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, 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.

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, June 17, 2019

Making the most of your pension income tax credit

Say a word for the pension income tax credit. It may pack a comparatively smaller financial punch, but ignore it at your peril. As part of a comprehensive wealth planning strategy, it plays its own modest part in helping Canadians make the most of their retirement savings.

I’ve asked my colleague Jeffrey Smith to break down the ins and outs of this sometimes underappreciated tax credit. Jeff is a Manager in BDO’s Wealth Advisory Services practice, based in Kelowna, BC.
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What is the pension income tax credit?


The pension income tax credit (PITC) is a tax credit that you can apply to the first $2,000 of eligible pension income, which would result in a tax savings of 15% of eligible income. The maximum savings federally is $300 ($2,000 x 15%), plus a provincial credit depending on the province you live in.

The PITC is non-refundable, so you cannot carry it forward in subsequent years. You use it or lose it.

That may lead to your next question: what is eligible pension income?

Eligible pension income


There are different sources of income that are eligible to claim the PITC. What’s interesting is that age may factor into eligibility. If you’re under 65, the PITC is available for the following pension income from as early as age 55:
  • A life annuity payment from a superannuation
  • Payment from a specified pension plan
  • Annuity payment arising from the death of a spouse under a Registered Retirement Savings Plan (RRSP), Registered Retirement Income Fund (RRIF), or Deferred Profit Sharing Plan (DPSP).
If the above income is elected split pension income, your spouse or common law partner will qualify for the PITC as well.

If you do not have the income sources noted above, when you reach age 65 there are many new types of income that qualify for the pension amount. These types of income are:
  • Payment from an RRIF
  • Interest from a prescribed non-registered annuity
  • Payment from a foreign pension
  • Interest from a non-registered GIC offered by a life insurance company.

Non-eligible pension income


Clients are sometimes surprised by the list of benefits that don’t qualify for the PITC – especially when it comes to government benefits. Income from the following sources generally does not qualify for the pension amount:
  • Old Age Security
  • Canada Pension Plan
  • Death benefits
  • Quebec Pension Plan
  • Retirement compensation agreements
  • Foreign-source pension income that is tax free in Canada
  • Salary deferral arrangements
  • Income from a U.S. Individual Retirement Account (IRA)

Potential tax savings


Now that we have identified what does and what does not qualify for the PITC, below is an example of the tax savings on the federal level for each marginal tax rate. For the purposes of this discussion, we have ignored federal surtaxes that apply on personal rates.

Federal tax rate
15%
22%
26%
29%
Eligible pension income
$   2,000
$   2,000
$   2,000
$ 2,000
Federal tax
        300
        440
        520
      580
Pension tax credit
    -   300
    -   300
    -   300
  -   300
Net federal taxes payable
$          0
$      140
$      220
$    280

Each province has its own respective tax rates and pension tax credit limits, so the total tax savings will vary by province.

Tax planning opportunities


If you have income that is eligible for the PITC, you should use it. However, if you are 65 or older and do not have eligible income, you can still take action to use this credit for you and your family. Here are three mechanisms on which we advise clients:
  • Transfer $14,000 of an RRSP to an RRIF. This will allow you to draw $2,000 per year and use the PITC from 65 to 71 when your RRSP converts to an RRIF naturally. This is an opportunity whether you need the income or not.
  • Transfer any unused PITC to a spouse who earns pension income greater than $2,000 and has not used the pension credit themselves.
  • Transfer a Locked-in Retirement Account to a Life Income Fund and annuitize.
These recommendations should be reviewed on a case-by-case basis to ensure that any pros and cons have been outlined before making a decision. Reach out to your advisor to assist you with structuring your assets in the most tax-efficient manner.

Jeffrey Smith - CPA, CA, CFP - is a Manager in BDO’s Wealth Advisory Services practice and can be reached at 250-763-6700 or by email at jrsmith@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, June 3, 2019

Should I commute my pension?

Defined benefit pension plans make some people very happy – and others just a bit jealous. But they’re not all fun and games. Their recipients – and the recipients’ families – must ask themselves several questions when they leave their job. Here is a key one: should I take the defined benefit or go for the commuted value?

Some people may ask, aren’t defined benefit plans a thing of the past? Yes and no. While the number of defined benefit plans offered by private sector employers in Canada has declined over the last 10 to 15 years, they still play a vital role in the retirement of over 4 million Canadians, according to 2016 Statscan figures. They also remain de rigueur in the public sector.

Today, BDO’s Tom Mathies – Senior Advisor, Wealth Advisory Services – drops by Blunt Bean Counter to analyze whether you should keep the pension as is or take the commuted value as a lump sum.
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The families my team deals with on a daily basis ask many questions about retirement. Often they boil down to one simple concern: “Where do I get my ‘next’ paycheck from?” That’s why the question of defined benefit vs. commuted value is so crucial. By taking the commuted value, people add a variable into the certainty of a defined benefit pension.

Figuring out where to start can be overwhelming for many. We recommend keeping track of your spending for six months to a year before retirement. This helps you understand your spending decisions by looking at your long-term habits and trends. It serves as a first step in deciding whether to commute your pension.

