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, October 22, 2018

Should You Simplify Your Investment Holdings for Estate Purposes as You Age?

Clients often ask me if they should sell stocks, real estate etc. for tax purposes. I typically answer back, “your decision should be an investment decision, do not let the tax tail wag the dog". However, where the question is framed as “Mark, I am starting to get my estate in order and I think it is too complex, should I sell certain assets to reduce the complexity?", my answer is often couched with “it depends”.

Before I delve into this issue, let us first take a step back. This question/issue arises in two ways:

1. The client consciously decides they need to make their estate more manageable for their spouse and/or children. The reasoning behind this decision is often they had to deal with a messy estate left by their parents, sibling or friend. In other cases, they just know their family is not as sophisticated as they are, and they want simplicity.

2. During an estate or financial planning discussion I ask my client if they were hit by a car leaving the meeting (I am very popular among my clients for this line of questioning 😊) would their family know what assets they own and where there are? Or, I just point out a complexity that makes the client step-back and consider whether they need to simplify things for their estate.

Whether it is the client or a question I asked that brings forth this issue is irrelevant. The key take-away is that when you are undertaking estate planning, simplification of your estate should be considered when practical.

Simplification of an estate at its finest is when you clean up complexity with no foregone investment opportunity cost or tax cost. Unfortunately, simplification for many people often comes with at least some investment and/or tax cost and thus, may not be practical where the tax and/or investment cost is higher than the person is willing to absorb.

No Cost Simplification


The following are examples where you can simplify your estate for your family at no cost:

1. You have four investment brokers handling your affairs. To simplify your estate, you consolidate to one or two.

2. If you have multiple corporations, you may be able to amalgamate, dissolve or consolidate without any tax consequences.

3. You open a joint account with a child (your trust implicitly) with enough money to cover a few months expenses and your funeral expenses if you died.

Simplification With an Investment or Tax Cost


In contrast to the above, there are many examples of where a decision to simply will result in a tax cost or possibly foregoing an excellent investment opportunity. For example:

1. Let’s say you were born in a foreign country and have kept investments or business structures in place back home. However, your children do not speak your mother tongue or understand the business culture and customs of that country. I have seen clients liquidate those investments to simplify their estate for their spouses/children’s benefits and bring the money back to Canada.

2. Some people have shareholdings, partnerships or joint ventures with friends or business associates. In the case of say a partnership, both parties often have no desire to keep the partnership going if one partner were to die and the other’s children step in. Thus, as they age they either sell the business or real estate earlier than they envisioned, or when a property is sold, instead of re-investing together, they go their separate ways.

3. I have also seen situations where a parent has a holding company and to avoid the estate complications of the deemed disposition of that property and the other post-mortem tax issues, they distribute the cash or assets as a taxable dividend to themselves, such that the corporation has no assets left. The parent has thus pre-paid tax, possibly years earlier than required (the tax would typically not be due until the latest death of the deceased or their spouse, if they left the holding company shares to their spouse).

Having it Both Ways


Some clients try and kill two birds with one stone. They keep their structures in place, but purchase insurance to cover any estate liability so that the family is not scrambling to sell assets to satisfy the CRA and the family keeps the more complex structure. The only real advantage here is that the simplification of the estate becomes less time sensitive, but the complexity remains.

Simplification is Not Required


In some families, the spouse and/or children are sophisticated business people and can seamlessly step into the parent’s shoes. This allows the parent to keep a complex structure in place but does not guarantee the estate will not initially be messy for estate and/or tax purposes.

Others have teams of advisors whom they expect to step in and guide the surviving spouse and/or children, so the estate complications are greatly reduced.

It Depends


So, I come full circle back to my answer in the first paragraph. Does simplification of an estate make sense? My answer is still “it depends”. Where there is no cost to simplifying, there is no question simplification should be undertaken. Where there is a tax cost or estate complexity cost, it depends on various factors; from the complexity of your estate, to the potential returns that would be forgone by simplifying, to the tax liability that will be incurred, to the sophistication of your spouse and/or children.

The only definitive advice I can provide is: always consider how complex your estate is, and consider whether you can simplify it for your family.

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, October 15, 2018

Obtaining a Clearance Certificate for an Estate

I have written numerous times on this blog about estate issues. I was quite surprised when I realized I had not posted on the issue of obtaining a clearance certificate for an estate. So today, I remedy this omission and discuss when a clearance certificate is required and how you go about obtaining one.

What is the Purpose of a Clearance Certificate?


A clearance certificate provides the following for an executor(s):
  • Confirmation that an estate of a deceased person has paid all amounts of tax, interest and penalties it owed at the time the certificate was issued
  • Confirmation the legal representative can distribute assets without the risk of being personally responsible for the tax debts of the deceased and estate
Consequently, if as an executor(s) you decide to distribute the assets of the estate without obtaining a clearance certificate, the CRA can hold you personally liable for any unpaid tax debts of the estate.

