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, March 31, 2014

Confessions of a Tax Accountant -2014 -Week 1

For each income tax season since 2011, I have published a series of posts called Confessions of a Tax Accountant. These posts highlight contentious and/or interesting personal income tax issues that arise in my practice during income tax season. Today, I continue with this tradition.

Every year at this time, I whine about the fact I have received very few income tax returns to date and this year is no exception. Most of my clients with complex tax returns still await their T3’s and T5013’s, meaning I will again have a severe income tax crunch the last three weeks of April. I will save you my annual rant on this topic. Since I have reviewed very few returns and have little material to discuss, today's post deals with changes to various forms and issues of an administrative nature.

New T5013 Partnership Information Form


For those of us who/will receive a T5013 tax slip for either our partnership income or flow-through tax shelters, you will notice the absence of one thing on the form; written descriptions for each box on the form. In prior years, each box had a number associated with each box and a written description. For example: for interest income earned, the box said interest from Canadian sources, for carrying charges it said carrying charges. This year, the form in some cases has like forty boxes with only four of those boxes having a written description. It is like looking at a crossword puzzle gone wild.

You have to either read the summary page to determine what each box is for, or use your tax preparation software to match up the box number to the written description. It is extremely frustrating and my clients have no idea what the numbers mean to them.

Online T-slips


For many of us, working in a paperless or online world is now part of our daily routine. However, in situations where paper still rules (such as with tax slips), dealing with the early online adopters can be problematic.

-Even though I have only processed a few returns, I have already had to ask a couple clients for their T-slips from Ing Direct and TD Waterhouse (although some people seem to get paper T-slips from TD Waterhouse, so I am not sure if those not receiving paper forms have elected to receive online receipts) when I noticed they reported income last year, but have no slip this year.

The issue with online tax forms is clients either a) don’t realize they are online or b) forget to download the slip.

Not reporting the income on these slips can be a costly omission if the CRA catches these missing slips when they undertake their matching program in the fall. The non-reporting of these slips could result in a 20% penalty if this is the second time you have missed reporting a slip in the last four years, or it could start the clock ticking on a 20% penalty.

I am not sure of the solution here, but online issuers need to build in a reminder system to their clients when a form has not been downloaded by March 31st (they may already do this, but I am not aware of it if they do).

T1135 Foreign Verification Form


I have written numerous times about the changes to the T1135 Form. Even with the transitional relief provided for this year, this form is still proving problematic. For example, even though you now only have to report the market value of foreign stocks held with a Canadian Institution on December 31, 2013, some broker reports have listings where Canadian and US stocks are intermingled and so we have to pick out the foreign stocks individually.

The form is also proving very troublesome for U.S. citizens who live in Canada and expatriates from other countries, as they have to report foreign stocks they hold outside Canada (they often still have a U.S. or foreign brokerage account) and U.S. or foreign bank accounts.

The CRA should send a few of its representatives to work in an accounting firm for a week and then have them report back on what they think of the new T1135 reporting requirements. I cannot even imagine the mess that will occur if the original rules are re-instated in 2014, where you must list any stock that does not pay a dividend individually.

My problem with this form is that it overwhelms those people who willingly report information that is readily accessible to the CRA, especially where they hold their investments with Canadian financial institutions. While I get why the CRA wants enhanced reporting for taxpayers with assets outside of Canada, I am somewhat skeptical that people hiding and/or not reporting foreign assets will now become compliant because the T1135 is more detailed.

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, March 24, 2014

The Dynamics of the Investment Advisor/Accountant Relationship

I have several clients in common with Pat O’Keeffe, First Vice-President and Investment Advisor at CIBC Wood Gundy. Pat and I have often discussed the dynamics of the relationship between the investment advisor (“IA”) and the accountant (“CPA”), and why our relationship works while other IA/CPA
relationships fail. One of Pat’s responsibilities with Wood Gundy is continuing education, in which he is charged with the responsibility of improving the quality of service the IAs offer and to increase their knowledge on all aspects of being a leading edge advisor to higher net worth clients. Pat thought it would be instructive for me to speak to his advisor group in downtown Toronto (which I did a few weeks ago) to provide an accountant’s perspective on the dynamics of this relationship. I summarize my talk in today's post. [Note: I use CPA above because that is my designation. I am not purposely slighting other accounting designations, so please do not send me nasty emails].

