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. Please note the blog posts are time sensitive and subject to changes in legislation or law.

Monday, July 16, 2018

The Best of The Blunt Bean Counter - Legacy Stocks - To Sell or Not Sell? That is the Question?

This summer I am posting the "best of" The Blunt Bean Counter blog while I work on my golf game. Today, I am re-posting a March, 2017 blog on whether to sell Legacy stock positions. People are often frozen into "in-action" because of the tax consequences of selling a legacy position, especially where you have a large unrealized capital gain.

Legacy Stocks - To Sell or Not Sell? That is the Question?


Some people, typically seniors/baby boomers have owned stocks for decades, either through direct purchase or an inheritance of some kind (stocks transferred from a deceased spouse pursuant to their will generally have an adjusted cost base equal to what the deceased spouse originally paid for the shares; shares inherited from a parent or grandparent will generally have a cost base equal to the fair market value on the day of inheritance). These stocks are commonly known as Legacy Stocks; more often than not, they will include shares of Bell Canada, the Canadian bank(s) and/or insurance companies.

In early 2017,  Rob Carrick, The Globe and Mail’s excellent personal finance columnist  mentioned to me that several of his readers had asked him about selling their legacy stocks (or as more typically is the case, not selling their legacy stocks). I told him I thought the issue would make a good blog topic and asked him if he was okay with me using his idea to write a post. He gave me his blessing, so today I am writing about the issues and considerations for those of you holding legacy stocks and similar type securities.

The Common Quandary


The issue with selling legacy stocks is that they:

1. Typically have huge unrealized capital gains and thus the sale of these stocks creates a large tax bill

2. The realization of the capital gain can result in a clawback of Old Age Security ("OAS"), which seniors are loathe to ever repay

I know some readers, especially my millennial readers are thinking to themselves “Is Mark really going to write about minimizing the large capital gains of baby boomers that have already benefited from the huge increases in real estate? Cry me a river that they owe some tax.” The answer is yes, since a tax issue is a tax issue and this blog, although meant for everyone, is targeted to high-net-worth individuals and owners of private corporations.

There Is No One Size Fits All Answer


If you have a legacy stock(s) you are considering selling, there is not a standard “one size fits all” answer. There are various investment and income tax considerations. I discuss these issues and considerations below.

Capital Gains Rates


The marginal tax rate for capital gains in Ontario for income in the $45-$75k range is approximately 12-15%. This rate jumps to 19-22% or so between $90-$140k in taxable income and hits 26.8% once your taxable income exceeds $220,000.

Capital gains rates are the lowest tax rates you get in Canada. So from my perspective, the taxes you would pay from the sale of a legacy stock should not be the determinant in deciding to sell. The key factor (subject to the discussion below) should always be what the best investment decision is. Watching a stock drop 15%, to save 20% in capital gains tax, makes absolutely no sense, when viewed in isolation.

There has been concern the last few years that the Federal government may change the taxable inclusion amount of a capital gain from 1/2 to 2/3 or even 3/4. However, as this is only conjecture, if you were to sell for this reason only, you would be accelerating your tax payable.

Old Age Security Clawback


As noted above, the capital gains tax tail should not wag the tax dog. However, there is one issue that complicates the matter for seniors and that is the Old Age Security Clawback.

As evidenced by many accountants’ scars and wounds, never cause even the sweetest senior to have an OAS claw back, because all hell breaks loose :). I am only half-joking; seniors really resent having their OAS clawed back. I assume it is because they feel they have an entitlement to this money and the government does not have the right to claim all or some portion back (even though, they did not directly fund this program).

Seniors must pay back all or a portion of their OAS as well as any net federal supplements if their annual income exceeds a certain amount. For 2017, if your net income before adjustments is greater than $74,789 ($73,756 for 2016) then you will have to repay 15% of the excess over this amount, to a maximum of the total amount of OAS received. The maximum repayment is hit around $119,000.

So if you have a capital gain on a legacy stock of $90,000 ($45k taxable) and you are right at the $74,789 OAS limit before the capital gain, the tax cost of the capital gain would be around $15,000 or 17% of the $90,000 gain. However, when you add the OAS clawback that would be applicable, the combined tax and OAS clawback could approach $22,000 or 25% or so. That is why you cannot look at the gain in isolation.

If you do not have an investment reason to sell your stock, you may want to consider selling the stock over a few years to minimize the tax and OAS clawback, assuming you wish to keep the stock each year.

Holding Company


A “sexier” alternative, especially for seniors is to transfer your stocks to a holding company. You should be able to do this on a tax-free basis under Section 85 of the Income Tax Act. The benefit to doing this is any dividends earned and the eventual capital gain are taxed in the holding company and thus, do not affect your OAS clawback. In addition, if you have any potential U.S. estate tax exposure (see this prior blog post on estate tax), the U.S. stocks in your holding company will not be subject to U.S. estate tax if there is estate tax in place at the time of your passing (estate tax is a U.S. political issue that keeps changing depending upon the party in charge). So while you do not save any actual income tax, you can save your OAS from being clawed back and possibly gain some U.S. estate protection.

The downside to this strategy is the cost to transfer the stocks (legal and accounting) and ongoing accounting costs, which can be high for a holding company and thus, potentially a significant part of the OAS clawback savings is now paid to your accountant instead of the government, so you have to weigh the savings versus the costs.

Capital Losses


If you plan on triggering capital gains on legacy stocks, you should review if you have any capital losses you can apply against these gains. The CRA notes your capital loss carryforward balance on your notice of assessment and if you have a My CRA account, you can get this information online. It should be noted, the application of the losses only reduce the capital gains tax, not the OAS clawback.

Charitable Donation


Where you donate public securities to a registered charity, the capital gains inclusion rate is set to zero. Thus, there would be no capital gain to report on the donation of a legacy stock (have your accountant run the numbers, but this should minimize or eliminate the clawback) and you receive a donation credit. This is reported on Form T1170 . This strategy is effective if you make large donations every year or were planning to make a substantial donation and helps the charity since you have more funds to donate than with an after-tax donation.

The decision to sell a legacy stock is not a simple one. The overriding decision should still be an investment decision; however, where you are indifferent to selling, you need to consider the various issues and options I have noted above. Before undertaking any legacy stock selling, you should consult your investment advisor and possibly your accountant.

