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, May 25, 2015

Financial & Tax Planning for the Terminally Ill - Part 1 - Getting Organized

Many of us do not consider our own mortality. Yet, if you or someone you know has been diagnosed as terminally ill, you are forced to face the reality of your/their impending passing. While the emotional and health issues are first and foremost, to lessen the burden for your family, friends and/or executor(s), it is very important to undertake both financial and tax planning.

A diagnosis of a terminal illness quite bluntly means that you are probably going to pass away in the near term. The near term for a terminal illness is defined by different medical practitioners and medical organizations as anywhere from 6 months to two years. Most likely you will not be able to work full-time (or you will want to stop working at some point) and may incur additional medical or nursing care related expenses that are not covered by the Canadian health care system.

Consequently, you may need to liquidate investments, retirement assets or draw on insurance policies to fund your day to day living and medical expenses. For the purposes of this post, I am going to assume you are lucky enough to have sufficient liquid resources to live comfortably until that fateful day.

If you have stress tested your death, as I have suggested in prior blog posts, the anxiety related to getting your financial house in order will at least be minimized. However, for today’s blog, I am going to assume you have done little to plan for your demise, and I’ll provide a comprehensive list of things you need to organize and consider.

Legal Documents to Prepare, Update, Review or Gather


1. Will(s) – Have an updated one in place

Hopefully you already have a will(s). If not, ensure you immediately have a one drafted. If you live in a province that allows you a second will (i.e.: In some provinces you are allowed to have a second will for the shares of your private company in order to minimize probate taxes; although the new rules for inter vivos trusts must be reviewed) consider whether a second will is applicable to your situation.

Where you have a will in place, ensure you review your will one final time to determine if it is up to date and reflects your current wishes. If you have not designated personal property such as jewelry and art in your will, you may now want to specify how that property is allocated; rather than leaving it to your family to sort out, possibly creating issues for your executor.

Although most terminal illnesses do not affect your mental capacity, I have seen circumstances where lawyers are concerned about the mental capacity of their clients and your lawyer may request a capacity test prior to allowing you to change your will.

2. Personal documents – Organize and store

Once you pass away, many financial institutions and government bodies will request legal documents (passports, birth certificates, drivers licence, etc.). You will therefore want to store all these documents in one place (safety deposit box) and make your executor or family aware of the location of these documents.

3. Powers of Attorney (“POA”) – Get your financial and personal care wishes down on paper

If you do not already have POA’s in place for both financial and health decisions, you will want to have both documents drafted as soon as possible. Whether you are just drafting a POA or reviewing a previously granted POA, ensure you are comfortable with your attorney (the person you have appointed) selection.

You will want to make your attorney for personal care (health) aware of your wishes for medical purposes.

4. Funeral Arrangements – Inform your executor or family about your preferences

You may have already prepaid your funeral or have specific wishes. You need to ensure any outstanding payments are made on prepaid plans and discuss your funeral wishes with your family or executor so they are aware of any specific wishes. Banks will typically allow your estate to pay for your funeral from your bank account; however, you may wish to give the money while alive to your executor so they do not have to deal with the bank.

If you were undecided about organ donations, this would be a time to make a final determination.

5. Insurance – Create a folder and summary with all your documents together with contact information

You may have life, disability, critical illness or any number and types of insurance in place. In order to assist your family and/or executor, you should create a file with all your policies, the amount of insurance and the contact information of your insurance agent where applicable.

In some cases your beneficiary designations under your insurance policies may be outdated (for example, many people still have their ex-spouse as a beneficiary) and need to be reviewed and changed. Many people also do not have updated beneficiaries for their RRSPs and RRIFs.

6. Real Estate – Organize all your deeds in a single file for easy reference

To assist your executor(s), you will want to create a file of title and purchase documents relating to your home, cottage and/or rental properties you own.

7. Information Check List – provide a list of helpful contacts

To help alleviate additional stress for your loved ones, I strongly suggest putting together an information checklist of:
  •  your key contacts (lawyer, accountant, insurance agent, investment advisor, banker etc.)
  •  location of assets (your bank accounts, investment accounts, and retirement account), credit cards
  •  location of safety deposit box etc.
If you do not have something in place, this would be the time to prepare your list, as a courtesy to your executor(s), so they are not playing a game of hide and seek with your assets.