Aside from spending habits, the factors in deciding whether to take the commuted value over the defined pension are as varied as the number of Canadian families. There is no universal rule to make this an easy choice. However, let’s discuss a few of the considerations.

What is a defined benefit plan?


A defined benefit plan provides a predetermined monthly income after retirement based on the formula stated in the plan. Typical factors in determining the benefit include number of years of service, age at retirement, amount of the contributions into the plan, and average income.

Many people believe that having a defined benefit pension is the retirement equivalent of receiving Willy Wonka’s “golden ticket.” These plans do provide peace of mind and potential income security. However, they are not foolproof. Cautionary tales like the Sears bankruptcy – though anomalies - illustrate how fragile defined benefit guarantees are for pensioners.

In addition, governments provide little protection in case the company goes belly-up. Ontario is the only province to provide such a guarantee, through its Pension Benefits Guarantee Fund.

Bridge benefit


To support retirees who retire early, many defined benefit plans offer a bridge benefit option. This bridges the gap years until age 65, when many people start receiving Canada Pension Plan (CPP) benefits. While Canadians can choose age 60 as their start date, they will receive lower individual payments than if they begin later.

Bridge benefit payments are considered an additional benefit above the calculated lifetime pension. If retirees commute their pension, they don’t receive the bridge benefit. Some pensioners choose to receive their reduced CPP benefit while also receiving a bridge benefit. Old Age Security (OAS) benefits also often begin at age 65 and will therefore replace some of the bridge benefit.

We urge people to consider all of their taxable income when applying for OAS, as OAS benefits are reduced when net income exceeds $77,580. If net income reaches $125,696 in 2019, OAS will be fully clawed back beginning July 2020. For those pensioners with higher income between ages 65 and 69, OAS can now be deferred to age 70. Those pensioners who opt to defer to age 70 will receive a benefit that could be as much as 36% greater than those who elect to take OAS at 65.

Survivor benefits


Defined benefit plans also offer a number of survivor benefit options in case the pensioner passes away after retirement. These ensure at least 66.67% of the monthly pension is available to their spouse. Pensioners may instead choose a survivor pension that provides a greater percentage - 80% or 100% - of the monthly benefit. If you choose a higher survivor benefit, the monthly pension will be lower to accommodate for the increased benefit to your spouse. The survivor options for loved ones of a pensioner who dies before retirement, or for a pensioner who dies without a spouse in retirement, vary based on the pension.

What is the commuted value?


People who decide their commute their defined benefit pension receive a lump sum amount instead of a monthly payout.

The commuted value of an individual’s pension is calculated by an actuary. It represents the net present value of the future obligation to fund a retirement benefit, based on the years of service and lifetime average income earned during the years of membership in the pension, to use the description of Fraser Lang of GBL Inc. Once calculated, a portion of the commuted value can be transferred to a locked-in retirement account (LIRA), and the balance comes out as taxable income. Every pension calculates the commuted value differently.

Consider a pension that pays $70,000 per year for life. What size portfolio would one need to generate that kind of income? Using the 4% rule, you would need a portfolio of $1.75 million to maintain your principal. So would a pensioner be further ahead by taking the commuted value?

In this example, the commuted value would be about $2 million. Of this value, approximately $650,000 would be eligible for transfer to a LIRA, and the balance comes to the pensioner as taxable income. After paying tax, they will be left with about $1.35 million in a mix of registered and non-registered money.

One note of warning: commuting a pension provides the recipient with liquidity, but also with a potentially large tax bill.

Defined benefit vs. commuted value


Deciding between taking the relative safety of a defined benefit and the lump sum of commuted value demands that you ask some tough questions:
  • Are you a person who needs the structure of a defined budget to keep you on track?
  • Do you like the idea of predetermined income for yourself and your spouse in case you pass away first?
  • Do you believe your company or organization is in a good position to fund pension liabilities for many years to come?
  • Is the defined benefit indexed to inflation?
  • Is the defined benefit plan underfunded?
  • Does the plan provide a greater benefit than what could be reasonably achieved in other stock or bond investments?
  • Do you require immediate liquidity?
  • Would you rather invest the funds directly or with the help of an advisor – or leave them in the plan?
  • Would you like to leave an inheritance for the next generation without purchasing a life insurance policy?
Deciding between keeping the defined benefit and choosing the commuted value can be one of the toughest decision retirees make. In the end, the answer will often come down to those familiar investment variables – lifestyle, risk profile, and finances.

Tom Mathies is a senior advisor in the Wealth Advisory Services practice at BDO. He can be reached at tmathies@bdo.ca, or by phone at 519-432-5534.

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, May 20, 2019

Retiring at a Market Peak – Why it May Not Be as Bad as You Think

In January of 2014, I took on my most ambitious task (never to be repeated) in writing my blog: I decided to write a six-part series titled “How Much Money do I Need to Retire? Heck if I Know or Anyone Else Does!”

The first four posts dealt with various studies and reports on the appropriate withdrawal rate in retirement. The consensus seemed to be that taking 3 or 4% (depending upon your perspective) of your inflation-adjusted nest egg each year (or “withdrawing” it, to use the term that gives the withdrawal rate its name) would last you approximately 30 years. Those four posts can be found here:
Post 5 dealt with the factors that could impact your retirement funding, such as longevity, inflation and sequence of returns. That post can be found here.