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. Please note the blog post is time sensitive and subject to changes in legislation or law.

Monday, July 9, 2018

The Best of The Blunt Bean Counter - Where are Your Assets?

This summer I am posting the "best of" The Blunt Bean Counter blog while I work on my golf game. Today, I am re-posting a February, 2011 post on where are your assets? It was probably my shortest blog post ever, but the message is succinct. Get your ass-ests in gear. Make sure you have a list of everything you own so that you do not leave your spouse and family a financial mess.

Where are Your Assets?


If you died tomorrow, would your family and advisors know where your assets are and what assets you owned?

I would suggest the answer in 50% or more cases would be a resounding no.

If you have answered no, take this one step further; consider the havoc you will cause your family and executors. They will be distressed having to deal with your passing, now you are compounding their stress by forcing them to deal with an estate when they have no clue what assets you own, what debts you have outstanding or where the assets are held. Most likely they will not have a duplicate safety deposit key or even know where your safety deposit box(es) is/are.

Whether you are just negligent or lazy, your actions are selfish and you should immediately take steps to rectify the situation.

All this can be averted very simply. Take a weekend and complete a personal information checklist (there are several on the Internet) and then put a reminder in your phone or Outlook calendar to review this checklist each year to ensure there are no changes.

Once completed, consider providing a copy of the checklist to your spouse, your accountant, lawyer or trusted third party. In any event, at minimum, put a final copy in your safety deposit box and ensure either your spouse of another person is aware of the location of the safety deposit box and the key.

I have on many occasions seen the aftermath of situations where a spouse has not provided a list of assets. It is not pretty and I am sure if you take a moment to ponder this, you do not want to leave your family in a similar situation. So, get to it and make a list! 

Bloggers Note: A couple years after writing the original post, I was told of a story of a well-to-do couple on vacation that got caught up in a natural disaster area. They ended up safe; but before they felt that security, they were trying frantically trying to call and inform their family what assets they had and where they were. I think this sums the theme of my post, just be prepared and if you get caught up in a natural disaster, worry about saving yourself, not telling your family where your assets are :)

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.

Tuesday, July 3, 2018

Gone Golfing for the Summer of 2018

This summer, I will again be posting a “Best of The Blunt Bean Counter” blog each week; so, I can spend some time golfing and enjoying the good weather with my family.
Cabot Trail - Nova Scotia (pray it is not windy when hitting your shot!)

As this is now the fifth year in a row that I have posted my "Best of" during the summer, as I stated last year, maybe at this juncture, a more appropriate title should be; "The Sort of the Best of The Blunt Bean Counter".

Anyways, you can read them again if you so desire and if not, I won't take it personally. I wish everyone a great summer and thank you for reading the blog. Some of you now have been reading almost 8 years as of September. I appreciate your readership and the many nice emails I receive from you.

Note: On August 1st at noon I will be participating in a live webinar on Planning for Retirement for Small Business Owners based on this report. I will provide an update in the next week or two.

Monday, June 25, 2018

The Taboo of Asking for Money Within a Family – Part 2


Last week in part one of this two-part series, I suggested there are three reasons why people may ask their family for money. They are: need, seed and greed. Today I discuss these three reasons in greater detail.

Need - I Really do Need the Money


Some examples of need-based requests by a child are as follows:

a) They are in a bad and/or abusive marriage and need money to get out of the marriage.
b) They need money to help buy a home.
c) They lost their job

Parents may ask their children for money for the following reasons:

a) Medical issues
b) Elder abuse by another child or another individual
c) Poor retirement planning
d) Poor fiscal environment

One of the hardest decisions a parent will have to make is; the decision to gift or loan money to a child that is in true need of the money. These are factual requests in which the need for money can be substantiated. These requests leave no question that the money has a direct intended use and will not be used for personal gratification or discretionary purchases by your child.

The weight of one of these requests is often compounded by the fact emotional issues are attached to your child’s request for money. In the end, the decision to provide financial assistance must be determined in large part by a cold hard analysis of your financial situation and your financial wherewithal to provide assistance, especially where the request could jeopardize your retirement. I discuss this is further detail below.

Requests by parents (or more likely, non-requests, but you discover a need) tend to be more readily accepted. This is just simply because the person is your parent and typically you will want to repay them for everything they have done for you. But as with a child, you still need to consider your financial position before making any emotional decision. 

Seed - Psst, I have a Great Idea


Some examples of where a child’s request for money is seed based are the following:

a) They require money to start a business

b) They require money to expand an ongoing business.

c) They require money to go back to school to upgrade their education

Requests for seed money can carry significant risk. Often money advanced or loaned for a seed money request cannot be repaid. These requests can create significant internal turmoil for parents. Many parents have always told their children to think for themselves and to reach the stars. When a child wants seed money, it often revolves around the child starting a new venture or investing in a business. These requests are often gut wrenching for the parent, as they struggle with whether they a) can afford to lend of gift money to their child and b) often the parent has preached initiative and grabbing the brass ring when the chance presents itself and now they may be roadblock to following through on that initiative and finally c) parents are often aware many business start-ups go bankrupt, so practically it is a huge risk to loan or gift seed money for a new business.

Greed - I am a Money Leech, I Admit It


Some examples of where a child’s request for money is greed based are the following:

a) Need money for a vacation.

b) Need money for personal vanity (such as cosmetic surgery)

c) Need money for a discretionary purchase such as a large screen TV or car.

Requests for greed money are often rejected by objective parents, but many parents will do anything for their kids, even if it is detrimental to their financial future and for non-necessities. Many of these greed requests fuel the notion that some children just see their parents as a bank. Many of these same children are often characterized as the type of children that will hover over your body waiting for you to die. While this view is extreme, it is not without basis. We all have observed children who have had fractured or little or no relationships with their parents over the years, suddenly arrive on the scene asking for money or when their parents take ill.

Separating Emotion from Finance


The decision to acquiesce to a request for money from a child or a parent needs to be analyzed as a purely financial decision. Can you afford the financial request or not?

Where it is determined you have the financial wherewithal to grant a request for money, you must then make an emotional decision as to whether you feel the request is warranted or of such an urgent nature you need to seriously consider granting the request. Where you have the financial ability to provide funds, the decision can easily be rationalized as an early inheritance or money you can afford to lose. The issue is these cases is often more philosophical, do you make the child stand on their own or assist them?

