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 BDO. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. My posts are blunt, opinionated and even have a twist of humour/sarcasm. You've been warned. Please note the blog posts are time sensitive and subject to changes in legislation or law.

Monday, November 11, 2019

The ins and outs of Registered Retirement Income Funds

The RRIF (Registered Retirement Income Fund) occupies an odd space for most Canadians. Everyone has heard of them – hands down, they are the most enjoyable financial vehicle to pronounce; the acronym is pronounced as it is spelled – but many people don’t realize the nuanced and sometimes surprising ways that a RRIF can help them and their families increase their income.

To clarify this piece of the retirement puzzle, I invited my colleague Jeffrey Smith to share his insight on this post of The Blunt Bean Counter. Jeff is a Manager in BDO’s Wealth Advisory Services practice, based in Kelowna
BC.

What is a RRIF?


A RRIF is a way of turning your retirement savings into income. This is achieved by converting your Registered Retirement Savings Plan (RRSP) into a RRIF no later than December 31 of the year you turn 71. You do have the option to convert all or a portion of your RRSP into a RRIF even before the year you turn 71. However, if the whole account is converted, you can no longer make RRSP contributions to the account and will have to open a new RRSP account. (In addition to converting the RRSP into a RRIF, you could also deregister the RRSP and take a lump-sum payment or purchase an annuity.)

The income earned in the RRIF still maintains its tax-deferred growth status; however, once the RRSP becomes a RRIF, there is a minimum amount that must be withdrawn annually. This withdrawal is fully taxable as income.

How do withdrawals from a RRIF work?


Once you convert your RRSP to a RRIF, you will be required to take out the annual minimum beginning the following calendar year. For people under 71, this amount is based on a formula:

1 / (90 – age) 

For example, at age 65 it would be 4%, based on this calculation:

1 / (90 – 65) or 1 / 25 = 4%

If the RRIF value on January 1, 2019 is $100,000, and the minimum RRIF withdrawal 4%, minimum RRIF income in 2019 will be $4,000 ($100,000 x 4% = $4,000). The 4% would apply to the value of the RRIF on January 1 and have to be drawn from the RRIF during the calendar year.

For people age 71 and older, the minimum withdrawal is calculated by applying a percentage factor that corresponds to your age and RRIF value at the beginning of the year.

For example, at age 71 that amount is 5.28%, at age 80 the minimum amount rises to 6.82%, and by age 90 the minimum percentage is 11.92%.

If your spouse is younger than you, their age can be used to calculate the minimum withdrawal. This allows you to withdraw less money from the RRIF in earlier years and thus extend the life of your RRIF. This is a very important tax planning feature of the RRIF and should always be considered in your RRIF and retirement planning.

There are no income tax withholding requirements on the minimum RRIF withdrawal; thus, be sure you either request tax be withheld by your financial institution, or you set aside the appropriate amount of tax related to your minimum RRIF withdrawal

For amounts taken in excess of the minimum amount, withholding taxes of 10% to 30% would apply, depending on the total amount withdrawn in the year, similar to redeeming RRSPs. Therefore, if you don’t need the income, don’t withdraw more than the minimum. It is also very important to understand that statutory withholding rates may be less than your actual marginal income tax rate, and as noted above with the minimum withdrawal, you either need to set aside the extra tax or ask for your financial institution to withhold a higher amount from any withdrawal.

RRIF: Specific situations


There are specific situations where someone may want to create a RRIF. Example situations may include:
  • Retiring early
  • Taking a leave of work to assist with a sick family member
  • You are 65 and have no other qualifying pension income to use your pension income tax credit (which depends on having $2,000 in qualifying pension income)
  • Extended sabbatical leave. If the leave is temporary, you can convert the RRIF back to an RRSP and continue contributing to the RRSP when you return to work, provided you are age 71 or younger at the end of the year.
While creating a RRIF to access the $2,000 pension credit is typically a sound idea, the other situations should be discussed with your investment and/or tax advisors to determine whether the benefit of creating the RRIF is more tax efficient than utilizing your RRSP (i.e. whether to withdraw a RRSP lump-sum in a low income year because you retired early versus creating the RRIF).

What happens to your RRIF when you die?


The three most common outcomes for a RRIF on the death of the owner are:
  • Spouse or common-law partner is named a successor annuitant;
  • Spouse is named a beneficiary
  • Estate is designated a recipient

Successor Annuitant


If the surviving spouse is named as the successor annuitant, they would essentially take over the RRIF as if nothing had happened. For clarity, if your spouse is named as the successor annuitant, the RRIF would continue to exist and your spouse would now be the annuitant. The spouse would continue to receive the RRIF payments that were set up. They would also be required to withdraw the annual minimum amount in the year of death if it was not already paid.

Naming your spouse as the successor annuitant typically has the benefit of administrative ease and simplified tax reporting.

Beneficiary


If the spouse is the sole beneficiary of the RRIF, the entire eligible amount of the RRIF is transferred to the spouse’s RRSP (provided the spouse is age 71 or younger by the end of the year of transfer) or RRIF, or used to purchase an eligible annuity by December 31 of the year following death. To be clear, under the beneficiary option, the RRIF ceases to exist and your spouse has the option to undertake the rollover transfer.

The eligible amount of the RRIF is the full value of the RRIF account minus the RRIF minimum for the year of transfer that was not actually paid that year.

Estate


If the estate was designated as the RRIF recipient, the executors of the estate will control the RRIF assets. Assuming there is a surviving spouse, the executor and RRIF carrier could agree to name the spouse as the successor annuitant as long as the spouse is a beneficiary under the will. This would have the benefit of creating a tax-deferred rollover.

If nothing is done, the value of the RRIF will be included in the deceased’s final tax return as taxable income.

If a financially dependent child or grandchild under the age of 18 is a named beneficiary under the RRIF, they could purchase an eligible annuity and thus save the estate from incurring the tax.

The many ways to use an RRIF


Every Canadian has unique circumstances, and RRIFs can be used in a surprising number of ways. Customization is key. Work closely with your advisor to obtain guidance on when to convert your RRSP into a RRIF, how to ensure beneficiary designations are made, and how to tax-plan your retirement and estate needs to save you and your family money in the long run.

The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

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

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.

Monday, October 28, 2019

What To Do When Your Spouse Dies Before You – Part 2, Taxes

Two weeks ago we discussed the administrative steps people need to take when their spouse dies.