In my final Post 6, I provided some simple retirement nest egg calculations to see if I could determine a reasonable range for the magic retirement number. That post can be found here.

Sequence of returns


In writing the above series, it became evident that not only is determining the correct withdrawal rate and approximate dollar value needed to retire a complex and somewhat impossible task — but also that the timing of your retirement could cause a significant variance in your financial position. This concept, known as “sequence of returns,” says that market performance just after your retirement date could sideswipe your retirement plans. I discussed it in my fifth post and it was very intriguing to me.

In that post I quoted retirement guru Wade Pfau as saying:

“In fact, the wealth remaining 10 years after retirement combined with the cumulative inflation during those 10 years can explain 80 percent of the variation in a retiree's maximum sustainable withdrawal rate after 30 years.”

In plain English, Wade is saying this. Let’s say two people have the same exact rate of return over 10 years. If one person’s return is better in, say, years 1 to 5, and the other’s is better in, say, years 6 to 10, the interaction between the rate of return, inflation and the standard rate of withdrawals will favour the person with the front-loaded higher returns. As a result, they will be able to continue their standard withdrawals for a longer period.

Since numbers probably illustrate this issue best, it may be useful to look at exhibit 4 on page 7 of this report from Fidelity Research written by W. Van Harlow and Moshe A. Milevsky.

Retiring at a market peak


Quite honestly, the fact that the arbitrary sequence of returns could drastically affect a well-planned retirement has always freaked me out. My luck isn’t too bad, but I just know that the market will peak the year I retire and fall for several years after.

I was thus very interested in an article titled “Solace for those worried about retiring at a market peak” (paywall protected), written by Norman Rothery, the founder of Thestingyinvestor.com in The Globe and Mail in late January of this year.

For those of you who cannot access the article, essentially Norman modelled an investor who retired at the top of the stock market in 2000 with $1 million invested in a balanced portfolio and reviewed the portfolio value using withdrawal rates of 3, 4, 5 and 6%. (“Balanced” in this case means half in the S&P/TSX Composite Index and half in the S&P Canada Aggregate Bond Index.)

What Norman found is that the portfolio using a 4% withdrawal rate lost 30% of its real value by the end of 2002 but climbed back to nearly $680,000 in inflation-adjusted terms by the end of December 31, 2017. He noted that while this unfortunate retiree did not have the greatest experience, the odds are that the 4% rule will still survive for 30 years, given the capital balance after 18 years. (It is important to understand: Norman is not saying that they did as well as the lucky investor who retired into a bull market. He is saying that the 4% rule still appears to work in that the retiree likely can continue to withdraw their intended yearly amount and make their savings likely last for at least 30 years.) 

Norman noted that the more aggressive withdrawal rates did not fare well, and this aligns with our discussion above. He suggests a 3% withdrawal rate would provide a greater margin of safety, but the model to date, reflects those who retire into a peak market should still make it through with 4% if they have a conservative retirement plan.

So, the moral of the story is to plan your retirement to occur at the bottom of the market. But seriously, this article should provide some hope to anyone unlucky enough to retire at a market peak who is using a 4% withdrawal rate and especially those using a 3% withdrawal rate.

Monday, May 6, 2019

How to Vanquish the Odds and Preserve Family Wealth

There’s a pithy saying that galvanizes wealth management professionals and wealthy families: “From shirtsleeves to shirtsleeves in three generations.” It or its variants exist around the globe — from Canada to Scotland to China.

The English-language version paints a perfect image: the first generation rises from poverty – shirtsleeves – to build wealth. The second generation may retain or even grow the nest egg. By the third generation, that wealth has eroded or vanished. The bottom line: While founders often build incredible wealth, subsequent generations excel at losing it.

This week I’d like to bring you the sage words of my colleague Jeff Noble. Jeff has advised hundreds of business families on how they can beat the odds and preserve their wealth to the fourth generation and beyond. I wanted to get his take on beating the three-generation curse.

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We all have a different set of thoughts and feelings on the value of life and wealth. When considering a multi-generational wealth plan that will endure and be the basis of successful and sustainable wealth transition, it is critical to clarify and communicate our values. This is no idle exercise. By sharing our philosophy about wealth creation, wealth management and wealth divestiture — we can increase the chances that the wealth will truly be generational.

Here’s the challenge: The time-honoured statistics on successful wealth transition are not promising. Wealth creators are often painfully aware that at least two-thirds of the time, wealth erodes or even disappears when it gets in the hands of the next generation or the one after that.

Building a wealth philosophy


Defining principles and values and developing a belief system – a philosophy – from those principles and values with your family will significantly increase the opportunities for you and your family to beat the statistics.

As constant and reliable as the true north in navigation tradition, choosing direction and purpose for wealth will define your legacy and help your beneficiaries and their beneficiaries to be best prepared to receive and to give. Some examples:

  • Don’t give away the golden eggs. The goal is to teach family how to look after the golden goose.
  • Recurring wealth is like gardening. You enjoy the flowers and then nurture the plant with care and attention so you can enjoy even more prolific blooms the next season.
  • Your standard of living is not equal to your cost of living. Always live within your means, not to a standard to which you may feel entitled.
  • Spend, save, give. Buy the things you need. Set aside money to buy things in the future. Donate money to help people, animals and the environment.
  • Leave the word a better place. Some wealthy families make a point of educating their children on this mantra: I have a personal sense of responsibility to leave the world a better place than it was when I got here.

