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, 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.

Monday, March 5, 2018

2018 Federal Budget

The Daily Telegraph, a national British newspaper, once commented on a Federal Budget by saying that; a “budget is like going to the dentist, there has to be pain now or the future health of the economy is at risk”. While I may want to debate that assertion another time, I took their comment literally. Last Monday I started off the week with a root canal on my bottom left tooth and was supposed to have an extraction on Friday for another tooth on the top left of my mouth. Unfortunately, or fortunately, I am not sure which, the Friday appointment was re-scheduled until the middle of tax season. Thus, I was not in a good frame of mind to write my usual detailed review of the federal budget, presented last Tuesday, February 27th.

Setting aside my tooth pain, the budget contained surprisingly few new proposals (which you can read about in this excellent BDO LLP budget summary) other than the introduction of new rules relating to the taxation of passive investment income (generally made-up of interest, dividends, capital gains and rental income) in private corporations. Today I will briefly discuss these new rules.

Passive Investment Income Taxation


The initial proposals set forth by the Liberal government in July and October of 2017, in relation to the passive income rules were very complicated and would have been an administrative headache for small business owners and accountants. There was also some concern that the proposals could result in a tax rate approximating 73%.

In issuing the new rules in last week's budget, the government clearly listened to the various comments made by small business owners and their advisors. The new rules are simple and clear and target those taxpayers the government seemed to be offended by in the first place, professionals and other service providers who were accessing the small business deduction.

While the aforementioned taxpayers who have accumulated significant passive assets for retirement based on the old rules will not be happy, there are many other small business owners and professionals, who let out a collective sigh of relief. Corporations (including professional corporations, typically partners in large professional firms) already subject to the general tax rate of 26.5% or so (depending upon your province) and investment companies that hold only passive investment assets, will continue under the current regime without any new restrictions.

Under the new rules, which are applicable for taxation years beginning after 2018 (so for companies with non-December year-ends, the rules may not apply until 2020) the Small Business Deduction (“SBD”) is phased out once passive income exceeds $50,000 at the rate of $5 for every $1 of passive income, or $50,000 for every $10,000 of passive income.

It is important to note that the test is for a corporation and its associated corporations. Therefore, if your operating company has no passive income, but your Holdco has $75,000 of passive income, you must combine the two and your operating company will have a reduced SBD.

The chart below illustrates how this will work.

Passive Income
Earned
Small Business
Deduction Available
$50,000
$500,000
$70,000
$400,000
$90,000
$300,000
$110,000
$200,000
$130,000
$100,000
$150,000
$nil

Somewhat lost in the discussion is that the SBD is just a tax deferral, not an absolute tax savings. For example, if you flow through a $100,000 taxed at the small biz rate and a $100,000 taxed at the general rate to a shareholder, there is likely only a net after-tax difference of a $1,000-$2,000 dollars, depending upon the province. So to be clear, you are not paying more tax, just paying it earlier.

Private corporations subject to the new rules will lose a tax deferral from $1 to around $65,000 or so (depending upon your province and assuming the provinces follow suit. If not, the amount will be lower) if the full $500k SBD is clawed back. In simple terms, at the maximum reduction, you will have to pay $65k (could be less depending upon the province) in tax earlier than under the current tax rules and you lose the ability to grow your retirement assets by the return on that yearly $65k.

Double Your RDTOH Pleasure


Part and parcel of the above changes to the SBD, the government has also proposed to create a second refundable dividend tax on hand ("RDTOH") account for eligible dividends, called, not unexpectedly, the “Eligible RDTOH”.

Under the current rules, where a private company earns investment income, the corporation is taxed at a high rate, typically 50%, of which 30% or so is refundable and 20% is a hard tax. Where the company also earns low rate small business income, the dividend refund can be caused in part from this lower rate tax and the shareholder can benefit from both a corporate dividend refund and a low rate eligible dividend designation.

To prevent this from happening in the future, the new rules essentially create two RDTOH accounts, non-eligible and eligible and upon the payment of a non-eligible dividend, the company must first access its non-eligible RDTOH before it can access its eligible RDTOH. I am sure this is clear as mud.

To further muddy the waters, there will ordering and transition rules, which are described in detail in the BDO tax memo I link to above.

As result of these new rules, which are also applicable for taxation years beginning after 2018, you will want to discuss with your accountant whether it makes sense to pay a large dividend prior to the application of the rules to clear out your current RDTOH.

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.