The truth is, there is more to this topic than the administrative steps we listed in that post. Surviving spouses also need to navigate several high-stakes tax issues, some of which are specific to a surviving spouse. Our blog from two weeks ago tackled the administrative piece – today we dig deep to analyze the steps related to tax.

It should be noted that for income tax purposes, “spouse” includes not only a married couple but also common-law and same-sex couples.

When the surviving spouse avoids tax


On death, a taxpayer is deemed to dispose of all of their assets at their fair market value. This means that tax must be paid on any accrued capital gains to the date of death. For your RRSP, the value at the time of death is included as income on the deceased's terminal tax return.

However, where the assets are transferred under the terms of the will to their surviving spouse or a qualifying spousal trust, the deemed disposition at fair market value is avoided and the assets transferred to the spouse take place at their adjusted cost base (the same deferral can occur for a RRSP where the spouse is a designated beneficiary of the RRSP or a beneficiary under the will and an election is made). If the assets are not transferred to the surviving spouse or qualifying spousal trust, there is a deemed disposition and tax must be paid on the accrued gains and/or value of the RRSP.

As the deemed disposition rules are complicated, I think an example at this juncture may help clarify how these rules work.

 Let’s consider the case of Tom and Mary. Tom unfortunately died while preparing his 2018 income tax return and transfers all his assets to his wife, Mary, under his will. He owned 1000 shares of Bell Canada stock. He had paid $10 per share for them (a $10,000 cost), but they are now worth $30 per share ($30,000 fair market value).

In this case, the shares roll over to Mary at $10,000. She effectively steps into Tom’s cost base of $10 per share, and there are no current income tax consequences. However, Mary will pay tax on the deferred capital gain on the Bell Canada shares at the earliest of when she actually disposes of the Bell Canada shares or dies. 

Saying no to the rollover


Tax-free transfers sound good on paper, and this one is no different. But sometimes the surviving spouse should consider saying no to the automatic rollover. They can do this by “electing out” – a procedure that is highly specific to a surviving spouse and involves triggering taxable capital gains.

The surviving spouse should consider this path in several scenarios. Common ones are when the deceased spouse had:
  • a very low tax rate - for example, they had low income in the year of death, or they died early in the year and only have a month or two of income
  • unused capital losses carried forward
  • alternative minimum tax carryforward
The election is made on a security-by-security basis (i.e., you can select anywhere from one Bell Canada share to all thousand shares) at the fair market value (or stock price) of Bell Canada at the date of death.

Once the election is made, the surviving spouse inherits the higher tax cost base from the deceased spouse. Put simply, where the election is made, the surviving spouse’s tax cost will be the fair market value of the asset as of the date of death of their spouse.

To explain, let’s return to our Bell Canada example from above. if it was determined that for tax purposes to elect to trigger the entire Bell Canada capital gain $20,000 ($30,000 fair market value less $10,000 cost) because your deceased spouse had capital losses, the surviving spouse would have a cost base of $30,000 going forward on these shares, instead of the $10,000 cost base if no election was made.

In some circumstances it may make sense to elect to trigger a capital loss or losses at death instead of a capital gain. This would be for example to offset capital gains on the terminal return. There are various technicalities to this election, so speak to your advisor.

The election may also be applicable if the deceased spouse owned shares in a qualified small business corporation. It may make to elect to trigger a gain to utilize the capital gains exemption, which is $866,912 in 2019. This is a highly complex mechanism, so again, speak with your advisor. 

Family farms


If your spouse owned part of a family farm you may also wish to speak to a professional who is familiar with farming to determine the best course of action. 

Filing an income tax return


Finally, you will need to file at minimum a terminal income tax return for the deceased from January 1 to the date of death. You may have other filing option such as a rights and things tax return. I will post a blog in the next few weeks with more detail on filing returns at death.

The tax and administration issues are immense when a spouse dies. For the surviving spouse, they represent a huge burden. The above will hopefully assist you in understanding these issues. However, I strongly urge you to obtain professional legal and tax assistance immediately in the event of your spouse’s passing.

The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

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

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.

Monday, October 14, 2019

What To Do When Your Spouse Dies Before You

I have written before on what happens when someone dies: both on the administrative issues an executor needs to consider and also on the income tax issues upon death. However, I recently realized those posts are essentially directed at what happens when a single person dies, or a widower or widow passes away.

Today I’m filling in the gap with a look at what happens when the first spouse in a married or common law couple passes away. This week I address the administration issues – many of which are the same as for when the surviving spouse dies later on, but I have added several additional items. My post in two weeks will tackle the tax issues – which can be very different from when the surviving spouse dies.

How to tackle the nitty gritty of administration


Here are 25 administrative considerations for the surviving spouse (family, or executor of someone who dies):

1. Determine the deceased’s funeral wishes and if the funeral has been prepaid. If they have not made arrangements, you may unfortunately need to deal with this issue immediately while you are likely still in shock from your spouse’s or parent’s passing.

Key takeaway: Always ensure your funeral arrangements have been communicated while you are healthy.

2. Obtain several copies of the funeral director’s statement of death. Many institutions accept this document in lieu of the death certificate, which is issued by the province and is time consuming to apply for and receive.

3. Open the safety deposit box (“SDB”). You may need to open the SDB if the will is in the SDB or to prepare a list of the contents of the SDB with the representative of the bank.

Key takeaway: Please always ensure someone has a copy of the SDB key or knows where to find the key.

4. Meet with your or your spouse’s lawyer to review the will and understand any legal obligations such as advertising for creditors. In general, most spouses leave all if not the majority of their assets to their spouse. This generally makes things easy for tax, but that is not always the case. In addition, specific assets may often be left to the children or a charity, and those assets need to be dealt with in the near term.

5. Notify any beneficiaries of their entitlements under the will and request their personal information.

6. Meet with your or your spouse’s accountant, to ensure you are clear on the income tax obligations and the income filing requirements. If you or your spouse do not have an accountant, engage one. As noted above, I will address this issue in more detail in two weeks.

7. If the executor is someone other than the surviving spouse, ensure you contact them and advise them of their duties and determine whether they accept the appointment. Hopefully, they are already aware they would be appointed.

Key takeaway: always inform the people who will be your executors and provide them an estate organizer or similar document to provide them a roadmap of your assets. They will need to have a list of all your assets for probate and to ensure a full distribution is undertaken.