I understand some aspects of this post may come off as arrogant, as I am telling IAs what to do and how to act. However, I know I don’t have all the answers. Please also understand I was asked to speak to the CIBC Wood Gundy advisors from a CPAs perspective and this is my interpretation of the relationship and I am blunt (and some would say a bit arrogant :).

You may be asking yourself, why the heck should you care about the IA/CPA relationship? I suggest that my expectations of an IA should become the minimum expectations you have of your IA.

Although I do not discuss this today, if you have a team of advisors, you need to ensure your IA, CPA, lawyer, insurance agent and banker all integrate their advice into one efficient coordinated plan. If your advisors operate at cross purposes, while trying to protect their own fiefdom and fees, you are the ultimate loser in this battle of professional egos.

How the Ideal IA/CPA Relationship Should Work


During my presentation, I suggested and it was agreed upon by the CIBC advisors present, that the ideal IA/CPA relationship should be as follows:

• Client centric – The best interests of the client should always be the first priority

• No turf battles – Many financial issues have an investment and tax component. It is important the IA does not overstep their expertise and provide tax advice to cut out the CPA, while the CPA needs to stay within their tax and advisory expertise and not attempt to provide investment advice. I know I have a good relationship with an IA when they call me for tax or financial advice on clients I have no vested interest in; because they know I will help them with their client. This also works the other way where I can call an IA for an opinion on what another IA is doing or for an explanation of an insurance product, etc.

• Proactive – Whether the IA has a new insurance idea or the CPA thinks a prescribed rate loan is appropriate, the IA and CPA should work together to ensure they are providing proactive advice before the client hears it at a cocktail party or seminar put on by another IA or CPA.

• Financial Hero’s – In a strong IA and CPA relationship, the synergies of the relationship should result in both parties becoming hero’s in the client’s eye. For example, an IA recently referred me a client that was not a good fit for the firm she was using. By working together with the IA and because of my knowledge and experience in working with owner-managers, we were able to not only lower the client’s fees, but provide more practical and proactive income tax advice. The client was very pleased with both of us.

The Accountant is the Trusted Advisor


During my presentation, I suggested to the IAs that some studies have concluded that the CPA is the client’s most trusted advisor. I further suggested that whether they agreed or not with that assertion, they needed to understand and acknowledge that dynamic. Although, I work very well with many IAs, over the years I have had reason to suggest to a few clients that their IAs were weak and should be replaced. In most cases they have replaced their IAs. My point here; if you are an IA, you should try and work with your client’s CPA, as it is in your own interest to have them as an ally as opposed to an enemy.

The Grey Areas of the Relationship


The following issues are often contentious and can cause a fracture in the IA/CPA relationship:

1. Who is responsible for determining the adjusted cost base of a personal tax client’s investments?

Most CPAs feel it is the IAs responsibility in all cases for personal clients. During my presentation, there was full agreement by the CIBC advisors on this point. The reason for this is unless an CPA is specifically engaged to track a client’s stock investments, they have no idea what stocks and bonds their clients are buying throughout the year and they have no reason to track such.

2. Who is responsible for determining the adjusted cost base of a corporate client’s investments?

The IAs again felt this was their responsibility. I surprised them by stating that in this case I felt we had a joint responsibility, since for corporate clients, CPAs track the ACB of the client’s investments when we prepare their financial statements.

3. Who is responsible for providing information to complete the T1135 Foreign Income Verification Form?

As I have discussed several times on this blog, the new reporting requirements that force taxpayers to report individual stocks held in Canadian Institutions that do not pay dividends (postponed until 2014 as per the recent transitional announcement) will be a massive issue next year. IAs told me they consider the determination of the fair market value of foreign stocks held during the year, their responsibility. However, they noted that should the rules not change for 2014; the systems of all Canadian Financial Institutions will need to be tweaked to provide reporting on the dividend exception issue.

4. Who is responsible for Income Tax Attributes?

I suggested it was the CPAs responsibility to provide the IA any capital loss carryforward information and RRSP and TFSA contribution limits. However, I told them I thought it was the IAs responsibility to contact the CPA to confirm this information before making any of these contributions.