The more typical and gut-wrenching cases are where it is determined you do not have the financial wherewithal and you must decide if you are you willing to jeopardize your retirement to assist a child financially.

Let me speak to my Accountant and Financial Planner

Any parent or child considering granting a request for money to a child or parent needs to review the issue with their accountant and/or their financial planner or engage such. Your accountant or financial planner has the ability to be detached and provide objective advice from both a financial perspective and emotional perspective.

For some people, money is never the issue. But for most, it is a significant issue, even where you have saved enough for retirement. Your accountant or financial planner can run several financial scenarios that will consider the impact of making a loan/gift on your retirement funding and allow you to review the financial consequences of advancing the money (assuming you will never see it back). For many people, the answer will never be entirely clear from a financial perspective, as the elephant in the room is always longevity. It is difficult enough to plan for retirement when you don’t know how long you will live, but that decision is further complicated when you must reduce your retirement nest egg for an unexpected cash request from a child or parent. However, at minimum you need to review the impact of making any significant gift upon different retirement scenarios.

Surprisingly, the few times where I have been involved in these type situations, it is often not just my financial expertise that is of value, but the fact I can relay my experience in other similar situations. As I am not emotionally attached, I can coldly state on a no-names basis what I have that observed in other similar family situations.

You mean I Must Speak to my Lawyer also?

If it is not bad enough I have already told you to pay an accountant and/or financial planner for objective advice, you likely will also need to spend more money to amend your will to account for the gift or loan. Your lawyer may do this via a Hotchpot clause, see this blog post on the topic or a simple promissory note.

The Tugging at my Heart (Purse) Strings is too Much

Some people will realize after meeting with their accountant or financial planner that they cannot afford to assist their child or parent. They often feel guilty and/or sad they cannot assist; or in some cases dejected they did not achieve a greater level of financial successes such that they could assist their child or parent. But, for financial reasons, the discussion ends as it is clear they cannot afford to assist their child or parent.

Yet, over the years, I have seen several parents assist a child financially when they cannot afford to do so. I call this the "blood is thicker than water” scenario. These parents cannot stand to see their child suffer financially or health wise and despite the objections of their accountants, friends, family etc. make the gift or loan. There is not much you can do or say in these circumstances, except try and help assist the child or parent to reduce costs where plausible and to review if there are any ways to make up for the loss of retirement funds. In the end, their child’s or parent's well-being far outweighs their concern for their own financial well-being.

There you have it, my discussion on asking for money. I still think someone should write a book on the topic, it just will not be me.

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. Please note the blog post is time sensitive and subject to changes in legislation or law.

Monday, June 18, 2018

The Taboo of Asking for Money Within a Family

In May of 2017, I noted that I had given up on writing a book on The Taboo of Money. In that post I noted I would be posting part of the second intended chapter on "Asking For Money: The Intergenerational Communication Gap". Today and next week I post an edited down version of this intended chapter.

Asking For Money: The Intergenerational Communication Gap


The Taboo!

Probably one of the most frowned upon money taboos is asking for money, whether as a loan or a gift. This can be a child asking a parent for money or surprising to some, a parent asking a child for money. This taboo can encompass everything from a child in an abusive marriage who is dependent upon the abusive spouse’s income and thus cannot leave the marriage, to a parent too proud to admit they do not have the necessary funds for retirement and are reverse mortgaging their house to survive.

Broaching the money taboo by the party in need requires a leap of faith that their family will not judge their current financial or living situation and not consider the request a money grab.

I have broken down this taboo into three categories, which will be explained in greater detail in the second post:

1. Need
2. Seed
3. Greed

Reasons for the Taboo

This taboo is all about our pride and possible embarrassment. Most of us are brought up to be self-sufficient and responsible for our own financial well-being. To ask for money is admitting we have failed at being self-sufficient, at least in the short-term. We may be embarrassed because we are asking a parent or a child for money, but in many circumstances, the issue that has caused the necessity to request money is embarrassing.

The reasons a child may ask a parent for money range from the fact they have lost their job, to they have a substance abuse or gambling problem, to they are involved in an abusive marriage, to they require money to start a business, to finally, they just want money to enjoy themselves.

A parent may need money because of poor retirement planning, physical or medical issues, elder abuse and economic situations beyond their control, such as the low interest environment we have faced for the last several years.

Some of the excuses I have heard for children not asking their parents for money include:

1. They will think me a complete failure.
2. My parents told me to get a profession as a fallback; now that my business has failed I don’t have a fallback. I will just be asking for a “told you so”.
3. My parents worked their whole life for what they have; I have no right to infringe upon their retirement earnings.
4. My parents will think I am just trying to “steal their money from them”.
5. My parent’s perception of me will be shattered.
6. The reason I need money is personal, I don’t really want to discuss it with my parents.
7. My father regaled me with stories of how he was given nothing from his parents and was self-made. He will not be able to understand that I am not from the same cut of cloth as he.

Some excuses I have heard for parents not asking their children for money (these have been few and far between):

1. I am my son’s/daughter’s role model, if I ask him/her for money he/she will think less of me.
2. I have told my children their whole life to not spend more than they earn and to save for retirement. How can I now ask them for money?
3. I can reverse mortgage my house and they will never know until I pass away that I had financial issues.
4. My children have their own job and family issues; I do not need to burden them with mine.
5. I lived through the war with very little; I can do it one more time.
6. I have lived to provide my children a better life than mine; I will not do anything that impacts that objective.

Next week I finish this discussion looking into why people may ask for 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. Please note the blog post is time sensitive and subject to changes in legislation or law.

Monday, June 4, 2018

BDO Canada LLP Retirement Survey Report - More Financial Survey Results

You may remember my November post highlighting the initial results of a financial survey conducted by BDO Canada LLP. These findings offered a trove of valuable information on the wealth management journey for Canadian business owners. They confirmed much of what I had been hearing in conversation with clients but also offered important new insights.

The financial survey produced such robust data that BDO created two reports. The second one — The Retirement Planning Report — is now available as a free download and reveals additional insights on how all Canadians manage their wealth and plan for retirement.

The survey that produced these two reports has strong ties to The Blunt Bean Counter. Many of you took part in this study — thank you very much for your tremendous participation and input. Some of you received a free copy of my book Let’s Get Blunt About Your Financial Affairs as a token of thanks for responding to the questionnaire. In total, almost 1000 Canadians took part in the study.