8. Your lawyer will advise you whether you will need to obtain a certificate of appointment of estate trustee with a will (probate), a very important step in Ontario and most other provinces.

Key takeaway: If you own shares in a private corporation, in certain provinces you can have a second will that removes these assets from probate. Ensure you discuss this with your lawyer if you do not already have a second will.

9. Collect any life insurance benefits.

10. Meet with your and your spouse’s financial planner, insurance agent or any other relevant advisor.

Key takeaway: Make sure you and your spouse meet all family advisors while both spouses are alive to create at least a basic comfort level.

11. Where the deceased was a controlling shareholder or ran a business, find out if there was a succession plan/disaster plan in place and that it is being followed. If the deceased did not create a plan, take control of the business in the short term and start looking for a manager to take over running the business. Your accountant can likely assist you in this.

Key takeaway: As I’ve written before, many business owners do not have a succession plan. This is the quickest way to lose some or a significant portion of your family’s worth when you die. Ensure you have a plan in place now or take steps to put one in place.

12. Apply for any government benefits the estate is entitled to, such as the CPP death benefit, survivor benefits and possibly child benefits.

13. Notify CPP/QPP and Old Age Security – at Service Canada – of your spouse’s death so they stop making payments.

14. Cancel the deceased’s driver’s licence, health card and other provincial documentation. (See this page for Ontario; each province will have a similar resource online.) Also make sure to cancel the deceased’s Social Insurance Number, passport and Nexus account as applicable.

15. Cancel credit cards in your spouse’s name, email and websites attached to them, and memberships in fitness clubs and organizations.

16. Change the name listed on utility, telephone and other bills.

17. Cancel personal health insurance premiums, cell phones and possible “fall alerts” if the deceased was elderly.

18. Transfer RRSPs, RRIFs and TFSAs.

19. Update your will or power of attorney (POA) if your deceased spouse was the beneficiary of all or some of your assets or your POA.

Key takeaway: It is important to update your will and especially your POA as soon as possible. I have seen many situations where the stress (broken heart) of spouse's passing often creates a medical issue for the surviving spouse, so updating your POA is very important.  

20. If you have real estate holdings in your spouse’s name or in a joint name, review the legal ownership and transfer issues with your real estate lawyer.

21. If your spouse had a vehicle, sell or transfer it and cancel or transfer the applicable auto insurance.

22. If the deceased had a domestic caregiver and the payroll account was in their name, you will need to issue final T4s, and possibly set up a new account in your name.

23. A sometimes-troublesome issue is family members taking items, whether for sentimental value or for other reasons. They must be made to understand that all items must be allocated according to the will or other means, and nothing can be taken.

Key takeaway: This is a very ticklish issue and needs to be handled delicately, but a family member "grabbing" a sentimental item can sometimes cause more dissension than monetary allocations.

24. For any jewellery and art not noted in the will, please note there are tax and probate consequences. See this blog I wrote on “Personal Use Property - Taxable even if the Picasso Walks Out the Door.”

25. Depending upon whether assets were left to beneficiaries other than the spouse, you may have to deal with a passing of accounts - commonly known as an official accounting of the estate’s assets – and possibly request a clearance certificate.

The administration and tax issue burdens are immense upon the death of a spouse. We have now covered the key items that the surviving spouse needs to deal with from an administrative angle. Look out for our next post, which will get you up to date on the taxation issues. For both areas, I strongly urge you to obtain professional legal and tax assistance.

The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

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

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.

Monday, September 30, 2019

Should I pay for my child’s university education?

Numbers are typically the focus of retirement planning. Will I have enough of a nest egg to support myself? When do I withdraw my retirement savings? Should I start receiving my Canada Pension Plan benefit early, before turning 65? These questions are easily answered by an advisor — preferably one who is good with financial planning software.

But advisors and clients often overlook the softer side of retirement planning, where human relationships and feelings come into play. One common issue on this front is adult children and their continued financial dependence on their parents – especially when deciding how to pay for a child’s post-secondary education.

This week BDO Canada LLP senior wealth advisor Carmen McHale explains why this common dynamic can be so fraught from both an emotional and financial point of view – and how to tackle it.

_________

By Carmen McHale

Most parents I work with have a hard time saying no to their children – their car payments and cellphone bills are covered by Mom and Dad well after the children are working and bringing in their own money. Parents pay for the wedding, help with the down payment on the house, pay for the master’s degree that never seems to end. They often ask: Should I keep my kids on the family payroll?

A recent survey by FP Canada found that more than a third of Canadian parents with children 18 or older have helped their children pay their rent.

The problem with this is twofold: first, your kids do not learn responsibility and are unable to budget for themselves because they have never learned the value of a dollar. The other problem can be much serious – you have spent so much money on your kids that you have put your own retirement in jeopardy.

As an example: The same FP Canada study reports that while less than 10% of parents with older children have used retirement funds to help them purchase a home, almost 40% of parents with children under 18 expect to postpone retirement to help their children purchase a home.

A report from Merrill Lynch also has some stark data points for parents to review. The study found that parents are spending twice as much on their adult children as they are putting away for retirement. Overall, it said, 79% of parents continue to give money to their adult children age 18 to 34.

What about the master’s degree? Most parents I work with want to pay for their children’s education, but covering costs for more than the four years of undergraduate studies is another story.


Multiple children, multiple tuition bills


I frequently run across a situation like this: the oldest child has just finished a seven-year post-secondary program and now the younger sibling wants to go to dental school (which would bring to eight the tally of years in school after graduating high school). I will assume for purposes of this discussion that any RESPs will be used for undergraduate or have been exhausted already.

Couples are often not prepared for these expenses, and now there is a dilemma. They have already covered all expenses for their first child, which could be upwards of $350,000 including living expenses (yes, $50,000 per year for seven years). Parents often feel guilty if they don’t treat their kids equally – what if they can’t afford the second child’s education? They have already paid the full way for the sibling. What does the couple do? They will be delaying their retirement by several years by funding the full bill. Will Mom and Dad have to delay their retirement? Even with this knowledge, they feel they are in a situation where it is too late to change course – family harmony is at stake.

Parents can handle this type of situation in a few ways. Sometimes they can guarantee loans for the dental school costs for the child. They can also equalize the extra school costs in their will or by reducing their financial assistance for the first child in other areas – like their wedding or house purchase.