 

The three Cs of wealth preservation


In my experience, families that successfully beat the odds at preserving and even increasing wealth through multiple generations excel at what I call the three Cs: collaboration, communication and common vision. This is what family governance is all about.

When speaking about collaboration, we speak of working with others among generations, between generations and with a group of external advisors to make the best decisions, together.

To do that, positive communication is critical. This will tie right back to family values as to how we treat each ourselves and how we treat others. Understand and learn from history, relationship dynamics, moods and personalities. Use structure and deal in facts. This will create a positive and safe environment for open, honest and productive communication.

Perhaps the most important of the three Cs is a common vision. This is your wealth-strategy true north. With this alignment of purpose, the focus is not on any individual “me.” The focus is on “us.” Adopt a future focus when managing your wealth for the long term.

Introducing a new definition of wealth


This brings me to a new definition of wealth. When we think of wealth, or capital, we naturally default to tangible items like money, stocks, bonds, real estate and the like. This is financial capital.

The other types of capital include human, intellectual, social and spiritual capital:

  • Human capital is a family’s greatest wealth. It comprises all the individuals that make up the family.
  • Intellectual capital is the sum of all the information that those individuals know.
  • Social capital is the quality and quantity of relationships within the family’s network.
  • Spiritual capital covers the deepest values that express the nature of the family.

And when you think about it, if we do not look after the human capital and all that means, the financial capital has precious little chance to endure.

Yes, each of us has a different set of thoughts and feelings on the value of life and wealth. Defining your family’s principles and values – the true north that can steer your family through the blips that will no doubt arise – is fundamental to creating alignment for the future and a common vision supported by positive communication and collaborative decision making.

Jeff Noble is a senior consultant and family enterprise advisor in the BDO Advisory Services practice. He can be reached at jnoble@bdo.ca, or by phone at 905-272-6247.

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, April 22, 2019

What is your Wealth Advisor Thinking? One Professional Reveals Lessons Learned from her Clients

Getting professional wealth advice – or really any professional advice – can be frustrating. We are asked to open up our lives and disclose our thoughts to someone who is initially a stranger. Personally, I’d love to know what my professional advisors are thinking on a whole range of issues.

This week senior wealth advisor Carmen McHale of BDO Canada LLP takes a step from behind the desk to share her thoughts on the past five years of dispensing wealth advice. She also wanted to thank two colleagues – Indy Sebastian and Eric Wipf – for their help in reality-checking her thoughts.
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When asked to write about what I have learned from clients in the past five years, my initial thought was – everything. But that might take too long to cover. So instead I’ll focus on one area that I find fascinating: the emotional biases I first learned of in textbooks and now see in investing practice. Emotional biases arise from impulse, intuition and feelings and can result in irrational decision-making. Because they are all about how we feel and react – they are impulses, after all – they are harder to mitigate.

Knowing ourselves is something many of us take for granted, feeling that it comes naturally – but how well do most of us actually know ourselves? We may think that there is no one we know better, but the truth is, we are often blind to our deficiencies. Despite our attempts to stay impartial, our emotions sway us more than we care to admit.

Loss aversion


When a decision is made to invest, it is usually based on what we think we will gain. Although a good advisor will focus on communicating the downside risks associated with investing, it is very hard to know how we will feel about that downside until it actually happens.

When it does happen – because it will – are we going to fall prey to our emotions, or will logic prevail? If your portfolio is down 10% and your advisor is telling you to stay the course, are you going to take that advice? If an investment results in a loss, will you be able to swallow the loss as a sunk cost and sell the investment – or will you want to keep it until it bounces back? Will you want to sell an investment too soon because you are afraid your gains will turn into losses?

So what have I learned? That no two families or situations are the same, and while logical reasoning attempts to quantify risk in an investment policy statement, often when faced with a real investment loss – the experience of seeing it – revisiting the investment policy statement reveals the tolerance for losses is lower than originally thought. With honest communication about how the investment policy is there in part to reflect the tolerance for risk, advisors can help keep a client’s plans on track.

Overconfidence bias


Overconfidence bias is thinking you know more than you do about a certain topic, or thinking you have more control about an outcome than you do. I have worked in Calgary for my entire career, and often deal with professionals in the oil and gas industry – they know the industry and believe in it. This leads them to over-weigh their investments. Their current and future income is based on the price of oil; add to that a large concentration of oil and gas stocks in their portfolio and the risk is amplified.

Unfortunately, this compounded risk reared its ugly head in the last few years in Alberta, setting many oil and gas professionals’ best-laid plans off track. The markets can take down anyone, regardless of investors’ level of knowledge.

So what have I learned? To present alternative scenarios. One that over-weights investments in line with the overconfidence bias and one with a balanced portfolio. Canadians have become better versed in the extremes of markets, and whether it be the oil and gas professional or the real estate speculator I have learned to discuss the lows with clients and hope that the risk and volatility resonates.