Summer beckons from just around the corner. For those taking time away from the office, the break provides a great opportunity to reflect on the big picture: how we envision retirement, how our finances align with that vision, and where family fits into the picture.

This new BDO report will help you focus on what matters to you in retirement and on your preparedness. Jonathan Townsend, the National Wealth Advisory Services leader for BDO Canada LLP, provides a synopsis of the report in his guest post below.

In conjunction with the BDO report, you may want to read, re-read or reference the six-part series I had on "How Much Money do I Need to Retire? Heck if I Know or Anyone Else Does!" The links for the blog posts are down the right-hand side of this page under the Retirement heading.

Retirement Planning Report   By Jonathan Townsend


Retirement sometimes appears to Canadians as a moving target. Like all plans for the future, it depends on variables that we can’t fully control. We do our best to cover all the circumstances, but life intervenes and renders our financial plans out-of-date.

“How much do people actually need to save?” Mark Goodfield in the report says the following: “That is the million-dollar question — with no clear-cut answer. At the end of the day, Canadians need to evaluate their individual needs with the help of a trusted advisor.”

That is why expectations play such a large role in successful retirement planning. In the 1980s, many Canadians believed their investments would support retirement at 55. Today’s pre-retirees have adjusted their retirement dates upward to fit the changing times. The average age of retirement climbed from 61 in 2005 to 63 in 2015, according to Statistics Canada.

BDO’s new Retirement Planning Report reveals valuable data on a topic that can be difficult to access: how Canadians themselves see retirement. By turning the spotlight on expectations, we can better understand the entire planning process.

Here are some key report findings that caught my attention:

  • On preparedness — About half of survey respondents have prepared a financial plan. Of those respondents with a plan, almost three-quarters had a professional advisor prepare the plan.
  • On health care — Long-term health care placed second on the list of respondents’ retirement concerns, but almost 4 of 5 of respondents have done nothing to prepare for health care costs in retirement.
  • On family — Canadians in the so-called sandwich generation raise their children while looking after their parents. Fifteen percent of respondents in our study say they are supporting their parents financially. As longevity continues to increase, Canadians may need to calibrate their retirement plans to account for both slices of bread in the family sandwich. Rob Carrick of The Globe and Mail found this topic of interest, especially the fact that 10% of Canadians support both their parents and children and discussed the study here in his Carrick on Money newsletter.
  • On pension plans — Companies have shifted more of the savings burden to employees by moving to defined contribution plans. In the longer term, more and more Canadians may have no employer-sponsored plan at all. Contract and part-time work are accounting for a larger share of the labour market.
The findings and strategies highlighted in the report provide actionable tips that you can incorporate into your own successful planning. I invite you to download the report here.

Jonathan Townsend is the National Wealth Advisory Leader at BDO Canada LLP. If you have any questions, please contact him at 519-432-5534 or jtownsend@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. Please note the blog post is time sensitive and subject to changes in legislation or law.

Monday, May 28, 2018

Post Tax Season Assessment and Filing Issues

This year I have had multiple client queries in respect to their Notice of Assessments (“NOAs”) which reflect tax balances owing, despite the fact the taxes were paid in April. Today I discuss this matter and a couple other issues, that have arisen after April 30th.


Notice of Assessments


Typically, taxpayers file their personal tax returns, pay their tax owing (or wait for their refund), start golfing and gardening and probably don’t give much more attention to their taxes until they receive their NOA. Upon receipt, they may take a quick glance to ensure no tax is owing, maybe make note of their RRSP contribution limit and then throw the NOA into a file.

This year, many taxpayers have done a double-take when reviewing their NOA, since their assessments are reflecting tax still owing. I have had a several clients call me in a panic asking if their return was incorrectly filed since the CRA has assessed them more tax? I quickly put their minds at ease. I tell them that what has happened is the CRA is moving to “express” NOAs and has issued the notice so quickly that their system has not yet had time to match the tax payment (this applies more specifically to people who pay their balance owing at the same time or within days of  filing their return). I would bet that many of you who owed tax this year had the same issue with your NOAs.

While the NOA expediency is impressive, they are actually being issued too fast (imagine that, complaining the CRA is too fast :) and are leading to some confusion. Perhaps the CRA should consider waiting a little longer to issue NOAs, so that for those people who pay their tax owing right away, the payment can be reflected, such that the NOA will not reflect a balance outstanding, where there is in fact, no tax due.

The assessment wording has also caused some confusion for those taxpayers who have filed T1135 Foreign Income Reporting Forms. The NOA states that if you indicated you owned foreign property, you have to fill out Form T1135 and send it to them if not already done so. Several of my clients have called to ask if we forgot to send in their T1135, when in fact, the NOA is just reminding people that if they said yes, they had to file the T1135.

Alimony


I have also had a couple clients who pay alimony receive NOAs that have reduced their alimony claim. The NOA says the agreement the CRA has on hand shows they are not entitled to the alimony deduction claimed. It is a little unclear at this time whether this is just an issue where agreements have been amended to change alimony and the CRA has not been provided the new agreements, or the CRA is factoring in non-deductible child support to reduce the alimony claim. In any event, I think both the CRA and taxpayers would be best served if where an alimony claim is made that differs from the CRA records, the CRA does not issue a NOA, but sends an information request asking the taxpayer to explain the variance and support the claim. This would save a lot of time and frustration on both the taxpayer and CRA side and reduce a number of T1 Adjustment Requests and Notice of Objections.

Information Requests


Finally, just a reminder: if you receive an information request to provide the CRA back-up for any expense or claim you made on your return, you typically have 30 days to respond. Either do so within the 30 day time period, or request an extension far in advance. Do not ignore the information request or your return will be assessed without the deduction or expense.

Hopefully you had a refund in 2017 and have not had to deal with any of the above concerns.

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. Please note the blog post is time sensitive and subject to changes in legislation or law.

Monday, May 21, 2018

How the Principal Residence Exemption Works When You Construct a New Home

Several provinces have experienced booming real estate markets the last few years and some people have used the increased equity in their home to buy land and construct their dream home. In some cases, people sell their current home and rent until the new home is ready to occupy, while others continue to own and live in their present home and then sell it before they move into their new home.