Two overarching rules will ease the challenge. First of all, plan your approach in advance. And second, commit your resources responsibly. There is nothing wrong with pitching in to help our kids financially as they move through key stages in their life. Housing costs continue to rise, especially in many urban areas, and some courses of studies end up burdening students with significant debt loads. But parents also need to reality-check their financial support – and make sure it won’t put their own retirement at risk.

The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

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

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.

Monday, September 16, 2019

Investing Like Your Grandmother (or Grandfather). The Results May Surprise You

When I was a young accountant and happened upon an estate return, I was often amazed at how much wealth the grandmother had accumulated at death. This applied to grandfathers too, but women tend to live longer, so I noticed the tendency more with grandmothers. The accumulated wealth was typically in conservative marketable securities bought over many years.


What I found remarkable, as I saw this time and time again, was that blue-chip stocks dominated these portfolios. (Mutual funds were just coming into vogue and no one had heard of an exchange traded fund (ETF).) Each portfolio had the big Canadian banks, insurance companies, utility companies and the Bell Canadas, Canadian Tires and Thomsons of the Canadian stock universe, plus some large high-quality U.S. stocks sprinkled in. Being a naïve and arrogant young investor, I somewhat derisively at the time called these stock holdings “grandmother portfolios.”

As I look back, an older me should have given my younger self a good swat upside the head, as these portfolios hit on most of the critical tips investment managers and experts still suggest today (other than maybe a little more global diversification and possibly some alternative investments):
  • They were fairly well diversified.
  • They very rarely turned over.
  • They contained stocks that generally paid dividends that grew over time.

Shredding my old tax returns – an eye-opening experience


So why am I talking about grandmother portfolios? Well, a couple months ago I followed my own advice and shredded some of my older personal tax returns. While shredding the returns, I entertained myself by looking at the income earned each year and the capital gains (Schedule 3), which detailed my stock dispositions for each year.

I have always liked to have some risk in my portfolio, and over the years have taken some shots with disruptive technology stocks, “find that big gold mine” stocks and “let’s hit the gusher” oil stocks, among other rather poor stock selections. However, I was astounded when I looked at how many of these flyers resulted in capital losses on my old returns.

The technology stocks included such household names as:
  • Samsys Technologies (RFID readers)
  • International Verifact (forerunners of point-of-sale payment terminals)
  • GenSci Regeneratrion (bone repair and generation for dental use)
  • Zeox Inc. (using Zeolite for environmental waste)
Some of the crazy gold picks included such sterling names as:
  • International Pursuit
  • Gerle Gold (actually looking for diamonds in the Northwest Territories)
  • South Pacific Resources (a stock that followed in the draft of Bre-X when it was going up)
And the oil stocks included:
  • Dome Petroleum (a famous oil stock for those of you of my vintage)
  • Mart Resources (a Nigerian oil play)
The above names are meaningless, but entertaining to me and maybe a couple readers. But what shocked me about my shredding exercise was how many flyers I had actually gone for over the years. (I actually hit on a couple others, but that was luck and not relevant to this post.)

My point is, I was shocked at the time and effort — let alone the money — I wasted trying to chase down the next big thing. 

Moral of the Story


While I have slanted this post on purpose to make a point (I typically also had a substantial part of my portfolio in quality stocks and alike), in retrospect I would have had a larger nest egg if I had stayed away from the above speculative flyers and only bought higher grade stocks.

As an accountant I cannot tell you what stocks and bonds to purchase. But after my shredding exercise, I would suggest the following general investing principles be considered:

1. Buy high-quality stocks, ETFs or mutual funds.

2. Keep the turnover of these securities to a minimum.

3. Diversify across countries and sectors.

4. Consider stocks that pay dividends that grow over time.

5. Keep your flyers to a minimum — or better yet, don’t take any flyers.

In conclusion, invest like your grandmother.

The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

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

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.

Monday, September 2, 2019

The Best of The Blunt Bean Counter - The Taboo of Asking Family Members for Money

This summer I am posting the best of The Blunt Bean Counter blog while I work on my golf game. I actually just returned from a golf trip to Bandon Dunes in Oregon. It was pretty awesome and I may post a future blog on the trip.

Today, I am re-posting a June 2018 blog on the taboo of asking for money within a family. Which, to say the least, is a very touchy subject.

The blog will return with new original material starting on September 16th.

________

Asking for money


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 is explained in greater detail in this 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.

As noted above, I had a second post on this topic, if you wish to read on which is located here.

The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

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

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.

Monday, August 26, 2019

The Best of The Blunt Bean Counter - What Small Business Owners Need to Know - The Debits and Credits of Shareholder Loans

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 what you as a small business owner need to know and understand about the debits and credits of your shareholder loan balance.

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As an owner-manager, you can withdraw funds from your corporation as a salary and/or a dividend or as a shareholder loan. The Canada Revenue Agency (CRA) has incorporated strict guidelines into the Income Tax Act (Act) when shareholder loans have to be repaid and the tax consequences therein. These rules are often misunderstood by shareholders and can result in adverse income tax consequences where care is not taken.

The following discussion relates to situations where you have taken more shareholder loans than you have contributed to your corporation. This is often known as a shareholder “debit” as opposed to a shareholder “credit." A shareholder credits results when your corporation owes you money, since you have advanced funds or loaned back salary or dividends in a prior year on which you were personally taxed.

The Rules


Section 15(2) of the Act outlines these rules which also encompass loans to a person or partnership who does not deal at arm’s length (i.e., family members) with the shareholder.

The basic rule for shareholder loans is that they must be repaid within one year after the end of the corporation’s taxation year in which the loan was made. For example, if you borrow money from your corporation in 2016 and the corporation's fiscal year end is December 31, 2016, the loan must be repaid by December 31, 2017. If the amount is not repaid within the time frame above, it will be added to the income of the shareholder in the year the loan was received (i.e., 2016 in this example). Therefore, a T1 adjustment may be necessary for the shareholder to correctly include the loan in income in that particular year (2016) plus accompanying interest. If anyone related to the shareholder receives the loan the amount will be included in his/her income and not the shareholder.

The Exceptions


There are some exceptions to the 15(2) shareholder loan rules which would allow the loan amount not to be included in an individual’s income. If any of the criteria below are met than 15(2) does NOT apply:

i) If the loan was repaid within one taxation year;

ii) If the loan was made in the course of a money lending business i.e. bank, and bona fide terms of repayment are made.