Self-control bias


As a lover of chocolate, I am very familiar with this bias. Time after time, I buy a bag of chocolate raisins and think I can limit myself to a handful. We tend towards immediate gratification.

In an investing context, there is the inability to focus on the long-term goals – like not saving enough for retirement and only realizing when you are 55 that you are running out of time. This can lead people to take excessive risks when investing. Clients often think that the markets will solve the problem if their portfolio can just get them a 15% return.

So what have I learned? That for the most part clients really just want to know where they stand. Given a detailed action plan, they can focus on short-term goals while understanding the long-term focus. I have learned I need to be the practical voice and provide the client with the tools and knowledge to make the right decisions, and be there for them along the way.

Regret aversion


This is all about not taking action because you do not want to be wrong – you try to avert regret. When you have this emotional bias, you are more likely to do what everyone else is doing. This can cause investors to over-concentrate their investments in well-known companies. Then, if the position goes down, it is not your fault because you were simply following the herd. Regret aversion is about avoiding making true decisions and then rationalizing the poor decisions that were made.

In these situations, I try to educate clients on the various investment management options that exist in the marketplace. Most are familiar with bank representatives and investment brokers where the advisors assess your risk tolerance, time horizon and performance objectives to determine which asset classes are most suitable - but investors ultimately make the buy and sell decisions, and the advisor’s role is primarily to offer an informed opinion.

On the other hand, I am a big proponent of discretionary investing, which is a more hands-off approach for the client. In discretionary investing, advisors still collaborate with the client to assess their investment goals. But it removes the ultimate investment decisions from the client and transfers them to the advisor, who communicates the investment decisions and reports the results. Discretionary investing provides the necessary framework around investment decisions and helps to remove many of the emotional biases surrounding investment decisions.

So what have I learned? That many clients like to have a “play” portfolio – where they can invest a specified amount of money in less popular companies. Clients enjoy the opportunity to do their gambling here without having to worry about their nest egg.

Status quo bias


This is the urge to do nothing. As human beings we typically dislike change. Staying with the status quo is much easier. People feel greater regret for bad outcomes that result from a new action taken than for bad consequences that come from doing nothing.

Changes from the status quo will often involve both gains and losses, but the tendency to overemphasize the avoidance of losses – loss aversion – will favour keeping things the way they are. This leads to inaction when action may be called for.

So what have I learned? That most clients meet with me to challenge this bias, and most people when given small, quantifiable actions generally want to challenge this bias.

Lessons and the investment journey


What have I learned from clients over the years? That even the well versed in the irrationalities of the market fall prey to the reality of emotions. And of course, as humans we are creatures of nature – so even when we do know our weaknesses, we may shy away from hearing hard truths. The fear of needing to break detrimental habits built up over a lifetime, or the realization that our behaviors have prevented us from meeting our financial goals.

One of the major roles we fill as advisors is that of the voice of reason. We strive to be the objective practical eyes, guided by experience, assisting our clients in navigating these biases in the context of their overall goals. We strive to help our clients understand that these goals are not achieved by leaps and bounds but by well-considered small steps – that proverbial journey of a thousand miles.

Carmen McHale is a senior wealth advisor for BDO in Calgary. She can be reached at cmchale@bdo.ca, or by calling 403.956.0103.

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, April 8, 2019

Confessions of a Tax Season Accountant — 2019 Edition

For the first four years of this blog, I wrote a series titled “Confessions of a Tax Accountant” during income tax season. Those posts would discuss interesting or contentious income tax and filing issues that arose as I prepared my clients’ tax returns. (One of my favourite of that series was this post that also included an ode to the Maple Leafs. I’ve since realized that I should stick to financial topics and leave the odes to professional writers. However, once a Leaf fan, always a Leaf fan. I wish them good luck with the Big Bad Bruins as they start another pursuit of the Cup on Thursday. Go Leafs Go.)

Today, I go old school and bring back the tradition with some new confessions to cleanse my tax soul.

I have only received the tax information for around 53% of my clients as of April 6th; as the remainder are waiting for their final T3 and T5013 slips to arrive and Easter is later this year. But I’ve still accumulated enough confessions to get off my chest. (By the way, the fact the T5013 essentially only has numerical boxes with no written descriptions continues to drive both clients and accountants mad.)

TOSI


This year marks the first year of implementation of the controversial tax on split income (“TOSI”) rules. If you have been a reader of this blog, you will know all about this issue. If you are a new reader or need a refresher, you can read this BDO publication on income splitting.

In general, TOSI has not been a huge issue for my clients this year (tax return wise) when considering their children, because many of them already stopped using their family trusts or private corporations to pay dividends to their children in 2018. This is because of the punitive TOSI rules for children (typically between age 18-24), which became effective January 1, 2018.

However, spouses are another story. Where spouses have received dividends, it must be determined whether the dividend is subject to TOSI or meets one of the exemptions. There is an excluded business exception for any family member who is at least 18 years of age and worked on average at least 20 hours a week in the business in the current year, during the part of the year in which the business operates. This exclusion will also be met if in a total of five previous taxation years of the individual the 20-hours-per-week test has been satisfied. Note that this is true even if the five years occurred at any time in the past. The years do not need to be in succession.