How to Lose the Accountant as Your Advocate


During my presentation I suggested to the IAs that the following actions or inaction could alienate their client’s accountant:

1. Give the CPA a hard time when they ask for duplicate tax slips. We are only asking because the client did not receive the slip or has misplaced the slip.

2. Don’t provide the CPA adjusted cost base information or realized capital gain/loss reports. As noted above, in my opinion, this is clearly the IAs responsibility.

3. Don’t assist with flow-through information. Flow-through limited partnerships are a strange animal. They start under one entity and are converted into a mutual fund typically a couple years later. CPAs often have a hard time following the conversion process because (a) the share conversions are never one to one, so it is hard to know which flow-through was converted to which mutual fund and (b) it is very time intensive work sorting this out and CPAs do not have time to waste on this during tax season.

4. Practice income tax. In prior years I have had a couple clients' IA transfer stocks with huge unrealized capital
losses to their RRSPs. The result, the tax-loss is denied and lost forever. I have also had IAs suggest to clients that they purchase very large quantities of flow-through shares without discussing their suggestion with me. Clients can become very upset with their IA when I prepare their income tax return and tell them they owe substantial minimum tax because of the excessive flow-through purchase. I have also seen IAs make transfers for probate purposes without considering the income tax costs amongst many other transgressions.

How an IA can Lose a Client


I suggested to the group that the following acts may cause them to lose a client:

• Not taking into account the client’s area of business. For example, should your asset allocation be heavy in REITs if the client’s personal corporation holds significant rental properties?

• Cause a RRSP or TFSA over-contribution because you did not confirm the contribution limits with the CPA. I don’t think IAs understand how upset clients get when this happens and what a huge strike this is against them over such a small issue.

• Have client pay tax on capital gains when the client has large unrealized losses. In November, I touch base with many of my client’s IAs, or they call me, to discuss whether there is an opportunity to tax loss sell. Although it may make investment sense to not sell stocks with unrealized losses, IAs need to speak to their clients in November or December to explain their rationale for not selling; so the client is not upset in April when they incur a large income tax bill.

• Don’t review annual returns with clients. Most IAs are very good about this, but if you ignore your client and don’t have at minimum a yearly meeting, know that I am asking my client if they have reviewed their returns for the year with you. If  they say no, I will usually figure it out myself and then compare the returns to index returns. 

Finally, if you're an IA, the reality is I like many other CPAs; prefer to work with other quality advisors, whether they are IAs, lawyers, valuators, bankers etc. For both yours and your clients benefit, you should strive to be one of those quality advisors.

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

Wednesday, March 19, 2014

Reporting of Internet Business Activities for 2013

The Canada Revenue Agency ("CRA") has been very concerned over the last few years about income tax “slippage” due to Internet commerce. This is a very complicated issue that deals with the location of servers and offshore tax planning.

The CRA has now set it sights on a much easier target, that being income earned from a website or webpage. As of January 1, 2013, the CRA now requires corporations to file Schedule 88, a one-page “Internet Business Activities” as part of their T2 return if the corporation earns income from one or more webpages or websites.

There is a similar requirement for unincorporated businesses on the revised Form T2125 (see Internet Business Activities section) so my fellow bloggers who are sole proprietors or partners in a business are now also caught by this disclosure requirement.

Income from Webpages or Websites


According to the schedule, income from webpages or websites includes:

  • The sale of goods and/or services through a website that includes the processing of payment transactions online
  • The sale of goods and/or services through a website that requires customers to either call, complete or submit a form, send an email to make a purchase, place an order, booking and/or other transactions
  • The sale of goods and/or services through an auction, marketplace or website operated by others
  • Income earned from advertising, income programs or other traffic your site generates

 

Reporting Requirements


Corporations (Schedule 88) and unincorporated businesses (T2125) must report the following information on:

  • Number of Internet webpages or websites your corporation earns income from
  • Provide the Internet webpage or website addresses (URL)
  • The percentage of gross revenue generated from the Internet in comparison to the total gross revenue
The CRA has not clarified to my knowledge if they require the form if the corporation has already filed their 2013 return.