In both these situations, people are often surprised at how the Principal Residence Exemption (“PRE”) must be calculated. Today, I will review what the possible tax consequences are under these scenarios.

Construction of a Home on Vacant Land


Where you acquire vacant land for the purpose of constructing a home for you and your family in a future year, the property cannot be designated as your principal residence until you and your family commence to ordinarily inhabit the newly constructed home.

Consequently, if the newly constructed home goes up significantly in value prior to you moving in, those years while the home was under construction may be problematic for purposes of the PRE. I review the details below.

The Principal Residence Exemption

As you may be aware, the PRE is a formulaic calculation that determines the amount of the gain on the sale of your principal residence that is exempt. I set forth the formula below:

The capital gain on the sale of your home multiplied by:

The number of years you have lived in your home & designated the property as your PR, plus 1 divided by the number of years you have owned the property

The one-year bonus is meant to ensure that you are not penalized when you move from one home to another in the same year. Thus, where you live in your home the entire time you owned it, you are typically not subject to tax on the sale of the home (don’t forget, you are now required to report the sale of your principal residence on your personal income tax return as I detailed in this recent blog post titled Reporting the Sale of Your Principal Residence). 

Income Tax Folio S1-F3-C2 Principal Residence


Income tax folio S1-F3-C2 sets forth a great example of how the PRE works where you have constructed a new home. The example (2.29) is as follows:

“In 2002, Mr. A acquired vacant land for $50,000. In 2005, he constructed a housing unit on the land, costing $200,000, and started to ordinarily inhabit the housing unit. In 2011, he disposed of the property for $300,000. Mr. A’s gain otherwise determined on the disposition of the property is equal to his $300,000 proceeds minus his $250,000 adjusted cost base = $50,000 (assume there were no costs of disposition). Mr. A can designate the property as his principal residence for the years 2005 to 2011 inclusive, but not for the years 2002 to 2004 inclusive because no one lived in a housing unit on the property during those years. The principal residence exemption formula cannot, therefore, eliminate his entire $50,000 gain otherwise determined, but rather can eliminate only $40,000 of that gain, as shown in the following:

Applying the formula A × (B ÷ C):

A is $50,000

B is 1 + 7 (being tax years 2005 to 2011)

C is 10 (being tax years 2002 to 2011)

= $50,000 x (8 ÷ 10)

= $40,000”

How the Principal Residence Exemption Works When You Continue to Own Your Current Home While You are Constructing a New Home


So, what the heck happens when you have a home and build a new one? Essentially two things:

1. As noted in the CRA example above, for the years you did not ordinarily inhabit the new home while it was under construction you will at most only be able to protect one year of those years you did not inhabit the home from being taxable when you eventually sell.

2. If your old home had a yearly gain smaller than the yearly gain on the home under construction before you move in, you cannot save (not designate) those years with the larger gain on the newly constructed home.

What this means is the following. Typically, you would suspect the result would be similar to where you owned say a home and a cottage. In those circumstances (since you ordinary inhabit both properties) where you sell your home, if your home went up $5,000 a year in value and your cottage for example went up $25,000 a year, you would likely not designate all the years to your home, since you would want to save as many years as possible of your PRE exemption for when you sell the cottage (since you would be saving $25k a year versus $5k a year) and pay some tax on the sale of your home.

However, where you had a home under construction for say three years that goes up in value $25,000 per year, you will not have the option to not designate all three years on your home sale and you can at best only protect one year, because you did not ordinarily inhabit the home under construction. Yes, I know, clear as mud.

Clearly this is a very fact specific situation, but the income tax result is often an unexpected tax hit. In any case, I strongly suggest you obtain income tax advice if you are in this situation, since it is obviously extremely complex.

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. Please note the blog post is time sensitive and subject to changes in legislation or law.

Monday, May 14, 2018

Terminal Income Tax Return Planning – Capital Gains and Losses

Today, I am going to discuss tax planning in respect of capital gains and losses on the final tax return (“terminal return”) of a deceased person. While a slightly morbid topic, many of you likely have been named as an executor in your parents, siblings or friends wills and today's discussion will provide you some basic understanding of one of the more important issues when filing a terminal return.

General Rules


When a person passes away, they are deemed under the Income Tax Act (“Act”), to have disposed of their capital property immediately prior to their death. In English, this means you are taxed as if you sold all your capital property the moment before you died and thus, your estate must recognize any capital gains or losses caused by this phantom disposition. For example, say a person had 100 shares of ABC Co. which they bought at $10 in 2010 and at their date of death, the stock was trading at $18. They would have a deemed capital gain of $800 ($18-10 x 100 shares) even though they never had sold the stock before they passed away.

The most typical examples of capital property are stocks, cottages and rental properties (I have assumed the real estate is capital property and not inventory, which it could be if your business is real estate development).

There is one main exception to the deemed disposition rule. Where you are married or live common law and have left your property to your spouse, there is an automatic spousal rollover such that these assets can be transferred to your surviving spouse with no immediate tax consequences and the deemed disposition can be deferred until the death of the surviving spouse.

The rest of this discussion involves planning where the deceased person has a spouse. If this is not the case in your particular circumstance, you can stop reading unless you want some general knowledge or will be an executor in the future.

Electing Out of The Automatic Spousal Rollover


The Act contains an interesting provision that allows a person’s legal representative to elect out of the automatic spousal rollover noted above. The election which is done on a property-by-property (or share by share) basis is typically undertaken for the following two reasons.

1. To trigger capital gains

2. To trigger capital losses

Triggering Capital Gains


You may wish to trigger a capital gain for the reasons I list below:

1. The deceased person is in a low-income tax bracket and by triggering capital gains, you utilize their marginal tax rates.

2. The deceased person was a small business owner and their shares are eligible for the Qualifying Small Business Corporation tax exemption of $848,252.

3. The deceased person had capital losses or non-capital losses that would be “lost” if you do not trigger additional income (be careful with this one, as per #2 below, the capital losses can be deducted against income in the year of death in certain circumstances, so don't waste them).

4. The deceased person has donation or medical credits that will not be utilized without additional income being generated.

