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 29, 2017

The Taboo Of Money - I Will Not Talk About It -Part 1

As discussed in my blog post last week, I am going to post small excerpts of a book I was writing on money taboos which I have abandoned. Today and next week, I write on the taboo of discussing your will with your children, either individually or in a family meeting, while you are alive.

The Taboo


One of the biggest money taboos people have is discussing their will openly with family members.

People hate talking about their own death. People hate talking about their own money. People hate conflict within their families. Combine all of these hang-ups and a perfect storm of neurosis results, creating a virtual tsunami of taboos involving openly discussing one's wealth, one's death and disclosing one's personal opinion about family members. Many people view the thought of this discussion with horror, but my advice is simply - "get over it and do it!"

Reasons for the Taboo


In a 2016 Google Consumer Survey conducted by Legalwills.ca, the survey found 62% of Canadians do not have wills. The survey also noted that 12% of Canadians have an outdated Will (most never updated their Wills once they married and/or had children), which means that 74% of Canadians do not have an up-to-date Last Will and Testament.

I suppose the most common, although rarely admitted, reason for this is, that people are in denial that their lives will eventually end and that their lives will probably end at a time that they cannot control. Understandable, but foolish. None of us get out of this world alive, so get a move on and arrange your affairs so that all of the money, jewelry, collectibles and personal items you have worked for will ultimately be distributed in the most beneficial and tax-efficient way possible.

Once someone has faced up to the necessity of drafting the will, why then the fear of discussing its contents with family members - those who are actually going to benefit from the will? I have heard both rational and irrational reasons for avoiding the discussion. Here's a sampling of some reasons/excuses I have heard over the years for people not discussing their wills/estate planning with their beneficiaries:
  1. It is none of their business.
  2. My parents did not discuss their will with me, so why should I discuss it with my children.
  3. It is bad luck.
  4. If my children know what is in my will, they will be hovering over me like the Angel of death waiting for me to kick the bucket.
  5. Discussing our intentions will just cause tensions amongst my children.
  6. My will does not split my wealth equally among my children.
  7. My children are not equally responsible and I have a trust for one child; I don’t want them upset at me while I am alive that I don’t trust their judgement.
  8. I am leaving a substantial sum to charity, my kids will “freak” when they find out.
  9. I have no idea how long I will live, my assets may be depleted by the time I pass away and the kids will be expecting certain assets that may not be in existence.
  10. I have not drafted a will (see above).

Consequences of adhering to the Taboo


If you do not discuss your will with your children while alive, the following are possible
consequences:
  1. Perceived or actual inequalities in your will that can be explained rationally while you are alive will never be explained. 
  2. You may create unintended conflict amongst your children.
  3. You may not have an accurate understanding of which assets your children truly want.
  4. Income taxes may not be minimized.
  5. Estate litigation may result.

There is no doubt that money brings out the worst in some people and a full disclosure of your family assets and planned distribution may cause problems in your relationship with your children and in their relationships with each other. But it is my belief that it is better to know the problems, confront the problems and solve the problems before you die and this can only be done by a full and frank discussion with your beneficiaries.

Next week I will discuss the benefits of having a family meeting to discuss your will and estate planning.

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 22, 2017

Breaking The Money Taboo – It Makes Cents

In 1913, Sigmund Freud recognized the taboo of money when he wrote, “money questions will be treated by cultured people in the same manner as sexual matters, with the same inconsistency, prudishness and hypocrisy.”

One hundred years later, sex is often openly discussed, yet many money matters are still considered taboo. As consequence many people make bad financial and personal monetary decisions because they avoid the topic. This lack of communication can impact anything from your estate planning, to your marriage, to the selection of your executor, to even losing friends over how to split a restaurant bill.

In my opinion, the money taboo is out-dated and potentially detrimental from both a familial and financial perspective and needs to be broken.

The Free Dictionary defines a taboo “as a ban or inhibition resulting from social custom or emotional aversion”. I think that is a simple and elegant definition. Whether the taboo’s origin is Victorian, French, or biblical in nature, our parents and their parents have propagated the notion that it is bad social etiquette to discuss money matters of any kind.