Do You Have to Obtain a Clearance Certificate?


In a complicated or contentious estate, I would suggest this is not even a consideration. Obtain a certificate. However, where an executor is the sole beneficiary of an estate or the beneficiaries are siblings that get along, the answer is not as clear-cut. I have had estate lawyers suggest a clearance certificate should be obtained, since it is always better to be safe than sorry. On the other hand, I have had estate lawyers suggest that there is no point when there is no reason to feel there are any unpaid tax debts and there is no contention in the estate.

As an executor, you need to understand the estate may have tax exposure to past transactions you may not even be aware of, even if you are sure there are no current debts. For example, the deceased may have missed filing a form such as the T1135 Foreign Verification form for several years that is subject to penalty or claimed the qualifying small business corporation capital gains exemption in the past and it is subsequently audited and denied or transferred property to family that resulted in a deemed disposition and never reported the deemed disposition. These are just a few of many potential tax issues that could result in taxes owing if uncovered or if the CRA audits prior returns.

I suggest being safer than sorry is generally the most prudent route. However, I have seen several estates where the executor(s) decide to not request the certificate because they are the sole beneficiary or do not feel there are any unpaid tax debts.

When Do You Request a Clearance Certificate?


You should request a clearance certificate once you are ready to distribute the remaining funds/assets of the estate. The certificate should only be requested once you have paid all tax debts and filed all applicable personal and T3 (estate returns). The request cannot be filed until you have received notice of assessments for all returns filed, especially the last return filed.

How to Apply


This is what the CRA says is necessary to apply:

For an individual (T1) or trust (T3):
  • a completed Form TX19
  • a completed Form T1013, Authorizing or Cancelling a Representative, signed by all legal representatives, authorizing an accountant, notary or lawyer, or any other person, to act on your behalf. Also use the form if you want the CRA to send the clearance certificate to an address other than yours
  • a detailed list of the assets that the deceased owned on the date he or she died, including all assets he or she held jointly, and all registered retirement savings plans and registered retirement income funds (even if he or she named or designated a beneficiary) and their adjusted cost base and fair market value.
One of the following:
  • a complete and signed copy of the taxpayer’s will, including any amendments, renunciations, disclaimers and probate documents that apply. If the taxpayer died intestate (without a will), attach a copy of the document appointing an administrator (for example, the letters of administration or letters of verification issued by a provincial court)
  • a copy of the trust agreement or document for a living trust
Also include the following documents if they apply to your situation:
  • any other documents proving that you are the legal representative
  • a copy of the Schedule 3, Capital Gains (or Losses) from the final tax return of the deceased
  • a list of all assets transferred to a trust, including (for each asset): a description, the adjusted cost base, and the fair market value
  • a statement of how you propose to distribute any holdback or residual amount of property
  • the names address and social insurance numbers or account numbers of any beneficiaries of property other than cash
It has been my experience that the statement of how you propose to distribute can be problematic. What I have done in the past is advise the CRA who will report the income for the period from the filing of the last return and the issuance of the clearance certificate. For example, if two brothers are the beneficiaries and there is a $200,000 GIC earning 2% interest, I advise the CRA that each brother will report ½ of the interest on their personal tax returns.

Interim Distributions


If you have been an executor, you will know beneficiaries have an expectation of receiving their share of the estate promptly (a cynic would say: often before the deceased is buried). Thus, often, an executor will make an interim distribution because it appears there will be minimal tax debts or quite frankly as a way to appease the beneficiaries. If you are interested in reading more about this issue, I suggest reading this article on interim distributions by Lynne Butler, an estate lawyer and writer behind the excellent blog, Estate Law Canada.

The Finalization Process


Upon filing the clearance certificate, the CRA will send you an acknowledgement letter (they say within 30 days) of receiving your request for a clearance certificate.

The CRA says “that the assessment can take up to 120 days, assuming you provide all of the necessary documents. However, in certain situations, the CRA may need to do an audit before it issues the clearance certificate”. In my experience, the process often takes much longer, even where an audit is not undertaken.

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.

Tuesday, October 9, 2018

Sometimes You Just Have to Shake Your Head

Some people make financial decisions that just make you want to shake your head. Often these head shaking decisions are the result of not obtaining professional advice. Today, I am going to discuss a few situations were not obtaining the proper advice can lead to potential issues and/or detrimental consequences. I also discuss a non-financial situation that has caused my head to shake so hard I fear for my brain's safety.