It is important to note, not only is the election beneficial for the reasons listed above, but there is a significant additional benefit. Where you elect to trigger a capital gain, the cost base of the capital property to the surviving spouse is increased to the fair market value of the property elected on. So, for example, if an executor elected out of the automatic spousal rollover on the 100 shares of ABC Co. the adjusted cost base of the shares to the surviving spouse would now be $1,800 (100 shares x $18 market value at death) instead of $1,000

Triggering Capital Losses


Although slightly counter intuitive, a legal representative may wish to trigger a capital loss. There are two reasons for this:

1. Any net capital loss triggered can be carried back against capital gains reported in the prior 3 years.

2. The representative can also choose to apply the capital losses against any other income on the terminal return and the preceding year. This means the capital loss can be applied against not only capital gains, but regular income if the capital losses are greater than any capital gains on the terminal return and prior years return. The one constraint is that if the deceased had claimed their capital gains exemption in prior years, the loss carryback is reduced by the prior capital gains exemption claim and may wipe out the benefit of option #2.

Tax planning for a terminal tax return is very complicated and I have simplified the above for purposes of discussion. If you are an executor for a will, I strongly urge you to seek professional advice to guide and assist you through the various tax implications and options.

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. Please note the blog post is time sensitive and subject to changes in legislation or law.

Monday, April 16, 2018

Confessions of a Tax Season Accountant - Determining the Adjusted Cost Base of Your U.S.Securities

Last week I received an avalanche of tax returns, as my clients finally received their T3 and T5013 tax slips (although many are now being amended). Driving to work to prepare all these returns was problematic, as the weather in Toronto was terrible. While snow in April is not what you hope for, the upside for an accountant is; my friends cannot call me on each hole of the golf course to torment me while I am working away doing tax returns. But I digress.

While preparing returns last week, I only found one noteworthy issue to discuss; that being the tracking of the adjusted cost base of U.S. stocks and securities. This issue rears its ugly head when filing terminal tax returns (the final return in the year of death) and for anyone who sells U.S. stocks and receives a capital gain/loss report solely in U.S. dollars.

What is the Adjusted Cost Basis of Your U.S. Securities? Your Guess is as Good as Mine

Unfortunately, over the past 15 months or so, I had a couple clients pass away. As discussed in this blog post, when you die, there is a deemed disposition of the capital property you own on death (unless you have a surviving spouse to whom you transfer your property under your will, although you can elect out of  this provision on a security by security basis). My issue has been obtaining the historical purchase dates of the U.S. stocks to determine the deemed disposition gain for these client's U.S. stock holdings.
For example. Say a client purchased IBM at $40 in their U.S. portfolio years ago when the exchange rate was say $1.05. The converted Canadian cost base is $42 ($40x1.05). Let’s assume the stock price upon the date of their death was $150. If the exchange rate on death is $1.30, the deemed proceeds are $195, and the capital gain should be $153 ($195-42).

However, in two cases where I had a client pass away, all I was provided with from the investment manager/institution was a U.S. cost base of $40 and a U.S. fair market value of $150. If I just convert both the $40 cost and $150 value at death at say $1.30, this would result in a capital gain of $143 instead of the correct $153. Where the U.S. stocks have been purchased with the current advisor, typically they can at least provide me with the purchase dates and sometimes they can run a new report with the converted $Cdn ACB. Where stocks were initially purchased by the client on their own or with another advisor, it is almost impossible to get the original purchase date unless the executor can find the original purchase documents.

The standard reasoning provided by reporting entities for not having this information is that the stocks were transferred to them and they don’t have the historical cost. I can live with that explanation, but query why when U.S. stocks are purchased by the manager or institution, they do not in many cases automatically track and convert to a $Cdn ACB? Another of life’s little tax mysteries.

Often I must play detective and try to somehow determine when these stocks were purchased which is either extremely time consuming or not possible given the lack of records.

Many of you may have this same issue if you have a U.S. stock portfolio with an investment advisor or financial institution and your yearly realized report is provided only in U.S. dollars. How do you know what your adjusted $Cdn cost base is? I suggest that in order to alleviate this problem, you ask your advisor to provide you on an annual basis with the $Cdn adjusted cost base of your U.S. stocks whether they have to push a button or have their assistant do it on a spreadsheet. You pay for this. If you are a DIY investor, you should ensure you note the foreign exchange date down for every U.S. or foreign stock purchase.

Long story short, this a significant reporting issue while you are alive and after you pass away.

Note: I am sorry, but I do not answer questions in late April due to my workload, so the comments option has been turned off. Thus, you cannot comment on this post and past comments on other blog posts will not appear until I turn the comment function back on.

This is my last post (although I may post a guest blog) for a couple weeks, so see you in May.


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. Please note the blog post is time sensitive and subject to changes in legislation or law.

Monday, April 9, 2018

Confessions of a Tax Season Accountant - Late T-slips and Reporting the Sale of Your Principal Residence

In today's tax season confession, I will provide an update on the required reporting when you sell your principal residence. I also include my annual rant, about the fact many of my clients must wait until late March or early April to receive their final T-slips.

Condensed Tax Season


Just to be consistent with the prior 7 years, I will again complain about the condensed nature of tax season. I receive about 65% of my clients returns after March 31st, causing a crazy April. The delay is typically caused by clients waiting for their T3 and T5013 tax slips (you would not believe the amount of emails and faxes I received last week with just arrived T3's and T5013's). I ponder why, with current technology, that all filing deadlines for T4’s, T5’s, T3’s and T5013’s cannot be moved up by 15-30 days, so everyone has adequate time to file their tax returns. I guess this is one of life’s little mysteries.

Principal Residence Exemption Rules


As discussed in this October 2016 blog post on the new Principal Residence (“PR”) reporting requirements, you must now report the sale of your PR (typically your house but can also be your cottage) on your tax return.

For 2016, you just had to report the sale on schedule 3, unless the gain was not fully exempt, in which case you had to file Form T2091 (IND) Designation of a Property as a Principal Residence by an Individual (Other Than a Personal Trust). However, for 2017 and any future years, you must now file schedule 3 and Form T2091 in all cases.

If you designate your home/cottage as your PR for all the years you owned it on schedule 3 (box 1), other than the free plus 1 year, (you may recall the formula to determine the exempt portion on the sale of your PR is the capital gain on the sale of your PR, times the ratio of the number of years you have lived in your home [i.e. designated the home as your principal residence] plus 1, divided by the number of years you have owned the property) the form is fairly simple to complete. You just need to fill out the first page of the T2091 form. You will need to include the following information:

  • the year of acquisition of the property you sold
  • the proceeds of disposition 
  • the address of the property being designated as a principal residence 
  • the years you owned the property and are designating as your principal residence.

