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 18, 2016

Rock On

Over the years, I have often suggested, probably to the point of ad nauseam, that I think you should make a Bucket List (A list of things to do before you die. Comes from the term "kicked the bucket"). I keep preaching this point because I’ve seen too many people never get to do the things they dream of, due to financial, health or age related reasons.

Personally, over the last eight or so years, I have crossed off multiple items from my Bucket List. For some of the more ambitious items on my list, such as my safari to Africa and playing golf at Pebble Beach, I have posted blogs detailing my experiences. One adventure on my list I did not recount was a golf trip I took last year to Ireland. It was an awesome trip and on a cold blustery typical Irish golf day, my friends and I and maybe only ten other people watched Dustin Johnson play a practice round for the British Open.

Bucket list items need not be extravagant trips. My list included watching a baseball game at Wrigley field and taking guitar lessons (which resulted in tennis elbow and quickly derailed my guitar playing to the relief of my families ears). The most recent item crossed of my list, was a visit to the Rock & Roll Hall of Fame (“RRHF”) in Cleveland. My wife took me for my birthday.

During my jaunt to Cleveland, I also attended a Cleveland Cavalier game in which Lebron James was his usual magnificent self (the game happened to be a throwback night to celebrate the 1976 Cavalier team, so the Jumbotron included a video clip of the current Cavs players dressed in 1970’s attire with a Soul Train motif in which many of them danced to the amusement of the crowed). The dancing is caught on this YouTube video. If you remember Soul Train and know some of the Cavs players, you will enjoy this video.

If following celebrity chefs is your thing, you’ll appreciate that we finished off our Cleveland experience with an awesome dinner at Michael Symon's restaurant called Lola’s.

Anyways, before I fall off my Soap Bucket - get it, soap box :) here’s a quick summary of the RRHF.

The Rock and Roll Hall of Fame



The first thing that strikes you about the RRHF is the structure itself. The building was designed by I. M. Pei, one of the world’s most famous architects. It is a really beautiful building.

While I thoroughly enjoyed my time at the RRHF (I was there for over 6 hours) and would recommend it to any music/rock fan, I can’t say there is one overall thing that stood out to me. It was a well- balanced combination of exhibits, video clips and interactive displays. My wife and I were struck by how disruptive rock and roll was to the “establishment”, both at its beginnings and again in the late 60’s and early 70’s.

The first floor of the exhibit was my favourite. It included among various exhibits:

(1) a gallery dealing with the Roots of Rock

(2) an Elvis exhibit (not really my thing)

(3) a Cities and Sounds exhibit which I really enjoyed (I have always personally been especially intrigued by the San Francisco scene of the late 60’s)

(4) a Dick Clark American Bandstand video retrospective (just so interesting seeing many rock stars as they were just coming on the scene)

(5) a legends of Rock exhibit that included clothing/costumes, pictures, video’s on such greats as the Beatles (see picture below), Rolling Stones, Jimi Hendrix, Doors, U2, David Bowie etc.

We enjoyed the colorful and historical guitars and instruments exhibited throughout the floor and the outfits/costumes worn from everyone from Led Zeppelin, to the Beatles, to even the black dress worn by Stevie Nicks on the Rumours album (yes like every teenage guy back then, I had a crush on Stevie).

There were also several fun interactive exhibits such as the one where you discover who inspired your favourite artists. There was also a new Graham Nash exhibit on while we were there.

The second floor provides a historical backdrop to how rock and roll began. Have you ever thought of all those one-hit-wonders you listened to when you were a kid? We had a blast on the second floor which hosted an interactive exhibit where you can search from A-Z for your favourite ones. You forget many of these songs until you see them listed. You then wonder why one only hit?

The third and fourth floors have such things as glass panels with the signatures of inductees and a Pink Floyd: The Wall exhibit. But, I must admit, I spent much of my time on these floors watching film footage and video that tell the story of the inductees and provide musical highlights of the induction ceremony concerts. For example; we watched a concert in which Stevie Wonder played with B.B. King, John Legend, Sting and Jeff Beck, which I really enjoyed.

My timing was a bit off, as I just missed a Herb Ritts rock portrait exhibit that ended the week before and had gotten rave reviews. The next exhibit unfortunately was under construction.

If you are a music fan, especially a rock fan, you’ll want to add the RRHF to your bucket list. You will not be disappointed by the venue or the exhibits.

Bloggers Note: I will not be posting again until May 9th. I have also disabled the ability to comment on this or any prior blog post. I apologize, but I am too busy during tax season to answer the various questions and comments I receive.