Many clients are still trying to determine whether their spouse's met/meet this test, and we cannot file their returns until that final determination is made.

U.S. capital gains reports


We continue to receive realized capital gains reports for clients for their U.S. brokerage accounts in U.S. dollars only. These reports are deceiving, as they have not converted the original purchase and sale into the Canadian-dollar equivalent at the time of the original purchase and at the sale dates. Thus, by missing the foreign exchange component, the reported gain is often way out of whack.

Donations and medical expenses


Several clients provide their donations and medical receipts in their own packages (i.e., each spouse provides me their own donations and medical receipts). I am not sure if this is done for simplicity or whether they do not realize that in almost all cases, we claim the donations and medical credits on only one spouse’s return to maximize the claim.

Missing T2202A for students


As per the recent blog post “The Top Tax Tips for Students,” students need to print out their T2202A tuition receipt from their student portal. I would say for 80% of the returns for which there is a student in the family, we have not received the receipt and I must request it be printed out. So, students and parents: ensure this form is retrieved.


RRSP withholdings


I had a couple of clients withdraw money from their RRSP this year for income smoothing purposes. The problem is the statutory withholding tax for RRSPs is only 10% for withdrawals up to $5,000, only 20% for withdrawals between $5,000 and $15,000 and 30% for withdrawals over $15,000. These withholding rates are often less than the actual marginal tax rate of the client and result in a surprise tax liability. For example, if you took out $15,000, the withholding rate is only 20%, but the actual tax rate when you file your return could be 42% — thus you would have a 22% shortfall.

That’s it for my confessions. I hope your tax return results in a refund or at least less tax than you anticipated.

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, March 25, 2019

The Top Tax Tips for Students

Many people say their college or university years were the best time of their lives. We leave home for the first time, gain some independence, meet new people from all walks of life, and binge-watch the antics of John Belushi and Co. in the classic campus movie Animal House. But with costs going up to attend post-secondary institutions, it has become more important than ever for students to understand how they can maximize their funds during the student years. One potential avenue? Saving money at tax time.

This week Christopher Bell joins The Blunt Bean Counter to break down the top tax tips for students.
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Tuition tax credit


The biggest credit in terms of dollar value is typically the tuition tax credit. In any given year, students are eligible to claim a federal non-refundable tax credit equal to 15% of eligible tuition fees.

The tuition tax credit is granted to students who attend a qualifying educational institution in Canada. These typically include universities, colleges, and other post-secondary level institutions (including select occupational skills courses as of 2017). To obtain this credit, students need to download Form T2202a from their university website.

Provincial credits are available for students in provinces other than Ontario, Saskatchewan and New Brunswick. In those three provinces, the tuition tax credit was eliminated in recent years - students who have amounts to carry forward will be allowed to continue to do so.

A student can transfer up to $5,000 of current year tuition amounts to a spouse, common-law partner, parent, or grandparent for a federal tax credit; provincial transfer amount limits may differ from the federal amount depending on the province. Students can carry forward any unused credits to deduct against income earned in future years.

Students who attend foreign educational institutions will need a copy of Form TL11A completed by the school’s registrar to claim tuition credits. These credits can turn into massive carryforward amounts that can result in large refunds when the student graduates and starts working. Students could consider paying mom and dad back if they helped to pay for your tuition and for their support with … or scratch that: go buy yourself something nice. You deserve it (and they won’t mind).

Education and textbook credits


Some bad news for students came on January 1, 2017 as the federal government eliminated the federal education and textbook credits. The education credit – like the tuition credit – relates to a student’s time on campus. However, it is calculated not based on tuition dollars but rather on the number of months the student is enrolled.

Yukon, Saskatchewan, Ontario, Quebec, and New Brunswick also eliminated their provincial education credits, and British Columbia eliminated its education credit as of January 1, 2019. Nunavut is the only province that will continue to offer a provincial textbook amount on top of its provincial education credit.

Students in all provinces and territories who have unused education and textbook credits from prior years can claim them on their 2018 tax returns, or continue to carry them forward to future taxation years if unused.

Scholarships and bursaries


Students can often apply for scholarships through their educational institution. They are a great way to help ease the burden of the large financial cost of post-secondary programs, and are typically awarded in the form of scholarships, bursaries, and research grants.

Here’s some good news: you may not have to include these amounts in income at all. Typically, the first $500 is exempted automatically. Not only that: most awards received from university or college programs are eligible for a full exemption. It is important to discuss this with an advisor, as there are additional implications to consider if these awards were received in relation to a student’s employment or business.

Registered Education Savings Plans


Another popular means of paying for schooling is making withdrawals from a Registered Education Savings Plan (RESP). One advantage of these plans is that the student (and the contributors) can withdraw the original contribution amount tax-free when required. This is because RESP contributions are made using after-tax dollars.

When the student makes a withdrawal from their RESP, any interest, dividends, or gains earned from the investment of the contributions, including any government grants or incentives (e.g., Canada Education Savings Grant), will be taxed in the hands of the student. These payments are referred to as Education Assistance Payments (EAPs), and can only be made if the student is enrolled in qualifying programs (most full-time and part-time programs in both college and university qualify). If a student decides to attend a foreign educational institution, there are specified criteria that the program must meet in order to qualify, so be sure to contact your advisor for assistance.