Penalty


There are stiff penalties for not filing the PR designation on time. New paragraph 220(3.21)(a.1) will allow for late-filed forms subject to certain time restrictions. The penalty will be the lesser of the following amounts:

  • $8,000; and
  • $100 for each complete month from the original due date of the relevant income tax return to the date that your request for a late-filed designation is made in a form satisfactory to the CRA.

The CRA says on their website that a penalty may apply where the PR election is late-filed. I would work on the assumption the penalty is applicable and you will need the CRA to be merciful to have the penalty removed.

It is also important to note that if you do not file the T2091 form, your return can be re-assessed at any time. This means the usual statue barred period of 3 years is not applicable and your return remains open until the end of time or three years from when your return is assessed, when you finally file the form.

If you sold your principal residence in 2017, simply put, complete schedule 3 and file Form T2091, or there may be punitive repercussions.

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. Please note the blog post is time sensitive and subject to changes in legislation or law.

Monday, April 2, 2018

Duplication of Investments

In August of 2011, I wrote a blog post about common investment errors I had observed in my capacity as an accountant who works in the wealth maximization and wealth advisory area. One of these errors was the duplication of investments. I find that many people have this issue to some extent; it is just a question of quantum. Today I want to briefly expand on this topic.

The duplication or triplication of investments, which can sometimes be intertwined with diworsification, occurs when investors own the same or similar stocks, mutual funds or Exchange Traded Funds (“ETFs”) in multiple places.

A simple example is Bell Canada. You may own Bell in your own “play portfolio,” in a mutual fund you own, in your investment advisors private managed fund or indirectly in an ETF fund. The same duplication often also occurs with many of the Canadian banks and larger cap Canadian stocks, such as TransCanada, Thomson Reuters, Enbridge, etc. Unless you are diligent, or your advisor monitors this duplication or triplication, you may have increased your risk/return trade-off by over-weighting in one or several stocks. Some may argue this is really just a redundancy issue, that likely results in higher costs and is not really that significant a risk to your portfolio. Although, I would suggest that if the redundancy is in a more volatile group such as the resource sector, the portfolio risk could be significant.

The investing reality in Canada is that there are only so many stocks in the Canadian stock universe that investment managers can select. This limitation plays a large part in this issue. Duplication can also result within a family unit. If your spouse or partner invests separately, they may be creating redundancies and additional costs, whereas if you invested as a family unit much of this duplication could be eliminated.

Asset Allocation


I think most of us are aware of the concept of asset allocation, which is essentially allocating/diversifying an investment portfolio across major asset classes (stocks, fixed income, foreign stocks, small caps, REITs, etc.). Typically, an effective asset allocation will also consider diversification across countries, which is important given Canada’s limited stock access as discussed above. Your asset allocation should be undertaken in context of your Investment Policy Statement which accounts for your risk tolerance, objectives and trading restraints (such as no stocks that sell arms or tobacco).

When you allocate and diversify your investments, you can typically, to some extent, minimize market risk and volatility. Where you have duplication, you are at cross-purposes with your asset allocation strategy, since you have doubled or tripled up on an asset class. Your goal is diversification with minimal investment duplication.

Tax Efficiency


When I meet or talk with investment managers (the better ones do this on their own volition) on my client’s behalf, I always ensure they have reviewed the tax efficiency of my client’s portfolio. This would include considering the type of income earned, typically interest, dividends, capital gains and would also likely account for their return of capital investments like REITs. This discussion is then tied back to whether an account is a registered account such as an RRSP, a tax-free account like a TFSA or a taxable non-registered account. I wrote about this in these blog posts on tax efficient investing, Part 1 and Part 2.

Where there is duplication, this tax-efficiency can be lost, especially where there are multiple advisors and there is no overall communication. This can be especially costly when tax-loss selling is undertaken in the fall and your advisors are at cross-purposes or thinking they are doing good by selling stocks underwater. You may end up with an excess of capital losses or not enough capital losses, and they all sell the same stock to trigger a loss, even if it is a good long-term investment.

Some Considerations to Avoid Duplication


If you use several investment managers, consider having one oversee the group to ensure each manager is investing in what they know best and there is minimal duplication and proper asset allocation. If you have significant wealth, you may want to or hire an independent person to quarterback the process such as your accountant or a fee for service financial planner.

You may also want to consider consolidating your investment assets. This can be done by reducing the number of investment managers you use (if you have several) or if you manage your own money, review the details of the funds and stocks you own and see if there is duplication of investments or a way to reduce your overall costs.

At the end of the day, your goal is to simplify the tracking of your investments, ensure you have managed your risk and have diversified your portfolio to minimize duplication.

The above in not intended to provide investment advice. Please speak to your investment advisor. 

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. Please note the blog post is time sensitive and subject to changes in legislation or law.

Monday, March 26, 2018

Let Me Tell You - Quotes and Proverbs to Ponder

As noted in October, I am writing occasional blog posts under the title “Let Me Tell You” that delve into topics that may a bit more philosophical or life lessons as opposed to the usual tax and financial fare. Today, I discuss three of my favourite quotes and proverbs. I think these words of wisdom provide some insight into my psyche, but I will leave that for you to decide.

I have tried my best to attribute these sayings to the proper person; but regardless of whether I have the correct acknowledgement or not, the key is the message, not the messenger.

Make a Decision and Go with It!


I have discussed this quote once before, but I am bringing it back, since it is one of my favourites.

The quote as best I can tell is from a poem by S.H. Payer’s “Live Each Day to the Fullest”. It goes as follows:

"When you are faced with decision, make that decision as wisely as possible,  then forget it.
The moment of absolute certainty never arrives".

Think about that last line: “The moment of absolute certainty never arrives”. Whether a decision is personal or financial, it has been my experience that people can freeze in their tracks with indecision and are often unable to act on their issues, until they feel they have found that moment of certainty.

However, we all know that the moment of certainty very rarely identifies itself or if it does, it is likely not in a timely manner. This is why I love this quote; time constraints often force us to deal with an issue before there is certainty. People who make the best decisions, under the circumstances and move forward without regret or second-guessing themselves, are best equipped to solve and deal with life and its often confounding decisions.