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, April 11, 2016

What Small Business Owners Need to Know - Shareholder Agreements

If you are starting in business with another individual, your accountants and lawyers will likely suggest that you draft a shareholder agreement. However, since many small businesses are started by family and/or friends with limited funds, the idea of paying a lawyer to draft a shareholder agreement is usually not at the top of the priority list for two reasons:

123RF Stock Photo Copyright: Andrew Grossman

1. The cost of drafting the agreement.

2. Why Worry? Since the shareholders are family or friends, everything will work out because - well, we are family and/or friends, so what could go wrong? 

Consequently, shareholders of many small businesses may go several years before they decide it is time to engage a lawyer to draft a shareholder agreement. Typically the two catalysts to action are:

1. The business has become profitable enough that the shareholders want to ensure if something were to happen to them, their family is well provided for.

2. There is some shareholder friction.

In today’s post, I will discuss two key areas that should be considered/included in any shareholder agreement, whether drafted at the outset of the establishment of the business or years after the business has begun. As many agreements are over 25 pages, please keep in mind I am touching on maybe 30-50% of what is required in a typical shareholder agreement and providing an accountants take on a legal document. I am not a lawyer. If you need an agreement, you must obtain proper legal advice and should get moving on the project, as most agreements take many months to be hammered out.

Key Considerations in a Shareholder Agreement


The two issues I am going to discuss in this post are:

1. Share Transfer Provisions

2. Death Provisions

Share Transfer Provisions


Share transfer provisions in a shareholder agreement provide some order to the often “unorderly” process of third party share sales, unsolicited share offers, shareholder exits and shareholder power struggles.

The most common provisions included in a shareholder agreement are:

1. Right of First Refusal

2. Shotgun

3. Piggyback

4. Drag-along

Right of First Refusal


In order to protect one shareholder from selling to an unwanted or undesirable third party, shareholder agreements typically contain a Right of First Refusal provision.

These provisions typically state that the existing shareholders have the option to match a third party offer made to any of the other shareholders and to purchase the shares of the selling shareholder themselves, on the same terms and conditions as offered by the third party. Minority shareholders, depending upon their financial situations, may be somewhat prejudiced by these provisions.

A related shareholder agreement provision is a Right of First Offer. Under this provision, a shareholder does not need a hard third party offer and can just state the terms on which they wish to leave the company and if the other shareholders do not take them up on the offer, they can sell to a third party on those terms.

Shotgun


A shotgun provision allows one of the shareholders to offer the other shareholders a price and the terms under which they are prepared to either purchase the other shareholder’s shares or sell their shares to the other shareholders. In theory, this will result in a fair price, since the shareholder triggering the shotgun, does not know if they will be selling or buying.

Once the offer is made, the other shareholders must decide whether they wish to buy the offered shares or sell their own shares on the same terms and conditions presented.

While this provision is often useful in shareholder disputes, where one shareholder has more resources than another, they may be dictating the end result of the shotgun, since the shareholder with less finances will not have the resources to fund the purchase of the shares and will be forced to sell.

Piggyback


A common share provision used to protect minority shareholders is a “piggyback” right. This provision protects a minority shareholder from being excluded by the majority shareholders, where they wish to sell their shares to a third party, but have not included the minority shareholder as part of the deal for one of many possible reasons.

A “piggyback” right typically allows a minority shareholder to sell some of their shares to the third party purchaser under the same terms as the majority shareholders.

Drag-along


As noted above, a “piggyback” provision protects minority shareholders where they are excluded from a sale by the majority shareholders. A drag-along provision is a clause that allows the majority shareholder to drag-along the minority shareholder whether they like it or not, where the majority shareholders want to sell and the purchaser wants 100% ownership with no minority owners.

These provisions will often have a minimum price to protect the minority shareholders from selling at a price they consider too low and/or apply only after they had the opportunity to purchase the departing shareholders shares (which in many cases is not practical given their resources).

Death Provisions


It is very important that any shareholders' agreement consider the death and disability of any of the shareholders. I briefly want to discuss one issue that can arise upon the death of a shareholder; that being the flow-through of the capital dividend account to the spouse or estate of the deceased shareholder.

Typically shareholder agreements require all shareholders to obtain life insurance with the corporation being the beneficiary. The idea is that if one shareholder were to die, the insurance is sufficient to allow the corporation to redeem the deceased shareholders shares at their fair market value, subject to a valuation. It should be noted, that life insurance proceeds generally are added to the corporations capital dividend account and can be paid as a tax-free dividend.