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, March 17, 2014

10 Ways to Avoid a Tax Audit


Two weeks ago, Adam Mayers the Personal Finance Editor of the Toronto Star wrote a column on 6 tips to steer clear of an income tax audit. The tips included suggestions from Henry Korenblum, a tax manager in Toronto with Crowe Soberman LLP and yours truly.

I liked Adam’s idea so much, I decided to Dave Letterman it, and prepare a list of the top 10 ways to avoid a tax audit for personal income tax returns (except I will not work my way down from ten to one).

Before I present my list, I want to elaborate on Adam's comments on the difference between an information request and an audit, as I find many people are unclear about the distinction.

Information Requests


As Adam noted, these requests are typically innocuous. The CRA usually sends a letter asking for back-up information relating to a deduction or credit claimed on your return. Generally these requests are to provide support for items such as a donation tax credit, medical expense claim, support payment claim, a child care expense claim, a children's fitness tax credit claim or an interest expense claim. These requests are fairly common and more often than not, relate to personal income tax returns that were E-filed. Typically, once you provide the information requested, you do not hear anything further from the CRA.

Audit

 

An audit, which can take the form of a desk audit (which are typically undertaken to review an item that the CRA finds unusual in nature or specifically wants to review) or a full blown audit, are invasive and stressful and often result in a tax reassessment of some kind.

Top Ten Tips to Avoid a Personal Tax Audit


1. Avoid conflict (only being slightly sarcastic here). Many audits are triggered by a scorned spouse/lover, business partner you have had a falling out with or a dismissed employee. Many hostile divorce negotiations end quickly when one spouse tells the other they will be snitching to the CRA if they don’t get what they want. On the other hand, in acrimonious divorce negotiations, the threatened spouse often tells the "snitch" spouse to go ahead, since after the CRA takes everything they will get nothing. As you can see, these negotiations can get quite interesting to say the least.

2. File your return on time. Late filed returns often seem to pique the CRA’s interest.

3. Do not write explanatory notes or letters to the CRA with your return. I have often been referred new clients who had the crazy idea the CRA wanted to hear why they did or did not do something and created far larger problems for themselves by trying to explain away one issue, while creating multiple other issues. I always thought reading these letters would be the most amusing part of working for the CRA.

4. Unless you have a travel log to support your auto expenses, be reasonable in the percentage of business use you claim in respect of your auto expenses.

5. Don't make up expenses. If you don't have actual receipts to support the expense, do not make the claim.

6. I know this is easier said than done, but if you are separated or divorced, try and agree in your separation agreement who will claim which expenses and which credits. Often both spouses claim the same children and same expenses on both returns. The CRA does not really appreciate duplicate claims.

7. Report foreign income, especially income from countries we exchange information with. Many people earn income in the U.S. or U.K. and do not report that income. The CRA exchanges information with both of these countries and they are like a “dog on a bone” once they realize you have not reported this income; plus the penalties can be very large.

8. Report the rental income attributable to the owner. For some unknown reason, many people seem to think the legal ownership of a rental property (and investment accounts) is irrelevant for tax purposes. I have seen several circumstances where spouses jointly own a rental property and they decide to just have the lower income spouse report 100% of the rental income (and often the spouse not reporting the income paid for the property). While this is often difficult for the CRA to find, they are not too impressed when they ask for a purchase and sale agreement and see that one of the legal owners has not reported any of the rental income or capital gains.

9. If you claim expenses as an employee, commission salesperson or self-employed business, do not claim personal expenses. I have seen people claim suits, dresses, nanny expenses (as administrative), facials, personal travel, etc. Claiming these expenses automatically casts a cloud over your honesty and auditors get their antennae up high.

10. File a departure tax return if you leave Canada. I have seen many situations where people move overseas or are transferred and do not file a final Canadian return, or file the return, but do not answer the question on the return about the date they left Canada. The CRA then keeps sending requests to file and often leads to an unnecessary review of their returns and residence.

I Guess Someone Other than my Mom is Reading this Blog


Over the last month, I have had over 21,000 unique visitors to The Blunt Bean Counter and over 75,000 page views; due in large part to my six-part series on "How Much Money do I Need to Retire? Heck if I Know or Anyone Else Does!". I am very pleased that so many people found value in the retirement series! (The series is now in Flip Book form - link here.) I would like to thank my loyal blog followers and welcome the many new ones. I appreciate you reading my ramblings.


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.