We Are Not Immortal – Live Your Life to the Fullest While You Can (but save a few bucks for retirement)


In October of 2015, I wrote a blog post titled “Believe it or Not - We Are Not Immortal” in which I discussed how denying our mortality had a significant impact emotionally and financially upon our families. The take-away from this blog post was that you should provide your spouse and loved ones a financial roadmap so that they are prepared as best they can be, should you pass away.

In the comments to that post, one of my reader’s, Vernon L provided a quote that read:

“Man, he sacrifices his health in order to make money. Then he sacrifices money to recuperate his health. And then he is so anxious about the future that he does not enjoy the present; the results being that he does not live in the present or the future; he lives as if he is never going to die, and then dies having never really lived.”

What a great quote! While it in part touches on our mortality, it has a wider breadth, in that it comments on how we live, or more accurately, how we often live improperly.

After reading the quote, I immediately googled it to determine who made such a perceptive comment on human behaviour. Initially, the quote appeared to be attributable to the Dali Lama. However, as I researched further, it appears the consensus is that it has been inaccurately credited to the Dali Lama and it should be attributed to John James Brown (pen name James Lachard) a writer and former CEO of World Vision Canada. So, while I am not 100% sure whom to attribute this quote to, let us just leave it at it is very sage advice.

This quote refers to money and the financial and health consequences of chasing the almighty dollar. But of course, enjoying your life and living in the present is not 100% correlated to money. We have family, religious and altruistic components of our lives that enrich and make our day to day living fulfilling (as discussed in this blog post I wrote).

I have written numerous times about having a bucket list and ensuring you cross items off your list during your working life. The longer we wait to undertake these bucket list items, the greater the chance we are not physically able to do them, or worse, not around to do them.

While this quote goes much deeper, we all need to live in the present and enjoy our lives and family, plan for retirement (where hopefully health and money permitting, you clean up your bucket list and make a new one), and always understand that you are very lucky for each day on this earth.

It is Never My Fault


Somebody sent me this quote/life lesson that was circulated on Facebook last year. I have no idea whom to attribute it to, but it very succinct and accurate in my opinion. It goes as follows:

Three Ways to Fail At Everything in Life:
  •  Blame all your problems on others 
  • Complain about everything 
  • Not be grateful

Craig Soroda who provides leadership training noted in this blog post that the above three points are known as blame, complain and defend (“BCD”). He provides a quote by well-known football Coach Urban Meyer that says “BCD has never solved a problem, achieved a goal, or improved a relationship. Stop wasting your time and energy on something that will never help you.”

Personally, I go back to the old school thoughts of my father. Dad always taught me that I must take responsibility for whatever I did, not to complain, and to never give up. I think being grateful just came from the way I was raised by my parents.

In brief, these quotes can be summed up as follows:

1. Life is fleeting, live it and enjoy it as best you can, but save a few bucks for retirement.

2. Don’t dither on decisions, make an educated decision and move on.

3. You are responsible for your own life, don’t blame others, it is counter-productive, and people don’t like whiners.

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. Please note the blog post is time sensitive and subject to changes in legislation or law.

Monday, March 19, 2018

CRA Information Requests – 2018 Update

In December 2016, I wrote a blog post titled CRA Information Requests - 2016 Update in which I discussed that corporate clients had been receiving information requests from the CRA to support their equipment (capital cost additions) and/or had received information requests to support professional fees that had been claimed.

On the personal side, I noted that taxpayers were receiving information requests to provide support for Interest deduction expense claims, foreign tax credit claims and matching income requests.

Today, I provide a quick update on what I am seeing.

Beware if You are Receiving or Paying Management Fees


Lately, I have seen the CRA issue information requests to support management fees paid. The requests appear to relate more specifically to intercompany management fees, but these requests can directly or indirectly lead to information about management fees paid to owner-managers.

As detailed in this guest post by Howard Kazdan last year on Management Fees, it is important to have proper support for the payment of these fees. This support is often lacking for both intercompany payments and payments to shareholders who consider themselves independent contractors.

It should be noted that management fees paid to owner-managers as independent contractors can be problematic in the first place, as detailed in this 2015 blog post.

The CRA information requests essentially ask for all the information Howard suggested you document or maintain in his blog post, including some of the following:

1. The name and Business or SIN# of the corporation or individual receiving the management or administration fees

2. If the fee was paid to a related party

3. Copy of the contract for services

4. Description of the services provided and log if available

5. Invoices for the services provided

I would suggest many corporations and shareholders have been lax in ensuring there is proper documentation and that the remuneration for the services is fair-market value. If you do not have your act in order, in respect of documenting the payment of management or administration services, I suggest you make this a high urgency task.

Individual Taxpayers


From an individual taxpayer perspective, we are still receiving information requests to provide support for interest deduction expense claims, foreign tax credit claims and income matching requests (technically a separate program). In addition, I have seen several requests to support alimony payments.

I have also seen information requests for individuals that are owner-managers of corporations and have claimed employment expense based on a T2200 form signed by their related company. If you want to read an excellent summary about deducting expenses as an employee, this tax bulletin by BDO Canada LLP titled “Deducting Expenses as an Employee”, is very exhaustive.

For those not aware, a T2200 form must be completed by employers for their employees to deduct employment expenses from their income. Many people receive these forms from their employers each tax season, so they can claim their auto expenses related to their job, however, other people use the form to claim a home office expense or various other employment expenses related to their job.

The CRA requests have been specifically for those individuals who are shareholders of the corporation issuing the T2200; we have not seen a general review of employment expenses for employees (although I do see these occasionally).

In reviewing corporate shareholders employment expenses (most notably auto and home office expenses) the CRA had been disallowing these expenses in many cases, based on a lower court case decision.

However, it is my understanding the CRA is considering reversing these re-assessments and will set forth new criteria for owner-managers in respect to claiming employment expenses going forward. If you have been re-assessed or are in the middle of objecting, speak to your accountant about this issue, there may be positive news forthcoming.

If you have claimed any of the expenses that are leading to the information requests I detail above, you may want to review your records to ensure you have your documentation readily available in case you receive an information request.

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. Please note the blog post is time sensitive and subject to changes in legislation or law.