gifts, bequests and inheritances, the transferees cost is the amount they actually paid for the property and there is no adjustment to FMV, a very punitive result.

In English, what these last two sentences are saying is that if you legally gift something, the cost base and proceeds of disposition are the FMV. But if say your brother pays you $5,000 for shares worth $50,000, you will be deemed to sell the shares for $50,000, but your brothers cost will now only be $5,000; whereas if you gifted the shares, his cost base would be $50,000. A strange result considering he actually paid you. This generally results in “double taxation” when the property is ultimately sold by the transferee (your brother in this case), as you were deemed to sell at $50,000 and your brothers gain is measured from only $5,000 and not the FMV of $50,000.

Transfers of a Principal Residence - The Ultimate Potential Tax Nightmare


I have seen several cases where a parent decides to change the ownership of his or her principal residence such that it is to be held jointly by the parent and one or more of their children. In the case of a parent changing ownership of say half of their principal residence to one of their children, the parent is deemed to have disposed of ½ of the property. This initial transfer is tax-free, since it is the parent’s principal residence. However, a transfer into joint ownership can often create an unforeseen tax problem when the property is eventually sold. Subsequent to the change in ownership, the child will own ½ the principal residence. When the property is eventually sold, the gain realized by the parent on his or her half of the property is exempt from tax since it qualifies for the principal residence exemption; however, since the child now owns half of the property, the child is subject to tax on any capital gain realized on their half of the property (i.e. 50% of the difference between the sale price and the FMV at the time the parent transferred the property to the child, assuming the child has a principal residence of their own).

An example of the above is discussed in this Toronto Star story that outlines a $700,000 tax mistake made by one parent in gifting their principal residence to their children.

 

 

 

Transfers for Probate Purposes


As noted in the first paragraph, many troublesome family transfers are done to avoid probate tax. Since I wrote on this topic previously and this post is somewhat overlapping, I will just provide you the link to that blog post titled Probate Fee Planning - Income Tax, Estate and Legal Issues to consider.

Many people are far too cavalier when transferring property among family members. It should be clear by now that extreme care should be taken before undertaking any transfer of real estate, shares or investments to a family member. I strongly urge you to consult with your accountant or to engage an accountant when contemplating a family transfer or you may be penny wise but $700,000 tax foolish.

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, May 20, 2013

Finding a Business Partner


Choosing a business partner is similar to selecting a spouse. You want to get to know the person over time and ensure your values and aspirations are in sync. 
In a best case scenario, the potential business partners work together or have worked together in an employment situation, or in some kind of supplier/vendor relationship. However, even these situations do not always reveal a future business partner’s hidden weaknesses. In less ideal situations, business partners are thrown together as a result of a funding arrangement to take advantage of a business for sale or some other small window of opportunity the marketplace provides.

As an accountant, I have observed many mismatched partners with respect to both skill and personality. These relationships are usually doomed. Today I will discuss some of the issues you need to consider when selecting a business partner.

Complementary Skill Sets


Most businesses will require three skill sets: financial, product/services and sales/marketing. Sometimes you can succeed without the financial skill set if you lean on your accountant, but ultimately, most businesses need a strong numbers person to keep track, plan, forecast and analyze the numbers. In a product-oriented business, you need someone to build the product or run the production side. Sometimes that skill set also includes a financial skill set, but not often. Lastly, you need someone who can sell the product. Often that is an attribute financial and production people don’t have. The reality is that when you are starting a business, at most, you will typically only have two of these skill sets. Thus, one person will have to fill the gap and you may require some professional assistance for the financial or sales side.

In a small business, it is vitally important that partners have complementary skills. If you duplicate skill sets, you may be dooming your business venture from the beginning. Two production or financial guys will often have a very difficult time generating business for a new company.

Roles Within the Business


Defining roles within the company is very much related to ensuring complementary skill sets. Defined roles create clear boundaries and hopefully prevent one partner from sticking his or her nose in the other’s area of responsibility. Defining roles at the beginning of a business partnership essentially ensures you are responsible for your area of expertise.

