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, October 19, 2020

Probate fees: These two ways to avoid it also bring pitfalls

Finances are the last item on people’s minds when a loved one dies. Between grieving for the loss of a family member and caring for other members of the family, people worry more about feelings than finances.

Eventually family finances do kick in, primarily in the form of the deceased’s wishes for their assets. Taxes play a large role in the estate, but less known are the probate fees assessed by the courts as part of the estate probate.

This week Jeffrey Smith explains what probate fees are and why two strategies to avoid them are more complicated than they first appear. Jeff is a Manager in BDO’s Wealth Advisory Services practice, based in Kelowna, BC.

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By Jeffrey Smith

Probate fees are the estate administration fee charged by the courts to administer probate—which is the process to confirm that the will of the deceased is valid. If a will isn’t validated by the courts, third-party interests on assets such as banks or land titles will not transfer ownership to the estate. Any assets that transfer through the will to the deceased’s estate will be probated. If the will is not probated, there will be little success with transferring assets of the deceased to the beneficiaries of the estate, such as bank accounts, real estate, and investments.

Each province assesses its own probate rates. When looking at provinces where probate is more expensive, B.C., Ontario and Nova Scotia have rates ranging from 1.4% to 1.65% on estate assets exceeding a minimum - $50,000 in B.C. and Ontario, and $100,000 in Nova Scotia.

Let’s look at B.C. as an example. Someone with an estate worth $2 million would be subject to probate totaling $27,450: no fee for the first $25,000, then $150 for the next $25,000, followed by $1400 per additional $100,000.

As probate fees are significant, people try to plan appropriately to reduce it where possible. They or their estate may be subject to significant taxes on their death, before paying probate fees. However, some of these strategies create additional challenges.

Let’s examine a couple of the strategies used to avoid probate fees and the pitfalls that sometimes arise as a result. As you learn about these strategies, consider whether the benefits outweigh the costs for your estate.

Making a child joint owner of your home

People often wonder whether they should add their child to the title of their home. The thought is to allow the home to pass directly to the child, and not form part of the estate for probate. With properties in Canada having potentially very significant value, it becomes an appealing option to save on probate. However, there are potential disadvantages of making your child a joint owner of your home:

  • May allow your child to borrow against or use the equity in the home as collateral for a loan without your consent
  • Opens the value of the home to creditors of your children
  • May form part of family property for division if your child goes through a separation
  • Could potentially lose principal residence exemption on the portion of your home if your child owns a home themselves. This would create a future taxable event for your child, or even a loss of the exemption for the parents if the child wants to claim another home as a principal residence.

A possible alternative to transferring part of your home to a child is to place your home in a trust. This is complicated and should be discussed with your tax and legal advisors, but where structured correctly, the trust ownership may avoid probate on the home entirely. Alter ego and joint partner trusts will typically work to prevent probate fees and allow for the principal residence exemption. Again, this is complex and should be reviewed with your professionals in light of your provincial rules as it may not work in each province. 

Naming direct beneficiaries of your RRSPs or RRIFs

By naming direct beneficiaries of your registered accounts, you allow the value to bypass your will and avoid probate.

While naming a direct beneficiary avoids probate fees, the estate is still subject to tax (unless you have named your spouse as the beneficiary of your RRSP/RRIF, in which case, the transfer should be tax-free). The full value of your RRSP or RRIF at the time of death is taxable on the deceased’s terminal return. For example, if the RRIF had $500,000 of value and assuming that it is taxed at BC’s highest rate of 53.50%, there would be $267,500 of personal taxes due on the terminal return.

This presents two challenges. For one, if the estate had no other liquid investments or cash and taxes are payable, the executor of the will may struggle to come up with the cash. The beneficiaries of the RRSP or RRIF have the cash and the estate owes the tax owing on the RRSP or RRIF ($267,500 using the above example). If the beneficiaries do not want to fund the tax liability related to the RRSP or RRIF, it becomes an estate issue - i.e., the estate has the $267,500 tax obligation and the beneficiaries get the RRSP or RRIF value tax-free, an unfair result.

Secondly, if dealing with a large estate and testamentary trust planning is being used, any funds that flow outside of the estate, in this case the RRSP or RRIF account, would not be included in the testamentary trust. This could reduce the overall benefits of will planning that was previously completed.

When looking at implementing a probate savings strategy, it is important to discuss your goals, family situation, tax planning and net worth details with your financial advisor and tax and legal professionals. In doing so, you can weigh the benefits and costs for each specific asset type and make proper decisions in your estate planning, so that your probate planning decisions are not made in isolation. 

Jeffrey Smith, CPA, CA, CFP, CLU - is a Manager in BDO's Wealth Advisory Services practice. He 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, October 5, 2020

Gifting and Leaving Money to Your Grandchild (Part 2)

My previous blog post discussed the concept of  deemed dispositions when making gifts to grandchildren while alive and upon death. It also covered the issues of income attribution and ensuring family law is considered when making or providing for gifts. 

Today, I discuss gifting by grandparents using a Registered Education Savings Plan (RESP), Tax-Free Savings Account (TFSA), or Registered Retirement Savings Plan (RRSP). I also briefly discuss estate planning considerations for grandparents.