Employees/Shareholders Exceptions


Absent of the criteria above, certain types of loans may still be exempt from 15(2) as described below for shareholders who are also employees of their business.

If the loan is to a specified employee (person who owns directly or together with related persons more than 10% of the shares of the business) the loan must be made for one of the following purposes:

1) Purchase a home (includes a house, condo, cottage);

2) Purchase a vehicle used for employment purposes; or

3) Purchase newly issued shares of the business.

Each of these loans must have bona fide arrangements for repayment within a reasonable time period and the loan must be provided as a result of the individual’s employment rather than shareholdings. This has generally been interpreted to mean that loans must be available to other employees who are not shareholders or related to shareholders, which could be difficult to prove if the owner is the sole employee of the business and preclude the loan where you have employees (unless you provide such loans to all other employees, which is very unlikely).

Where loans are made for a home purchase, the CRA often audits the loan and it can be problematic if not impossible to prove such a loan would have been made to other employees if there actually were such. As result of this burden of proof, where housing loans were once routinely recommended by accountants, they are now typically selectively recommended.

If the loan is to an employee-shareholder who deals at arm’s length with the corporation and together with related persons own less than 10% of the shares then the loan can be made for any purpose. This provides an exception for many employees who are minority shareholders. However, similar to specified employees above, the loan must have bona fide arrangements for repayment within a reasonable time period and the loan must be provided as a result of the individual’s employment rather than shareholdings.

Interest Benefits


Section 80.4(2) of the ITA provides for an imputed interest benefit if 15(2) does not apply. Meaning if the shareholder loan does not have to be included in income, a deemed interest benefit will still need to be reported by the individual. This interest benefit arises when the interest rate charged (if any) on the shareholder loan is less than the CRA prescribed rates per quarter - currently at 1%. The amount of the interest benefit is reduced by any interest actually paid on the loan no later than 30 days after the end of the calendar year.

If the loan is included in income by virtue of 15(2) than no imputed interest benefit would be reported.

Questions to Ask


Some of the key questions to ask when an individual shareholder or connected person (e.g. daughter) receives a loan:

1) Is it reasonable to assume the loan was received by virtue of employment?

2) Is the individual receiving the loan a specified employee (i.e., owns more than 10% of any class of shares of the corporation)? If so, was the loan made to acquire a dwelling, vehicle or shares are described above?

3) Are there bona fide terms of repayment?

If the answer is NO to any of the questions above, 15(2) applies to include the loan in income, unless the entire loan is repaid within one taxation year. Repayment of all or part of the loan that has been included in income will be eligible for a deduction by the individual on his/her personal tax return in the year of repayment.

It is very important that the loan(s) not be considered to be a series of loans and repayments or else CRA could deny the deduction upon repayment. E.g. repaying an amount at the end of 2016 only to borrow again in 2017. One of the more common ways to reduce or eliminate a shareholder loan is to convert it into a salary, bonus or dividend. Since this gives rise to taxable income, it is generally not considered to be a series of loans and repayments.

See Archived IT119R4 for more details and exceptions regarding shareholder loans.

Section 15(2) is one of the most commonly applied and misunderstood sections of the Act. You should always consult your accountant or tax specialist when dealing and planning with your shareholder loans.

I would like to thank Lorenzo Bonanno, tax manager for BDO Canada LLP for his extensive assistance in writing this post. If you wish to engage Lorenzo for tax planning, he can be reached at lbonanno@bdo.ca

The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

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

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.

Monday, August 12, 2019

The Best of The Blunt Bean Counter - No Will? You're in Famous Company

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, 2018 post on famous people who did not leave a will and in many cases, caused havoc for their loved ones and/or their estate? If you do not have a will or it is outdated, please get it drafted or updated.

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Readers of my blog are aware of my inclination to harp on the fact that you should have a will, and where you have a will in place, that it should be updated for significant life events. I also think it is important to have up-to-date powers of attorney for financial and personal care. But today, we are talking wills and the lack of such for some famous people and the lessons you may learn from their estate planning miscues.

In my blog post “Canadians Don’t Have the Will”, I highlighted a 2016 survey conducted by Legalwills.ca, that found 62% of Canadians do not have wills.

The 62% number is astronomical and in my not so humble opinion, just irresponsible. I thought of this survey, when I was recently told by a colleague that they were working on an estate where the first spouse passed away without a will, and then the surviving spouse died a couple years later without ever having a will drafted. I can maybe understand that some couples don’t have wills based on the premise “everything will just automatically flow to the surviving spouse”, although this thinking may be flawed depending upon your province of residence as noted in this link for the laws of Ontario when you die intestate (without a will). But for a surviving spouse to not have a will drafted is just beyond my comprehension.

Since the advice of accountants, lawyers, finance columnists and bloggers is obviously being ignored, I thought instead of lecturing that you should have a will, I would reflect on the folly of not having a will by looking at famous people who have died intestate and the messes they left behind.

Please note: I have no ability to confirm that these people did not have wills and I am relying on articles and other internet sources for this list, so I cannot guarantee its accuracy. Some of the stories in respect of these people’s deaths and estates are fascinating. You may wish to read in detail the links and source documents I provide below.

Famous People Who Supposedly Died Without a Will


The Musicians

There seems to be a correlation between being artistic and financially irresponsible as noted by the extremely famous musicians I note below. This does not surprise me, as I have suggested in prior posts on naming executors, that at the risk of generalizing you will want someone more anal than artistic to carry out this task.

Prince


In this article by People Magazine it was reported: “A Minnesota judge has made it official – despite Prince’s estate being worth an approximated $250 million, the singer did not have a will in place to declare the distribution of his assets. A hearing was held Wednesday morning, according to court documents obtained by PEOPLE, and the judge has approved Bremer Bank, the institution Prince trusted with his finances over the years, to move forward with handling his estate – both personal and financial business”.

Prince's former manager, Owen Husney, in this USA today article said “he was too smart to have overlooked something that crucial and he had teams of lawyers, business managers and accountants over the years who would have advised him it was crucial”. Assuming that no will ever surfaces, it is mind numbing that with so many advisors, Prince did not have a will in place and it could have fallen through the cracks (unless he just refused to have one drafted).

"It's astonishing, absolutely astonishing that he did not have a will," says Jerry Reisman, an estate lawyer on Long Island who's been following the case. He predicted trouble ahead. You're going to have 'siblings' coming out of the woodwork alleging they are siblings. Everyone is going to be fighting over this estate.”