You will also want to summarize and provide documentation regarding any liabilities you have, such as mortgages, bank loans and lines of credit.

Finally, it’s a good idea to introduce your key contacts to your executor and/or spouse so they have familiarity with them.

8. Digital Information – provide a protected list of your passwords

As discussed in my blog Alzheimers and Death in the Digital World you will want to consider how you deal with the issue of passwords in respect of your online financial accounts and Internet/social sites.

I am going to stop here today. Next week I will discuss financial and tax planning issues you will want to consider if you or anyone you know is terminally ill.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.

Monday, May 18, 2015

Can a Shareholder Be an Independent Contractor to Their Own Company?

If you perform services for a business, it is extremely important to determine whether you are an employee, a self-employed individual (i.e. independent contractor) or a Personal Service Business (if you contract through your own corporation).

I have discussed these controversial income tax issues a couple of times in “I am a Contractor Unless the CRA Says Otherwise” [see the second part of this post updating employee/contractor status] and in “Is Your Corporation a Personal Service Business”.

However, how about the situation where a shareholder of a corporation (whom you would typically consider to be an employee) wishes to treat themselves as an independent contractor and pay themselves a consulting/management fee instead of a salary? As I have been asked this question several times by readers, today, I will discuss a 2012 court case that "sort of" addressed the issue.

Pluri Vox Media Corp


In the 2012 court case, Pluri Vox Media Corp.v The Queen, 2012 FCA 295, the sole shareholder of Pluri Vox took the position that he was an independent contractor (not an employee) to his own company for the following reasons:

1. He was not paid a predetermined salary, but was paid a fee between $3,000 and $8,000 per month based on the commercial activity Pluri Vox undertook.
2. The company asserted that the varying compensation was indicative of the financial risk the shareholder undertook.
3. The shareholder was not directed on how to perform his duties and was able to hire assistants without Pluri Vox’s consent.

Nonetheless, the court ruled the shareholder's status to be that of an employee. As a result of this, the company was liable for payroll source deductions that were not remitted in the past.

This ruling was founded in part on the finding that there was no contract between Pluri Vox and the shareholder and that the shareholder did not invoice Pluri Vox for his services and did not charge GST (despite being registered for GST with the CRA).

However, Justice Webb made an important comment in respect of whether a shareholder can be a contractor to their own company. He stated:

"It would also seem to me that, while this would be unusual, an individual could enter into more than one contract with his or her own company and therefore could provide services in different capacities. It follows that the simple fact that an individual is a director or an officer of a company does not, in and of itself, exclude the possibility that other services may be provided by that individual as an independent contractor. When that occurs, it will be necessary ..... to apportion the amounts paid between the services performed in one capacity and the other."

Thus, the court provided for the possibility a shareholder could be an independent contractor to their own company in certain circumstances.

Justice Webb also commented that where applying the "control" test often used by the courts, “[t]he importance lies in the corporation's legal power to control the employees, not whether the employees feel subject to that control”.

Unfortunately, while the court actually addressed two important concepts, it failed to provide clarity for employee/contractor situations involving a shareholder of a company. Thus, if you own your own corporation and pay yourself as a contractor or through management fees, understand the CRA may come knocking at your door.


Employee vs Contractor


The link above to "I am a Contractor Unless the CRA Says Otherwise" is now almost four and a half years old. I may update this topic in the future, but until then, it should be noted a 2013 Federal Court of Appeal hearing, 1392644 Ontario Inc. (Connor Homes) v. Canada (National Revenue), 2013 FCA 85, has placed a new strong emphasis on the role of “intent” in the determination of whether you are an employee or contractor. In the case the judge applied a two-step approach:

1.The intent of the parties

2. Does the actual reality of the working relationship confirm the intent of the parties?

To reach a definitive conclusion, both steps must be consistent. In examining intent, the courts will examine the contractual relationship or the behavior of the parties, such as were invoices issued and whether or not the worker registered for GST/HST purposes and made various other filings as an independent contractor. The second step will involve a review of the same tests applied in the Weibe Doors and Sagaz Industries cases I note in the "I am a Contractor" post.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.