The requirement to redeem the deceased shareholder’s shares generally allows the surviving spouse to receive most of the redemption funds tax-free (via the capital dividend) and the remaining shareholders to obtain control of the corporation, with minimal cash outflow, since typically the insurance covers most if not all of the redemption price payable to the spouse or estate.

The reason I have mentioned all this is; that while most agreements have a clause regarding the redemption of the deceased shareholder’s shares and the requirement for the shareholders to obtain life insurance, I have seen on several occasions no mention that the funds used to redeem the shares must be paid from the capital dividend account ("CDA") caused by the insurance (Nowadays, many lawyers do not specifically reference the CDA, but have a clause requiring the redemption to be made in the most tax efficient manner for the vendor). 

Without this clause, the corporation can use the life insurance proceeds to redeem the shares, but keep the capital dividend for itself and its remaining shareholders. While most people would not try and take advantage of such a missing provision, where the shareholders and their families have not got along, the surviving shareholder could try and “stick-it” to the estate of the deceased shareholder without a clear provision.

Marital Breakdown


Many shareholders do not consider that a marriage breakdown by one shareholder can significantly impact the other shareholders. As this post is too long as it is, I will quickly point you to an interesting article published by Jordan Dolgin Do Family Law Clauses in Shareholder Agreements Really Matter? that discusses this topic.

My post today just touches on just a couple points you need to consider in drafting a shareholder agreement. If you have a corporation and do not have such an agreement, I suggest you contact your lawyer and get to work promptly on drafting such.

Bloggers Note: I have disabled the ability to comment on this or any prior blog post. I apologize, but I am too busy during tax season to answer the various questions and comments I receive.

The above blog post is for general information purposes only and does not constitute legal or other professional advice or an opinion of any kind. Readers are advised to seek specific legal advice regarding any specific legal issues.

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.

Small Business Owners - Get on my Mailing List


If you are an owner-manager and/or a shareholder in a corporation and have not signed up for my corporate mailing list, please email me at bluntbeancounter@gmail.com.

I will be sending out specific mailings on matters of importance to small business owners and I am considering, depending upon the interest, holding a roundtable for small business owners who are in the Toronto area. I will start the mailings in May.

Thanks to the many readers who have already signed up.

Monday, April 4, 2016

Reporting the Capital Gains on Your 2015 U.S. Stock Sales

Last year I wrote a blog post titled Foreign Exchange Translation on Capital Gains and Dividends. The article noted that the Canada Revenue Agency (“CRA”) expects you to use the Bank of Canada noon rate or other acceptable exchange rate in effect at the time of purchase and sale for any capital transaction.

To be clear; this means that when you purchase a stock you must translate it at the date of purchase and again at the date of sale [i.e. if you purchased 50 shares of Johnson & Johnson for $80 when the foreign exchange rate is $1.10, your cost for Canadian purposes is $4,400 (50 x $80 x $1.10)]. If you sold the J&J shares later in the year for $90 and the FX rate was $1.45, your proceeds are $6,525 (50 x $90 x $1.45) and your capital gain to report is $2,125 ($6,525-$4,400).

The trouble is, many financial institutions just provide you capital gains summaries based on your U.S. purchase and sale price. If you then multiply that gain by the average foreign exchange rate for 2015 ($1.2787), your capital gain is wrong.

This is a huge issue for 2015, where the U.S. dollar strengthened significantly against the Canadian dollar. You really need to go back and translate your purchases and sales at the FX rate in effect at that time. The same holds for sales of U.S. real estate or any other U.S. capital property.

The above was recently re-enforced when a client of mine advised me of the following:

My client informed me that a certain financial institution was very proud of themselves this year for coming up with a new Realized Capital Gain report and had sent him an email to tell them how wonderful they are.

However, he noted the trouble was they were only reporting capital gains in the original currency, USD.

My client said, “I would bet that many taxpayers are just taking that USD number and converting it to Canadian at the sale date and calling that the gain. Given the big drop in the CAD$ in recent years, they are, of course, under-reporting grossly. There is no warning on the report, not to do this”. He suggested I write another blog post on this topic and hence, today's topic.

When he calculated his capital gain using the rates in effect at the time of purchase and sale, he emailed me to tell me the gain was $35,000 higher than if he had just taken the U.S. gains on the report and used the CRA's average rate for 2015.

It is very important to ensure you translate your capital gains at the actual purchase and sale prices in 2015, or you may be severely under reporting your capital gains.

Bloggers Note: I have disabled the ability to comment on this or any prior blog post. I apologize, but I am too busy during tax season to answer the various questions and comments I receive. 

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.