Will Lesson #1: Run Out and Write Your Will 

Hendrix, Marley and a Cast of Thousands


In this LegalZoom,com article the writer notes that both Jimi Hendrix and Bob Marley died without wills and that their estates were subject to legal battles for years. Musicians such as Prince, Jimi Hendrix and Bob Marley have complicated estates due to the publishing rights they hold on their music, the typically massive demand for their music once they pass away and the value in unreleased material that is often released posthumously.

Other musicians that have purportedly died without wills include Kurt Cobain, Barry White, Tupac Shakur, James Brown, Sonny Bono and Amy Winehouse.

Athletes

Many athletes are known for blowing fortunes, but you would again think that their advisors would have ensured they had wills in place, but that apparently is not the case, or the athletes ignore their advice.

Steve McNair


Mr. McNair who played in Super Bowl XXXIV as the starting quarterback for the Tennessee Titans and was the NFL’s Co-MVP in 2003, did not have a will. He also had, in addition to his wife and children, a girlfriend - who murdered him in a murder-suicide. The sad details of this case can be read in this Probate Lawyer blog. 

If this story is not tragic enough, this Family Archival Solutions Inc. article discusses how McNair’s mother subsequently lost her home because Mr. McNair had not put his mother’s name on the house or made provision in a will for her to inherit the property as he had intended for her.

Will Lesson #2: Unintended Consequences Transpire when a Will is Not Drafted

Lamar Odom


This is a story about almost dying without a will. In 2015, former NBA star and ex-husband of Khloé Kardashian was hospitalized after being discovered unconscious at the Love Ranch, a brothel in Crystal, Nevada. Mr. Odom’s heart supposedly stopped several times and was touch and go to live. Luckily for him, he survived the ordeal.

As Mr. Odom supposedly did not have a will, it was reported that if he died, his estate would have all gone 1/3 to Khloé and 2/3 to his children. It is my understanding that Odom and Khloé had a good relationship despite their divorce and she was there at his side while he recovered and she did not want his money. So this is not a story about an ex-spouse trying to get something that was not hers, but clearly reflects that an ex-spouse may be entitled to your estate or part of it, if you are not careful.

Will Lesson #3: When You Do Not Have a Will, Your Ex-Spouse May Inherit Part of Your Estate

Other Famous People Who Died Without a Will (or Updating Their Will)


Martin Luther King


Mr. King who was assassinated on April 4, 1968 was one of the best known civil rights activists in the World. His “I Have A Dream” speech made in 1963 during the march on Washington is known as one of the finest speeches ever given. Unfortunately, when assassinated Mr. King was only 37 years old and did not have a will per this Forbes article.

This LA Times article discusses how the children are threatening his legacy as the estate battles on 47 years after his death in respect of his tomb, sermons and memorabilia.

Will Lesson #4: When You Die Intestate You Create Possible Conflict amongst Your Family

Pablo Picasso


As detailed in this 2016 article by Vanity Fair on the estate of Pablo Picasso,  Picasso did not have a will and left over “45,000 works, all complicated by countless authentications, rights and licencing deals”. The legal fees on this estate have were supposedly over $30 million.


Will Lesson #5: When You Die Intestate, Your Estate Can Be Withered Away in Legal Fees

Heath Ledger


As I noted in the introduction, I not only stress the importance of a will, but that it must be updated to reflect significant life events. Heath Ledger died of an accidental drug overdose in 2008 during the editing of the Dark Knight Batman movie in which he played the Joker and posthumously won the Academy Award for best supporting actor.

Mr. Ledger had a will drafted a few years earlier in which his parents and sisters were beneficiaries. He however, had neglected to update his will upon his marriage to actress Michelle Williams and on the birth of their daughter Matilda. However, unlike many messy and nasty estate fights highlighted in this blog post, Heath’s family as detailed in this People article altruistically handed over the entire estate to Matilda. It is nice to see some kindness amongst the greed and fighting of the other estates.

Will Lesson #6: Update Your Will for Life Events, or You May Negate the Benefits of Having a Will

Howard Hughes


As per Wikipedia, Howard Hughes “was an American business magnate, investor, record-setting pilot, film director, and philanthropist, known during his lifetime as one of the most financially successful individuals in the world. He first made a name for himself as a film producer, and then became an influential figure in the aviation industry. Later in life, he became known for his eccentric behavior and reclusive lifestyle—oddities that were caused in part by a worsening obsessive–compulsive disorder (OCD), chronic pain from several plane crashes, and increasing deafness”.

As discussed in this New York Times article it took over 20 years to sort out the estate of the reclusive Howard Hughes. Mr. Hughes did not leave a will and his estate was subject to various forgeries.

Will Lesson #7: If You Have Not Decided to Draft or Update Your Will After Reading These Stories, I Give Up!

While most of these famous people had substantial estates, the lesson is still the same for the average person. Have a will drafted (and powers of attorney) so that you ensure your estate goes to whom you wish and it is not frittered away on legal battles that not only cost significant sums, but destroy the lives and relationships of your loved ones.


The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

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

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.

Monday, July 29, 2019

The Best of The Blunt Bean Counter - Common Investment Errors

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 an August, 2011 blog on common investment errors I have observed over the years.

I am involved in wealth advisory for some of my clients as their wealth quarterback, co-coordinating their investment managers and various professional advisors to ensure they have a comprehensive wealth plan. I sort of chuckled when I reviewed this list, as not much has changed in the last eight years.

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Duplication of investments

Duplication or triplication of investments, which can sometimes be interpreted as diworsification, is where investors own the same or similar mutual funds, ETFs or stocks in multiple places. A simple example is Bell Canada. An investor may own Bell in their own “play portfolio,” they may also own it in a mutual fund, they may own it in a dividend fund and they may own it again indirectly in an index fund. The same will often hold true for all the major Canadian banks. Unless one is diligent, or their advisor is monitoring this duplication or triplication, the investor has actually increased their risk/return trade off by overweighting in one or several stocks.