Every culture and every family have different money taboos. For example, North Americans dislike revealing how much money they earn. It is taboo. Norwegians, on the other hand, have the tax records of all citizens available as public record and have no expectations of privacy.

I have observed first-hand, the financial cost to clients, friends and family and the related personal cost in regard to marriages, sibling and personal relationships where people did not have open frank discussions about money. This issue caught my attention to such a degree that in 2013 I decided to write a book on the topic, encouraging people to confront and/or consider various money taboos.

As they say, the best-laid plans of mice and men often go awry and unfortunately two years later, due to time and work constraints and the realization that many of my proposed topics had psychological bents I was not qualified to discuss, I had only finished two (way too long) chapters of my proposed 17 chapters. I thus decided to set aside the book on money taboos and wrote Let’s Get Blunt About Your Financial Affairs (which was a collection of my best blog posts and thus required more editing than writing). Check - bucket list item taken care of.

As I expect to go in a different direction should I ever write another book, I figured I may as well get some use of the time I spent on my proposed book, so I have decided to post excerpts of the two chapters I wrote (the first chapter over the next couple weeks, the second likely in September). These two chapters are:

1. I Will Not Talk About It – this chapter revolves around our reluctance to discuss our will with our family

2. Asking For Money: The Intergenerational Communication Gap – this chapter discusses situations where children need money (example to escape abusive relationship or start a new career) and situations where parents need money (example: need to reverse mortgage their home since they have no money left and have medical bills or just daily expenses they can no longer afford to cover).

In these posts I am going to discuss reasons people have given me for continuing specific money taboos and review the consequences they face by adhering to these off limit discussions. I attempt to explain why we should consider challenging these prohibitions and how to break some of these taboos.

Hopefully by the time I conclude this “mini-series”, you may understand why I think Canadians need to talk about money.

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 15, 2017

Public Retirement Systems: Comparing CPP/OAS in Canada to Social Security in the United States

I'm back. I made it through yet another tax season. I request your indulgence for a paragraph, as I have one last rant about the timing of the issuance of tax season T-slips.

You would not believe (or maybe you would, since you are probably like many of my clients, who received their tax slips into the first ten days or April, let alone the number of amended slips received up to the third week of April) how many returns we had to amend or hold because of late or amended T-slips. With current technology and payroll services, I really don't see why the CRA does change the required issuance date for T4's and T5's from the end of February to either the end of January or the middle of February. This would allow the corresponding acceleration of T3's for public entities and T5013's to say March 1st or 15th (I would keep trust filings for private trusts to March 31st so they would not have to amend each return for the tax slips received after March 31st). By doing such, taxpayers could file their returns on a timely basis without being rushed and constantly amending their returns.

Okay, let's move on to today’s post, which contrasts and discusses retirement benefits under the social insurance systems of Canada and the United States. 


 This post lays the groundwork for a future guest post by Alyssa Tawadros a senior manager U.S. tax with BDO Canada LLP, which will discuss various cross-border aspects of social insurance, such as:
  • How CPP/Social Security contributions work when one goes on a temporary cross-border assignment (i.e. totalization agreements and certificates of coverage) 
  • How contributing to the U.S.’s social security during one’s lifetime affects their ability to claim benefits for CPP (and vice versa)
  • How each respective country taxes a resident’s social security benefits

Public Retirement Systems


As noted above, today’s post will compare retirement benefits under the social insurance systems of Canada and the United States. In Canada, this would be the Canada Pension Plan (CPP) and Old Age Security (OAS), and in the U.S. this would be Social Security.

  The Canada Pension Plan (CPP)


The CPP is a contributory public pension plan administered for employees and self-employed individuals. It provides a basic level of earnings replacement in retirement for workers throughout Canada, with the exception of Quebec. Quebec workers are covered by the Quebec Pension Plan (QPP), which is an almost equivalent plan. For simplicity’s sake, we will focus on the CPP only. In addition to retirement benefits, the CPP also provides disability and survivor benefits.