How Well Do You Know Your Partner?


Whether you have worked with your future partner(s) before or not, it is very important to undertake a background check. I have seen several business partnerships break-up, and when the dust settles it comes to light that one of the partners had similar issues elsewhere. Try to speak to people in your industry who have had contact with your potential partner.

Does Your Partner Have Connections?


Look for a partner that has a strong network or connections within your industry. If your partner has a strong network, he/she may open doors for your new business very quickly. However, it has been my experience that when people tell you they are bringing customers with them, the customers do not necessarily follow immediately. Be wary when a partner promises customers will follow them. It may not be their fault, but clients often want to wait to ensure a new business is stable before changing suppliers, consultants etc. 

Shared Vision and Values


It is vitally important that business partners share the same initial vision and values. When there is not unanimous consent on the initial business vision, the business can fragment and become dysfunctional quickly. That is not to say partners will ultimately continue to have the same vision and agree on everything, but at the outset; there must be consensus. In addition, business partners should have similar core values.

Skin in the Game


There may be cases where you have a silent partner or an angel investor, but in the typical business situation where two or three people join forces, it is important that equal value be contributed to the business either in
the form of cash or technology. Furthermore, it is important that all partners have a minimum level of financial resources available to ensure decisions are always made in the best interest of the business and not because one party is short of money.

Shareholder Agreements and Decision Making


Many new businesses cut costs by skipping the drafting of a shareholders’ agreement; this is risky. If you forgo an initial shareholder agreement for monetary concerns, you must agree with your partner that as soon as the business is on stable footing, you will engage a lawyer to draft a shareholders' agreement.Some key terms you want to consider in a shareholder agreement are noted in this online template agreement.

There are a multitude of other issues to consider when choosing a business partner. However, if you undertake due diligence and cover off most of the issues above with your potential partner(s), you have a much better chance of succeeding together.

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, May 13, 2013

Should You Discuss Your Salary with Friends, Co-Workers or Family?

I have written several blogs on various money taboos; from discussing your will with your family to planning for inheritances. I enjoy writing or discussing these sacred topics because I like to challenge some of our financial conventional wisdom's. Frankly, I find some people just so uptight on these topics that I enjoy watching their reactions and/or reading their comments on my blog.

A major taboo is discussing your salary with friends, co-workers and family. Although I am personally fairly open to discussing many sacred money topics, I think discussing your salary is generally not a prudent action. However, are there any situations in which a discreet discussion of salary may be advantageous to one or both parties?
  

Friends


Personally, I see few if any circumstances that would ever merit discussing your salary with your friends. The one possible exception may be where your friend is in the same or similar profession. I will discuss that exception in detail below. Otherwise, I see only risk in discussing this topic with friends. Some may lack discretion and inform others of your salary, while others may be jealous or harbor resentment. 

Co-Workers


In the case of co-workers and friends in similar professions, I can see at least 2 reasons why someone would divulge their salary. The first reason being to ensure equality of salary. Many people want to know they are being paid equally, especially in industries where there may not be gender equality. The issue becomes what you do with that information? Do you run to your employer and tell them Don down the hall told you he is making $2,000 more? You put Don at risk with your employer (which is why Don may be hesitant to discuss the issue in the first place), and if you confront your employer you risk your own job, whether your employer is legally entitled to dismiss you or not.

On the other hand, if an employee is discreet, they can use their knowledge of wage inequality in salary discussions to know how far they could try and push for a salary increase, assuming they feel
confident they are a valued employee. Both the above situations involve risk to the employee and their co-worker which is why I would suggest many co-workers do not discuss their salaries (Although, I may have employer bias; as I would not be pleased if someone told me during a salary review that they deserve to be paid as much as Mary or Sam).

Another reason for discussing your salary amongst friends and co-workers in the same profession would be if you or they are job shopping. If you know Jane makes $70,000 working for an engineering firm and your engineering firm only pays you $60,000, you may wish to consider applying for a job at Jane’s firm if all other employment variables are equal. Alternatively, this information may be helpful in pushing for a raise at your current firm, as knowing what other firms are paying and what your firm really needs to pay to compete would be valuable knowledge.