There is a tax savings opportunity available if a student has multiple income sources during the year and they are drawing from the funds within their RESP. If a student is expecting to owe taxes at the end of the year, it would be advisable to make withdrawals on the contribution amounts rather than taking EAPs during the year to remove any tax liability created from receiving the payments. A student should plan with their advisor which types of withdrawals to take in each year, but it is important to ensure that any grant money received from the government on the funds contributed to their RESP is withdrawn prior to graduation; otherwise, these funds will need to be repaid to the government. It is also important to note that if a student does not withdraw the entire balance of the investment income (the amounts that would qualify as EAPs), these amounts will be brought into income after graduating, at potentially higher tax rates.

Loan interest


Even with help from parents, working a part-time job and savings, students are often forced to turn to government loans or private lenders in order to fund their education. When it comes to government loans, remember that sometimes the assistance is broken down into grants and loans. The grant portions do not need to be repaid, but the loan component requires repayment, and has interest associated with it.

Typically, the interest begins to accumulate at the end of a student’s studies at their educational institution, while repayment of the loan (and associated interest) is not required for the first six months after graduating. Recently, the Ontario government eliminated this six-month grace period, so for students in Ontario, loan repayment begins as soon as the student graduates.

The interest paid on student loans qualifies for both a federal and provincial tax credit if it was issued under certain government Acts related to loans or financial assistance. If the credits are unused at the end of the year, they can be carried forward for up to five years to be deducted against future income earned.

Moving Expenses


If a student moved to begin attending a post-secondary institution on a full-time basis, and assuming the move enabled them to be at least 40 kilometres closer to the school, they may be eligible to deduct select moving expenses. Note that these moving expenses can only be deducted against any taxable scholarships, bursaries, or research grants that they received during the year that did not meet the exemption criteria. These expenses can be carried forward to later years and deducted against the same type of income if they are not fully utilized in the year in which they were incurred.

If a student moved during the year for employment-related purposes, whether it was for a summer job or a co-op placement, and they moved at least 40 kilometres away, they can also make a claim for these moving expenses during the year. Note that these expenses can only be deducted against the employment income they earned from the job they moved closer to. These moving expenses are not allowed to be carried forward to future years unless income is earned from the same or a related job in another year.

Please consult with a trusted advisor if you have any questions or concerns, or simply want to better understand how to optimize your tax position.

Christopher Bell is a senior tax accountant working out of BDO’s Markham office. He can be reached at cbell@bdo.ca, or by calling 905-946-1066. 

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, March 11, 2019

Ecommerce Sales Tax in the U.S.: The Road to Wayfair

Taxation can be slow to change, but legislatures, courts and other government bodies eventually cause the tax laws to catch up. That’s what happened last year with a landmark U.S. court decision affectionately known as Wayfair. (The full title is South Dakota v. Wayfair, Inc.)­

This decision from the U.S. Supreme Court brought sales tax into the 21st century by finally ushering ecommerce into the sales tax tent. Now ecommerce companies — even Canadian companies — will need to think about collecting state sales tax. And while Wayfair was triggered by ecommerce, other Canadian companies will also feel the impact when doing business with the U.S.

Today Naomi Cutler, Senior Manager, U.S. State and Local Tax at BDO, zooms out to reflect on the events leading up to this key decision — and how Canadian business owners and leaders need to adapt.
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How U.S. state sales tax works


Most U.S. states impose sales tax on purchases of goods, and many also tax some services. For those states with a sales tax, the tax revenues often account for the largest income line item in the budget.

Businesses resident in the state are required to collect the tax. Over 25 years ago, the federal Supreme Court ruled that out-of-state businesses must have a physical presence in-state for sales tax collection laws to apply to them.

E-commerce


With the rise of e-commerce came deficits in state budgets. Most e-commerce retailers were not required to collect sales tax, so many transactions were going “un-taxed.” Bricks and mortar stores were also suffering from lost revenue, partially attributable to not being able to compete with the “sales tax discount” available to consumers who purchase online.

Congress drafted several “Marketplace Fairness Acts” in efforts to create sales tax parity between online retailers and their competitors with retail storefronts. None of these passed through both the House and Senate. Vocal states like New Hampshire, the Live Free or Die state, derided the idea that their local businesses should be stuck with the headache of collection of any state’s tax.

Meanwhile, Supreme Court Justice Kennedy made a comment in passing, suggesting that it was time to bring a new case to the Supreme Court to test prior rulings on physical presence.

Several states took up the challenge, and South Dakota was the first to make it to court. Its legislature drafted a law that looked to be unconstitutional: Per the law, an out-of-state business will need to collect state sales tax, once it has $100,000 of sales to South Dakota in a year, or had 200 transactions in a year. The company Wayfair and several other similar businesses did not abide by the new law. The state of South Dakota took them to district court, and eventually the case made its way to the Supreme Court.

