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, 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.