Not Using Accountants and Lawyers


Look, I get it. accountants and lawyers can be expensive, but when you require them, you just need to accept they are a cost of personal or business life. Over the years, I have noted the following negative results that occurred because people refused to engage the proper professional advisor, which left me shaking my head:

Selling the Assets of a Business


Occasionally people figure they will split the difference and hire only a lawyer instead of an accountant when selling the assets of their business. The theory being the legal work must be done, and the lawyer must also be proficient at business and tax planning. The major consequence of doing this type of transaction without the advice of an accountant is that sometimes only the gross sales price of the assets is addressed in the agreement, but the allocation of the sale price is not dealt with. This leads to two issues:

1. The most tax efficient allocation of the purchase price is not negotiated for the vendor.

2. With no allocation, both sides just choose what is best for them. As a result, the CRA has two different allocations on the same transaction. Not a recipe to avoid an audit.

Transfer of Property to a Family Member


Over the years, I have discussed this issue multiple times. Many people transfer properties to their children for tax or probate purposes. Where you transfer your principle residence to a family member, the transfer can result in the loss of a part/all of your principal residence exemption on a future actual sale to an arms length party. Where you transfer land or a rental property to a family member, a deemed disposition on the transfer of the land or rental property may result. When I am engaged on a file that relates to cleaning up these type transfers, I shake my head and I think of the expression: penny wise and pound foolish - since these files typically result in the client owing significant taxes and incurring large professional fees, that could have been avoided with advice upfront.

As a reminder, where you transfer your principal residence to a child (say 50% ownership) who has their own principal residence or does not live in the house, you have effectively changed a tax-free principal residence into a 50% taxable asset (the value of the house at the time of transfer becomes the cost for the child, and any increase in that value becomes taxable to the child when the house is ultimately sold).

If you transfer land or a rental property to a child, the transfer will likely result in a deemed disposition to the parent at the fair market value (“FMV”) of the property and tax is due immediately on the difference between the original cost and the FMV at the time of transfer. In these circumstances the income tax liability and penalties (since the transfer often occurred many years ago) are so large I shake my head not only in disbelief but with profound sadness.

Note: Above I say likely because in certain circumstances a lawyer may, on purpose, separate legal ownership from beneficial ownership (the real value) before the transfer for probate planning purposes. If you are considering this, you must get tax as well as legal advice to ensure your specific situation does not result in a taxable event and both your accountant and lawyer agree the intended result is the actual result - i.e.: no taxable event and probate savings.

Not Paying for a Will


In this September, 2016 blog post I discussed that 62% of Canadians do not have a will. If that statistic is not enough to make your head shake, how about this situation: a few years ago, a lawyer I work with called me to discuss whether I was interested in taking on a client who had engaged him (I ultimately decided to pass on taking on this file for a few reasons). He told me that the client’s father did not want to incur the cost of hiring a lawyer and paying for a will even though he had various businesses and multiple real estate properties. The father passed away and the client was now dealing with the estate. However, the inaction of the father was only a minor head shaking compared to the second part of the story. The wife, who was left with a huge mess by her late husband, somehow also did not see fit to have her own will drafted. She then died without a will, leaving the estate in a tangled web, with the children tasked with sorting it out. Why a surviving spouse who had to deal with the aftermath of an estate left by their spouse who passed away without a will, would not immediately ensure they had their own will drafted, is beyond comprehension!

The Small Dog Park is for Large Dogs


I cannot conclude this post without a final non-financial head shaking situation. My wife and I have two dogs. We started taking our new puppy (she is about 17 lbs) to the dog park to play and socialize with other dogs. We entered the section for small dogs (the park is split into small and large dog sections) and encountered a man with a very large dog. I politely asked him if he could take his large dog to the section for large dogs. He told me his dog does not get along well with other dogs and therefore he must keep him apart from other large dogs. I said I appreciate that, but this is the small dog section. He said, too bad, he was not leaving. My wife and I looked at each other and simultaneously shook our heads. We walked away; which for me is a good thing, since I tend to talk back, but the combined size of the owner and dog were enough for me to keep my trap shut.

If that was not bad enough, a month later we went to the same park and encountered the same situation with a woman and her large dog. Again, I politely asked if she could take her large dog to the section for large dogs. Same response: no, my dog does not get along with other dogs. I suggested she should not bring her large dog to the dog park for small dogs if her dog has social difficulties. She got upset and said we were the third couple today telling her to leave and she was tired of being told what to do and was not leaving. My wife and I looked at each, shook our heads, and wondered if there is a correlation between dogs that don’t get along with other dogs and less than brilliant dog owners.

So, in conclusion. If you are undertaking a financial transaction, please obtain tax and legal advice and if your dog does not get along with other dogs, don’t bring them to a dog park.

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.