The CPP is financed by employer, employee and self-employed contributions as well as income earned on CPP investments. Contributions begin at age 18 and end at age 65 unless the individual has already begun receiving benefits or has died. Currently, the CPP contribution is 9.9% of annual pensionable income. Employees make half (4.95%) of the contribution and the other half is paid by their employer. Self-employed contributors pay the full 9.9%, and they receive a corresponding tax deduction on their tax return for one half of the contribution to represent the “employer” portion of the contribution. When calculating the contribution, there is an annual exemption of $3,500 that is deducted from the annual pensionable income. CPP contributions are limited by the “year’s maximum pensionable earnings”, which in 2017 is $55,300. The year’s maximum pensionable earnings approximates the average Canadian wage and is indexed to average wage growth annually.

For example, let’s say you’re employed and your total annual income in 2017 is $130,000. Since this income is in excess of the maximum pensionable earnings, the CPP contributions are calculated based on pensionable earnings of $55,300. After the deduction of $3,500, you and your employer’s contribution would each be $2,564.10 (4.95% of $51,800), for a total contribution of $5,128.20.

Currently, when the contributor reaches the normal retirement age of 65, the CPP provides retirement benefits equal to 25% of the contributor’s pensionable earnings for the years that the contributor is aged 18 to 65. A certain number of months with lowest earnings may be automatically disregarded under a general “drop out” provision to account for certain periods when one wasn’t working (e.g. unemployment, attending school, etc.). The maximum CPP retirement pension one could be entitled to is calculated as 25% of the average of the maximum pensionable earnings for the last five years. For 2017, that maximum is $13,370.04. The average annual amount of benefit for new beneficiaries is typically much lower than the maximum. In 2016, the average amount of benefit collected was $7,732.202.

It is possible to apply for and receive CPP benefits as early as age 60, but the pensioner will receive a reduced amount. On the other hand, by delaying CPP benefits until the age of 70, the pensioner will get an increased benefit. Calculating what your benefit might be at retirement is quite intricate, but estimates can be requested for ages 60, 65 and 70 from the Service Canada website. In order to qualify for CPP benefits, the pensioner must be at least a month past their 59th birthday, have worked in Canada, have made at least one valid contribution to the CPP, and want their CPP retirement pension payments to begin within 12 months.

You may be aware that in 2016 the government introduced Bill C-26, which sets out amendments to enhance CPP benefits. The main changes will be an annual payout target raised up to 33% from 25% and to increase the Year’s Maximum Pensionable Earnings to $82,700 when the program is fully phased in by 2025. The program will be funded by an increase in contributions by employees and employers from 4.95% to 5.95%, phased in slowly starting in 2019. In today’s dollars, the Department of Finance has indicated that the maximum benefit under the enhanced CPP will increase to nearly $20,000.

Old Age Security (OAS)


OAS is a government program that provides a basic level of retirement income and is funded out of the general revenues of federal government. It is not tied to past work history or funded through payroll taxes. It operates as a monthly payment available to seniors aged 65 and older who are Canadian citizens or legal residents living in Canada or elsewhere – provided that the minimum residence requirements are met. In addition, low-income seniors who qualify for OAS may be eligible for the Guaranteed Income Supplement (GIS), which is a tax-free benefit. To qualify for the GIS in 2017, a single pensioner’s income must be $17,544 or below and married pensioners’
combined income must be $23,184 or below.

The OAS maximum monthly benefit for 2017 is $578.53. The benefit is subject to a reduction also known as a “clawback” starting at incomes of around $70,000. The benefit is fully clawed back at incomes around $120,004. It should be noted that when people complain their OAS is clawed-back, it is not their own money, but the governments money. Here is a link to a post I wrote on strategies to reduce the claw-back.