Family


I would think that most people share their salary with their spouse. However, I know there are spouses who try and keep that information private or provide partial disclosure. In some cases they think the information is private, in others they feel their spouse will spend more money if they know what they earn, and finally, many spouses are not forthright so their spouse will be in the dark should there ever be a marital breakdown.

I see no reason to provide such information to siblings, unless it would be useful information for their own careers. Even the most well intentioned sibling could say something by accident and we all know about sibling rivalry and jealousy.

How about younger children? I found a couple of articles on this topic, specifically this New York Times Article titled “Daddy Are We Rich? and Other Tough Questions”. The author, Ron Lieber, discusses ways to handle the question without providing specific income in various situations. The article puts forth an elegant solution by Gary Shor, a financial planner, where he suggests parents turn the question upside down by detailing the expenses they incur to live their current lifestyle. This provides their children with a sense of how much salary would be needed to afford those expenses and what kind of professions could provide such income for their children in the future.

For full disclosure, the reason I wrote this blog is that I recall as a university student considering following in my father’s footsteps. He was a baseball player (a left handed pitcher who was asked to try out for a Cleveland Indian farm team when younger) and I asked him how much do major league pitchers make? 

Just joking about asking him how much pitchers make, but he was asked to try out for a minor league team and believe it or not, in the late 50’s accountants made more than baseball players. Then there was my grandmother who forbade him from trying out for the Indians, so in the end my father decided against baseball and he became an accountant. I have digressed as I often do, however, I do remember having a frank discussion with him about what he made as an accountant that I found very enlightening in making my career choice. In retrospect, I would have preferred it if he had framed our discussion based on what accountants make per hour they work (given the hours I have worked over my career), instead of on a gross annual basis.

Anyways, as I stated at the outset, I would generally dissuade anyone from disclosing their salary, other than where that information provides them or someone they trust, with knowledge to leverage a greater future salary. And in those rare cases when you do disclose your salary, always understand you are taking a huge risk with that information being leaked – intentionally or unintentionally.

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, May 6, 2013

Travel Travails

I need another week to rest my brain post tax season before I get back into more technical or philosophical blog posts. So I am going to write about some travel travails a friend and I have experienced in the last few months. My story is of luggage lost and then found; but my friend’s story is so outrageous you could never make it up and I bet you laugh out loud at the end of the story.

No Luggage, No Big Deal


A few months ago I went to Samana, in the Dominican Republic. The Air Canada flight was smooth and on time. Unfortunately my bag didn’t arrive with me, nor did it ever arrive in the Dominican Republic. It did arrive at my house 4 days after I returned home from my trip. Although I never got a
straight answer, I don’t think the bag ever even left Toronto.

This post is not intended to be a rant piece. So, I am just going to say that Air Canada’s policy to only reimburse you $50 a day for replacement clothes and toiletries for the first two days to a maximum of $100 is absurd

So I have no bag, only running shoes, a hoodie, a sweater, jeans, one t-shirt and what I carried on the plane – that being a bathing suit, tank top and flip flops. In my infinite wisdom I had not carried any toiletries or medication; considering I had pulled a muscle in my back the week before, not taking some pain relievers in my carry-on bag was a stupid move on my part.

As our hotel in Samana was in a somewhat remote location, there was not exactly a Wal-Mart around the corner. For $140, I purchased from the hotel store: deodorant, shaving cream, a razor, a toothbrush and toothpaste, an ugly Hawaiian patterned bathing suit, a t-shirt and a circa Miami Vice drug lord white short sleeved four pocket casual white dress shirt for dinner (I eventually got Air Canada to reimburse me for the entire $140, plus I worked them for another concession).

For one week I made do with two bathing suits, two pairs of underwear (one from my son), three t-shirts (one a free giveaway from the hotel), my jeans, one tank top, a hat from my friend and my Miami Vice shirt. In all honesty, if I had two more pairs of underwear, a pair of shorts, a pair of Dockers and a couple shirts to change for dinner I would have been good – this trip made me realize how little one really needs to pack for a week-long beach holiday.