Monday, May 11, 2015

How Your Birthdate Can Impact Your Financial Affairs and Retirement

Have you ever wondered if you had been born a few years earlier (or alternatively, a few years later), what effect it would have had on your financial affairs and retirement? I personally have pondered this issue; specifically wondering whether my housing and stock market returns would have improved if I had been born two or three years earlier.

Retirement


Based on my contemplation above, I was intrigued when I read a recent article by Ian McGugan in The Globe and Mail on the perils of early retirement, in which he noted that “there’s not much justice when it comes to retirement. Two people born a few years apart can follow identical investing plans and yet wind up with radically different results, simply because of the way the market performed over the course of their investing lifetimes”.

This issue of varying financial returns is known as “sequence of returns”. The sequence of returns you experience can cause a dramatic difference in your retirement funding, especially when you have negative market returns early in your retirement vs later in your retirement. This is because your portfolio’s value is reduced by both negative market performance and any withdrawals you take to fund your day-to-day expenses. However, based on the data discussed below, you also face a sequence of returns risk when saving for retirement, which is birth year, retirement year and market return correlated.

Those of you who read my six part series on retirement, “How Much Money do I Need to Retire? Heck if I Know or Anyone Else Does!” will recall I discussed the concept of sequence of returns in Part 5 of the series, when I talked about the various factors that can impact both the funding of your nest egg and your withdrawal rate in retirement. In that post, I discussed some comments made by Wade Pfau, a retirement researcher who has a Ph.D. in economics from Princeton and is currently Professor of Retirement Income at The American College and the Director of Retirement Research for McLean Asset Management and inStream. Wade has a popular blog, called appropriately, Wade Pfau's Retirement Researcher Blog .

In Mr. McGugan's article, he notes a new tool created by Wade that reflects variances during the accumulation phase of your retirement. The tool, called The Retirement Wealth Index, reflects how many years of income someone would have accumulated if they had started contributing 15 per cent of their salary to a balanced stock-and-bond portfolio at 35 and continued until they hit 65.

The Globe and Mail article goes on to say that “Prof. Pfau estimates that someone reaching 65 this year would have accumulated 10.7 times their annual salary by following the strict investing regimen described above. That's among the poorer outcomes of the past 20 years. In contrast, an investor who turned 65 in 2000 would have had more than 18 times their annual salary. Even in 2005, a new retiree would have built up a nest egg worth more than 14 times their salary.”
This empirical evidence supports my intuitive observation. What a difference your year of birth can make in your investing nest egg.

Housing


I don’t have any empirical evidence for the affordability of housing, but obviously based on the price of homes in Toronto, in which the average cost of a detached home recently hit one million dollars, it is a huge issue for many, especially younger people.

I have personally observed that similar to the sequence of returns for investing, even a year or two can affect your housing returns. When I look back at friends and family who had comparable financial situations to me, but were either two to three years older or two to three years ahead of me in purchasing their first homes, they always seemed to buy when the Toronto market was weak or stable and to always be selling when the market had risen (and I was buying). As a result, they leapfrogged ahead of my housing affordability simply by virtue of timing and/or date of birth and ended up in areas I could not afford (unless I was willing to take on substantial debt). Of course, I realize I should not be complaining, as my housing experience pales in comparison to today's generation who face a monumental challenge in purchasing a starter home.

I am grateful for where I am financially in my life (although I do have some regrets based on non-birthdate decisions). I do however feel, that my own stock market and home buying experiences re-enforces how the luck of your birthdate can impact your financial future.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.

Monday, May 4, 2015

Topics of Interest

I am burnt out from personal income tax season and trying to get out my various December corporate year-ends. So I am taking a break from writing this week.

During the year I jot down topics to write about and draft blogs. It’s a process; from just an idea, to a draft, to a complete blog that just needs revisions. My ideas for this year take me until the summer when I hit the golf course. At that point I’ll be re-posting the “Best of The Blunt Bean Counter”.

However, I could use a few suggestions for future blog post topics for next fall. So if you have an idea or topic you would like me to discuss, leave a comment on this post, or feel free to send me an email to bluntbeancounter@gmail.com

See you next week, when I write about how your birth date affects your financial position.

Bloggers note: Sorry, by accident I closed the comments section for this post. However I have received many suggestions for future topics to my email.  Thank you. The comments section is now available.