The annual retirement benefit for someone who is entitled to maximum CPP and OAS benefits is around $20,312 ($578.52 x 12 + $13,370.04). However, as the average CPP benefit in 2016 was lower than the maximum, an estimate of the average retirement benefit from CPP and OAS would be around $14,674 ($578.52 x 12 + $7,732.20)

How Does Social Security Compare?


Social Security is similar to CPP in that it is a mandatory publicly-provided system providing retirement assistance which is funded by contributions from employees and employers and the self-employed. The funding is by way of FICA taxes (FICA stands for Federal Insurance Contributions Act) where contributions to Social Security are 12.4% of eligible earnings. Similar to CPP, half (6.2%) is paid by the employee and half by the employer. Those who are self-employed are liable for the full 12.4%, but receive a deduction for 50% of their contribution on their tax return to represent the “employer” portion. Similar to CPP, there is a maximum earnings cap known as the “wage base limit” which is $127,200 for 2017. So as you can see, Social Security requires higher annual contributions than CPP, mainly because the both maximum pensionable earnings and contribution rate is significantly higher.

Using our example from above to compare both systems, the individual earning $130,000 a year would contribute the maximum under both systems since the salary is higher than the maximum earnings cap in both countries. For 2017, the individual would contribute $7,886.40 to Social Security ($127,200 x 6.2%) or $2,564.10 to the CPP (ignoring exchange rate considerations).

With a high contribution you would hope it would come with a high reward at retirement – especially since the U.S. does not have an analogous program to OAS. Social Security is a credit-based system and the number of credits one has determines whether one is eligible to collect. In 2017, one credit is received for every $1,300 in earnings up to a maximum of four credits per year. To claim retirement benefits, 40 credits are needed, generally representing ten years of work. However you can’t collect retirement benefits until you earn 40 credits and reach the age of 62 or older. Retiring at age 62 is considered early retirement, with the full retirement age being 67 for those born in 1960 or later. Similar to CPP, if one collects early starting at age 62, they get a reduced payment. Conversely, if they wait to collect after age 67 they get a higher payment, which tops out at age 70.

The retirement benefits depend on how much money was earned during one’s working years and when they started collecting. The program was designed to replace roughly 40% of pre-retirement wages for an average earner. Getting the highest benefit possible means that the income must have been at or above the Social Security ceiling each year for at least 35 years. In 2017, the maximum benefit for one retiring at the full retirement age is $32,244. However the published average benefit for 2016 was around $16,092. Similar to CPP, the average collected is typically less than the maximum benefit.

Expanding CPP – was it a necessary step?


Currently, Social Security covers a much higher income range (and requires a higher contribution) than CPP and generally aims to replace more pre-retirement wages than CPP. However, the U.S. does not have an analogous program to OAS. Social Security tends to provide a larger benefit at retirement to those who were high income earners during their working years in comparison to CPP and OAS. In contrast, Canada’s system can provide more benefits to those who had lower incomes when they are working. This is consistent with the Department of Finance’s study that found lower income families had the lowest risk of undersaving for retirement as OAS and CPP benefits provide a relatively high income replacement at their income range.

CPP reform appears to be targeted more toward middle class families. The Department of Finance found that 24% of families nearing retirement age are at risk of not having adequate income in retirement to maintain their standard of living. They also suggest that roughly 1.1 million families will have trouble maintaining their standard of living at retirement. The Department of Finance identified a number of factors which have increased the level of savings required, such as the decline of workplace pension plans, the shift from defined benefit plans to defined contribution plans, and younger workers living longer lives. The enhancement to the CPP is meant to provide higher, predictable retirement benefits. Although the mandate is arguably needed in today’s world, both employees and the employers must now take on a higher burden through increased contributions. Where labour can often be one of the largest costs of a small business, the increase in contributions lowers the bottom line and can be an inhibitor of growth. Ideally, the gradual phase-in will help small businesses integrate the changes into their business and financial planning

I would like to thank Alyssa Tawadros, Senior Manager, U.S. Tax for BDO Canada LLP for her extensive assistance in writing this post. If you wish to engage Alyssa for individual U.S. tax planning, she can be reached at atawadros@bdo.ca

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.