Although I was cranky the first two days, on the third day I told myself to accept the situation and make the best of my holiday. I learned to live with my limited wardrobe and my wife, family and friends had some fun at my expense. Every morning on the beach, I would be asked if that was a new bathing suit, each night I would bum hair gel off my son (yes, despite my lack of hair, I still need gel to hold down what’s left). When I arrived for dinner a gag developed as to what I had put in the four pockets of my shirt that night. So I would put anything I could find from toothpicks, to mints, to matches, etc. The point being, sometimes you just have to make the most of what you have. 

In the end, I realized I was lucky to be in the Dominican Republic, with or without luggage. Once I adjusted my mind set I was able to have fun and enjoy my vacation, as best I could.

While losing one's luggage on a beach holiday can be overcome, losing or having your baggage misplaced on a cruise or sightseeing trip can be devastating. If you want some tips on how to protect yourself from lost luggage and how someone fought back against a Cruise Line when they lost her luggage, check out this article by Ellen Roseman of the Toronto Star. 

Is That Your Rental Car?


My misplaced luggage story is pretty common place and mundane. My friend’s story on the other hand could not have been concocted by Steven Spielberg.

My friend and his family went on a Caribbean vacation this Christmas and stayed at a nice hotel.
They also rented a standard sedan car, the type that if you don't jot down the licence plate would be indistinguishable in a parking lot.

My friend was enjoying his vacation, but like many North Americans who are not used to the slow pace in the Caribbean, he became impatient waiting for the hotel valet to get his car each morning and night. He thus asked for his keys so he could get his own car. For the next couple days he retrieves his car himself and they drive around the island in relative comfort. The only issue is that they misplace their maps and get lost one day.

On the fifth day of his vacation, he goes down to the parking lot to get his car and it will not start. He is obviously less than pleased, as he will now have to deal with the car rental office and try and get a replacement car during Christmas, which he figures could be problematic.

He gets out of the car and opens the hood. (This raises a totally separate issue as to why most of us even bother to open the hood when a car does not start, since we do not even have a clue what is under the hood, but I digress). After he closes the hood and comes around the car he is met by tall and burly hotel security guard, actually the head of security. He is asked if there is a problem and he tells the head of security that his car will not start. However, the security person is not really interested and asks him if he can provide the rental car agreement. My friend, not sure why he is being asked for the agreement hands over the papers. The head of security asks him if his name is Tom Wilson (made up name) of Tennessee. At this point, knowing this is not his name; my friend starts to feel uneasy and is asked to accompany the security person to a room. He is then told that the reason the car did not start was that the hotel had pulled the engine wires as the car has been reported stolen. My friend now understands what has happened, but in a Caribbean country in a small locked room with two large security agents, I imagine he is thinking Midnight Express and getting worried. 

While this is happening, his wife has now gone to reception and is giving the hotel a what for and threatening to call the Canadian Consulate and trying to find out what the hell is going on and where her husband is. As the story starts to come together, my friend’s daughter realizes what has happened and goes looking for a similar car and finds the car they were initially provided sitting in the lot, unused, with the missing maps. 

It turns out the valet had provided my friend with the keys to the wrong car and the cars were so similar, nobody noticed it was the wrong car. Meanwhile, Mr. Wilson had his holiday ruined by not having a car and having to deal with reporting a stolen car. The hotel security was dumbfounded as to why a stolen car was being taken and returned each day by the thief. Why they did not act expediently once they realized this, is another question.

Anyways, one can only imagine the mess this caused and once the truth emerged, how everyone involved must have shaken their heads in disbelief. Despite all the hotel security had put my friend through; the hotel initially wanted my friend to cover Mr. Wilkinson’s car rental costs. However, as the story unraveled, they quickly changed their tune and provided free massages and a nice bottle of wine to my friend. As for Mr. Wilson, I am not sure how he was made whole; I understand he was not pleased with the whole episode.

That concludes this week’s episode of travel travails; feel free to comment on this blog with any travel travail you have endured.