Laddering

This is simply ensuring that fixed income investments such as GICs and bonds have different maturity dates. For example, you should consider having a bond or GIC mature in 2019, 2020, 2021, 2022, 2023 and so on, out to a date you feel comfortable with. However, many clients have multiple bonds and GICs come due the same year or group of years. The risk of course is that interest rates will spike, creating a favourable environment for reinvesting at a high rate, and you will have no fixed income instruments coming due for reinvestment. Alternatively, rates may drop and you have all your fixed income instruments coming due for reinvestment, locking you in at a low rate of return. With the current low interest rate environment, you may wish to speak to your investment advisor about whether shortening your ladder a year or two makes investment sense for you; however, that ladder should still have maturity dates spread out evenly over the condensed ladder period.


Utilization of capital gains and capital losses

Most advisors and investors are very cognizant of ensuring they sell stocks with unrealized capital losses in years when they have substantial gains. However, many investors get busy with Christmas shopping or business and often miss tax loss selling. Even more irritating is that I still occasionally see clients paying tax on capital gains as their advisors have not reviewed the issue with them and crystallized their capital losses. Always ensure your advisor has reviewed with you your personal realized gain/loss report by early December, and the same holds true for your corporate holdings, except the gain/losses should be reviewed before your corporate year-end.

Taxable vs. non-taxable accounts

There are differing opinions on whether it is best to hold equities and income producing investments in your RRSP or regular trading account. The answer depends on an individual’s situation. The key is to review the tax impact of each account. For example, if you are earning significant interest income in your trading account and paying 53% (when I wrote this article initially, the rate was 46%, quite the jump in rates) income tax each year, should some or all of that income be earned in your RRSP?  Would holding equities in your RRSP be best, or do you have substantial capital losses you can utilize on a personal basis? There is not necessarily a one-size-fits-all answer, but this issue must be examined on a yearly basis with your investment advisor. (In 2017 I wrote a two-part blog series on considerations for tax-efficient investing, which you may wish to review. Here are the links: Part 1 and Part 2.)

Tax shelter junkies

I have written about this several times, but it bears repeating, I have observed several people who are what I consider "tax shelter junkies" and repeatedly buy flow-through shares or other tax shelters, year after year.  I have no issue with these shelters; however, you must ensure the risk allocation for these type investments fits with your asset allocation.


Beneficiary of accounts

This is not really an investment error, but is related to investment accounts. When you have a life change, you should always review who you have designated as beneficiary of your accounts and insurance policies. I have seen several cases of ex-spouses named as the beneficiary of RRSPs and insurance polices.

The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

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

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.

Monday, July 15, 2019

The Best of The Blunt Bean Counter - Estate Planning - A Tale of a Father's Selfless Act of Love

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 January 2012 blog on a father's selfless act of love. That act: getting his estate in order so he did not leave his estate in disarray for his loved ones.

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Lynne Butler, of Estate Law Canada blog fame, had a blog titled “What my father’s death taught me about estate planning." What was interesting about this blog post, is that Lynne essentially got out of the way and just said you have to read this amazing article. I wondered why Lynne had so little to say until I actually read the guest post on the Getting Rich Slowly blog. Essentially, Jody (the guest poster) relayed how her father planned while he was alive, to make her job as an executor as stress free as possible. If there was ever a selfless act of love in a financial sense, this is it.

This blog was of particular interest to me as I have written several blogs on this topic: Where are your Assets, Speak to your Executor-surprise only works for birthday parties, not death and You Have Been Named an Executor Now What. Like Lynne, I was amazed at how much thought Jody’s father put into his estate. This contrasts with the average person, who often does not even inform their executor that they have been named, let alone provide a roadmap that can be followed once they are gone.

In her guest blog, Jody discusses the steps and actions her father undertook while he was alive to minimize the fees associated with administering his estate, and just as importantly, to keep the process as stress-free for his daughter as possible. While I cannot do Jody's guest blog justice (you really should open the link above and read it), the following is a summary of some of the steps her father took to ensure he minimized Jody's stress in administering his estate.

To help assist in administering your estate, you may wish to download the BDO Estate Organizer so that you have a detailed document for your family and/or executor.  You can link to the estate organizer and download the document here.

Professional team


Jody’s dad not only built a team of advisors - a banker, accountant, insurance agent and lawyer - but he also ensured that he introduced his daughter to each of these advisors while he was alive and ensured that she had their contact information. Think about how smart that was. How much easier is it to communicate and work with someone you can put a name and face to?

Fees


Jody’s dad negotiated the estate fees with his lawyer down to 2% from the typical 4-5%. One can easily see why the lawyer accepted the lower fee. Jody’s father was so organized; the estate probably took one-quarter of the time most estates need to settle. Not only did he negotiate the fee, but he also put those fees aside in a separate account.

Joint Accounts


Jody’s father added Jody to his bank accounts, which allowed her to seamlessly pay bills. As Jody is American and there are no probate fees in the U.S., this was not done for probate purposes, but only for easing the administration of the estate for Jody. See my blog on Joint Bank Accounts Documenting your Intention, to understand some of the issues of using joint bank accounts in Canada.

 

Preparing for death


Jody’s father pre-paid his funeral expenses and even had a master binder that included funeral instructions - he told Jody to go to “F” for Funeral in his binder. Jody essentially had nothing to do but follow instructions.

In addition, her father left extra money for miscellaneous expenses that always arise on an estate. The extra money, whether left in a joint accounts or actually just given to a responsible child, is very important in Canada. The banks will typically pay for the funeral expenses and the probate fees, but access to the funds for any other expenses can be problematic until probate is authorized. Consequently setting aside funds so your executor will not need to beg the bank for access to accounts is a great idea.

Executor Fees


When Jody’s father informed her she would be named executor and he offered compensation, she, like many children, declined because she did not feel that she should charge her father.

However, after undertaking the executor’s job, Jody had this to say: “After he passed away and I realized all that it entailed, I found myself thinking that maybe I should have taken him up on that offer. Being the executor of an estate — even a very well-planned estate — took about 10 to 15 hours a week for months. It’s a big job. I found myself resenting my brothers since I was doing it all.”

The above is a very insightful and honest comment and is the reality in many estates. Jody’s father showed even more insight when he disregarded Jody’s protestation on accepting an executor fee as he had arranged to give her 1% extra when his IRA was distributed.

I cannot say it better than Jody


I conclude with one more quote from Jody. “I honestly consider my father’s financial planning to be a selfless act of love. Despite his generosity, I would trade every last cent for ten more minutes with him. When someone you love dies, it’s brutal. Emotionally, and physically. Trust me; you really are in no state to make these types of financial or legal decisions on your own.”