The Wayfair ruling came back on June 21, 2018: The requirements set out by South Dakota seem reasonable. Physical presence was no longer required to make companies liable for sales tax. (Fittingly, Justice Kennedy wrote the judgement; it was one of his final decisions before retiring.)

The world after Wayfair


Since June 21, many states have enacted laws similar to South Dakota’s, and have begun to enforce those laws. The expectation is there will now be a level playing field between bricks and mortar and ecommerce.

Not just ecommerce


To be clear — the change in rules was targeted to recoup losses from ecommerce, but it reaches a lot further than that. Many Canadian B2B companies have in the past successfully sold into the U.S. market without sufficient presence in the U.S. to trigger sales tax collection responsibilities. These rules may change that. What has not changed is that sales tax is still only collectable from the end user and that often machinery and equipment sales are exempt. Sellers should collect and retain sufficient documentation to maintain rights to these exemptions.

The changes brought about by Wayfair are very complex. Please contact your professional advisors or seek advice from a U.S. state tax specialist to understand how this case impacts your business.

To learn more about managing your taxes when doing business in the U.S., read this new guide.

Naomi Cutler is Senior Manager, U.S. State and Local Tax, with BDO Canada LLP. She can be reached at ncutler@bdo.ca or by phone at 647.730.6762.


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, February 25, 2019

Bridging the Financial Literacy Gap with your Spouse

We have all heard the expression about affairs of the heart: opposites attract. However, how do these opposites operate when managing a family’s financial affairs? Spouses and common-law partners sometimes come to the relationship with differing levels of financial literacy.

When meeting with couples to discuss their financial affairs, it has always amazed me how one spouse often takes control of that aspect of their lives and the other spouse, in many cases, abdicates that responsibility. Of course, in some families, the financial duties are shared and both spouses have an understanding of the family’s finances, but I would suggest this is the exception rather than the rule.

How do you as the “financial spouse” involve the other spouse in spite of their indifference or reticence? How can you help them overcome their comparative lack of financial literacy? Why would you even want to?

Why your spouse should raise their financial literacy


I will start with the why. Here are three reasons:

  • For the sake of your marriage — it is best to have consensus on financial decisions.
  • You may die first — your spouse needs to be aware of and understand family finances, or it could lead to severe financial consequences. At minimum it could create significant stress for them after you die.
  • Get a new view — it may be useful to have a different perspective on financial issues.

How to improve your spouse’s financial literacy


Here’s how you can involve your spouse in the family’s financial affairs:

  •  Plan, document and communicate
  •  Introduce your spouse to your advisors
  •  Review the budget together
  •  Ask your spouse to pay some bills
  • Share yearly investment reports
  •  Discuss daily financial events

Plan, document, and communicate


An estate organizer is a great tool to plan, document, and communicate with your spouse on key financial issues. It doesn’t help just your spouse — it assists your entire family and your executor on your death.

While this estate organizer is really a future document, you can use it to educate your spouse now. If you have not prepared this document, do so; if you have already prepared it, you should review it with your spouse. Walk through each section. It will provide clarity on your affairs to your spouse and they will at least have some familiarity with this document if your death precedes theirs.

Introduce your spouse to your advisors


Introducing your spouse to your advisors means involving them in meetings. Introductions to your advisors will help your spouse develop a comfort level with the advisors. This will go a long way if you pass away and are not around to continue the relationships. On a current basis, if your spouse attends these meetings, they will begin to gain at least a minimum understanding of your affairs.

Review the budget together


If you create a family budget, you should review it with your spouse. A non-financial spouse will often consider this a form of financial torture, so keep the review brief and hit on points that your spouse is responsible for or will affect them. Seeing that you spent x dollars on restaurants may crystallize your concern about eating out too much to your spouse. Along similar lines, reviewing your interest expense will highlight the need to reduce debt. Any number of issues can be discussed.

Your spouse may surprise you. Sometimes showing the raw numbers in black and white can trigger an interest in financial affairs that – after all – affect them just as much as they affect you.

Ask your spouse to pay some bills


It may help to have your spouse be responsible for paying certain bills. This teaches them how to pay bills, especially online. I am often shocked by how many spouses have no clue about banking and paying bills. By taking an active role in this crucial activity, they can see first-hand the budget issues your family may have. In addition, should you pass away, it is vital your spouse have basic banking and bill paying skills.

Share yearly investment reports


I have always stressed the importance of looking at your investments annually to review your returns, fees and asset allocation. While your spouse may not care about the minutia, they may be interested in your yearly returns.

Discuss daily financial events


When there is a significant financial event – Brexit, an interest rate hike, trade agreement negotiations, or even relevant tweets from U.S. President Donald Trump – you may wish to have discussions with your spouse, so they are aware and understand the potential impact on your day-to-day lives.

Finding the right financial conversation


There are many practical ways to get your spouse involved in the family’s financial affairs. Feel free to discuss them in the comments below.

While there are some people who do not really want their spouse to have too much knowledge of their financial affairs, let’s hope these spouses are few and far between. For everyone else, the benefits of improving your spouse’s financial literacy are significant. I would suggest that you consider implementing some or all of the steps I discuss above to improve your spouse’s financial literacy and your family’s financial and estate planning. Your marriage and finances with be all the better for it. 

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.

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