The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

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

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.

Monday, July 1, 2019

5 Lessons Investors Can Learn from the Raptors' Championship Run

The Toronto Raptors are the toast of the town and the talk of the National Basketball Association. Fresh off a championship run that surprised some pundits, they now have basketball higher-ups wondering how to replicate their success.

For The Blunt Bean Counter, I’m more interested in the lessons investors can glean from the Raptors’ success – especially tips around the psychology of investing. Both sports and investing mix hard analysis with emotion. We all know the role emotions play in sports. Less known are the psychological challenges of high-stakes investing. Researchers call them behavioural biases.

As Canadians continue to bask in the glow of Raptor success, here are five lessons investors can learn from this historic championship run. 

#1: Herd mentality


The Raptors won a championship by going their own way. President Masai Ujiri set the tone with his bold acquisition of Kawhi Leonard – who was recovering from injury and had played only nine games the previous season with the San Antonio Spurs. Coach Nick Nurse adapted the maverick approach to the hardcourt, where he innovated on both offence and defence to help the Raptors win their first championship.

What investors can learn


Following the herd can be tempting as an investment strategy — popular stocks and funds often look like successful stocks and funds. In reality, smart investors take note of the investment climate but also stop to question the hysteria of the markets. Staying true to your investment policy and principles is important not only for picking stocks, mutual funds and exchange-traded funds, but also for timing decisions to buy and sell.

Avoiding the herd doesn’t need to push investors to the extremes of contrarian investing – but it does require independence and well-defined goals.

#2: Overconfidence


All athletes need to master that balance of confidence and overconfidence – avoiding the pull of “too high or too low.” The Raptors made a mantra of the practice, by preaching the benefits of “staying in the moment.” Because when playing top-flight teams like the Golden State Warriors and Milwaukee Bucks, an overactive ego can prove as damaging as a faulty jump shot.

What investors can learn


What goes for athletes is also true for investors. So many investors think that a few smart investing moves will translate into long-term investing genius. In this way, overconfidence ties into self-attribution bias, when investors believe their success can be attributed only to their investing acumen. If only investing were that straightforward. Even legendary investor Warren Buffett has made mistakes while wrestling with the limits of human intelligence and the inevitable factors beyond his control.

#3: Diversification


The Raptors present an interesting case of a superstar paired with balanced team. While Kawhi Leonard proved pivotal to the team’s success, several Raptors contributed double-digit scoring. This led commentators to describe the Raptors as one of the more balanced championship teams in recent memory. The Raptors’ tendency towards balance only grew as the postseason progressed, and helped the team compensate for a Kawhi limited by injuries and opponents’ double-teaming defences.

What investors can learn


It may constitute almost the first rule of investing, but we tend to forget it: diversify your holdings. Much as basketball teams can’t rely on scoring from one or two sources, investors can’t depend on big gains from a small number of similar investments. Portfolio risk needs to be spread among a variety of investment vehicles and various sectors.

Some investors fail to diversify due to familiarity bias. The theory goes that people trust – and select investments based on - what they know best. They will therefore focus on domestic stocks and funds or those stocks and funds that are household names. By investing in international stocks, adding holdings in several sectors and including both low- and high-risk investments, investors put themselves in a better position. A word of caution: when exploring less familiar investments, seek out dependable research and advisors.

Familiarity bias can also be viewed as a home vs. international bias from an investing perspective.

As I am writing this, Kawhi has not yet decided whether to stay with the Raptors or return home to play for the Los Angeles Clippers, the other rumoured option. He is weighing many factors, but his choice pits Los Angeles, where he was born and raised and has family and friends, against Toronto, an international destination that is somewhat familiar but is still a foreign location and certainly not home. If Kawhi looked at this from an investment perspective, clearly he should sign with Toronto. (And now I’m showing my own bias – for the Raptors.)

#4: Worry


It’s not just sports fans who experience anxiety as they live and die with their teams’ fortunes. Even professional athletes have been known to lose sleep due to worry, as former Raptor Jonas Valanciunas has acknowledged. When tired athletes bring the previous night’s restlessness to the court, their performance generally suffers. Raptors management recognizes this, and educates the players on how to use rest to prepare their bodies and minds for competition. This year’s edition of the Raptors was also helped by a coach, in Nick Nurse, who cultivated a calming culture.

What investors can learn


Losing sleep may not directly influence investing performance in the same way as it drives on-the-court results. But researchers have uncovered interesting ties between worry and investing. Victor Ricciardi, who studies the psychology of investing, found that increased worry about a stock decreases an investor’s risk tolerance for that stock and the chances they will buy it. People may want to control their worries – but we all struggle to master our emotions around investing. For some this can lead to sleepless nights, which can certainly impact us at the office and at home. Part of investing is matching our risk tolerance to our rest tolerance.

#5: Anchoring


Raptors’ fans may not know the anchoring bias by name, but they know it all the same. Years of seeing good teams bowing out in the playoffs – sometimes in embarrassing fashion – conditioned fans to expect defeat for the team. Their beliefs about the future were “anchored” in past Raptors performances. So much so, in fact, that one American sportswriter asked Raptors players about Torontonians’ so-called defeatism. Acquiring Kawhi Leonard helped shift fans’ perceptions, but many still found it difficult to believe this year would be different. Now a championship has given Raptors’ fans an entirely new, and positive, anchoring event to form their expectations in the future.

What investors can learn


Anchoring bias can unsettle our portfolios in surprising ways. The classic investing example concerns purchase price: investors hold on to a stock because they remember their purchase price, not the stock’s decrease in value. They use that original price as an anchor. On the other end of the spectrum, investors may exhibit an extremely low tolerance of risk based on past performance. Think of a new investor who lived through the record one-day TSX drop in 2008 and runs from the markets as a result. Even the investing styles of our parents can anchor our perceptions of the correct way to invest.

Anchoring, like all investing biases, is difficult to avoid. Even our best attempts at fully rational investing behaviour can’t rid us of the emotions that make us human. What we can do is know our personal biases, understand why they may exist and access the best research and professional advice possible so that facts and data inform our investing decisions. And be sure to ask questions; even advisors have their investing biases. Professional advisors should be able to explain their investing recommendations to you.

I hope you found this post fun and informative. As this is the last original post until September (I will post The Best of The Blunt Bean Counter a couple times a month in July and August), I wish you a great and safe summer.

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