RESPs


RESPs are great vehicles to save for a grandchild’s education. A grandparent can contribute under their own plan for a grandchild, but it is very important for the grandparent to ensure they are not duplicating contributions made by the child’s parents.

If both a grandparent and parent have plans for a child, they must coordinate their contributions on a yearly basis. If the grandparent intends to make the annual contribution, the child's parents may not even want to bother opening a RESP for that child. Alternatively, the grandparent can just gift the yearly contribution to the parent, who then puts the money into the RESP they have set up for the child.

RESPs upon the death of a grandparent


If a grandparent (subscriber) dies, things can get very complex and deserve their own blog post.

However, here are two key things to consider in your estate planning:
  1. Ensuring you have a successor subscriber so the plan can continue, or the RESP may become part of your estate.
  2. A clause in your will setting out your intentions for the RESP, including whether you wish to have your estate continue making the RESP contributions.
Takeaway #1 – If you set up a RESP for your grandchild, ensure their parents don’t already have a plan. If they do have a RESP, communicate each year with them. Ensure your estate planning considers the RESP.

TFSAs


TFSAs are a great tax-free option to help your grandchildren (who are 18 or over) save for education, a house, a car, vacation or even retirement (if they can look that far ahead). 

Care should be taken to ensure you do not over-contribute to the TFSA, as penalties will apply.

TFSAs are far simpler than RESPs when giving money to a grandchild. The TFSA is set up in your grandchild’s name, so you don’t have the estate concerns you have as an RESP subscriber; however, you should not make direct contributions (you should gift the money to your grandchild to contribute), and you have no control over the TFSA and what your grandchild does with the money in their TFSA. If they wanted to, they could cash in the TFSA and travel the world - and you would have no say.

A grandparent does not require a clause in their will to deal with the TFSA. A grandparent could have a clause in their will to have their estate continue making yearly gifts equal to the TFSA contribution limit.

Takeaway #2 – Gifts to fund a TFSA for a child 18 and over are tax efficient and a great way to assist them in funding their education, home purchase or retirement savings. Just be aware, they can decide to use the money for a fancy sports car or vacation and you have no say in the matter.

RRSPs


For grandparents making gifts to grandchildren, an RRSP is like a TFSA in that it is set up in the grandchild’s name, the grandparent has no control over the RRSP. A gift for a RRSP should be on the understanding the grandchild will not touch the money until their retirement. But a grandparent has no way to enforce this.

RRSPs can be set up at any age, as long as the child has earned income and a social insurance number. Practically, there is limited tax savings value in an RRSP when a child has minimal taxable income (although there is a tax-deferred component and it can assist in teaching a grandchild about saving for retirement). A TFSA is often the better choice if you plan to gift $6,000 a year or less to your grandchild.

If you intend to gift more than $6,000 (assuming the first $6,000 goes to a TFSA), an RRSP contribution can be made equal to your grandchild’s RRSP contribution limit. It often makes sense for the grandchild to not claim an RRSP deduction until their income is higher and carry forward the contribution until they can obtain a larger tax refund. In any case, the RRSP money grows tax-free.

The grandparent and child need to ensure they do not exceed the child’s RRSP contribution limit, or penalties may apply.

Grandparent gifting to RRSP: Example


An example may help clarify the above.

Say a child works part-time, is over 18 (so has no attribution concerns) and makes $15,000 to $20,000 a year. The child’s RRSP contribution room is 18% of their annual income, so let’s say $3,000 a year for simplicity's sake (they may also have contribution room from prior years). The grandparent gives the grandchild $3,000 a year for five years to contribute to their RRSP while the child is in university. There would likely be little to no tax refund if the RRSP contribution is claimed each year while the grandchild is in school, due to tuition credits. 

But if the grandchild works full-time in the year after graduation and makes, say, $60,000, they could claim the RRSP carryforward deduction in Year 6 and obtain a refund – likely somewhere in the $4,000 to $5,000 range, while getting the tax-free growth on their RRSP assets from Day 1.

Takeaway #3 – Gifting money for a grandchild’s RRSP will typically be your last option (likely better to gift to RESP or TFSA).

Your will

A will is best discussed with an estate specialist. I will just provide a few considerations:
  1. If you are leaving money to your grandchildren in your will, ensure you consider additional grandchildren that could be born after you draft your will or even after you pass away.
  2. Is the bequest going to be outright or in trust? You may wish an outright gift for smaller bequests and if the grandchildren are older. If the grandchildren are younger or the bequest is large, a trust (a formal properly executed trust) will likely provide greater protection from the whims of an immature child.
  3. Most legal writers suggest grandparents consider their own children’s financial circumstances, as you do not want to skip a generation from your children to your grandchildren when your own children may need the money and unintentionally create resentment with their own children.
  4. At what age do you want your grandchildren to have access to the inheritance?
Takeaway #4 – There are multiple trips and traps in leaving bequests to your grandchildren. It is imperative you have an experienced estate lawyer draft your will if you are leaving substantial assets to your grandchildren.

I am finally done, and now I’ll catch my breath. Somehow one brief blog turned into two parts and almost 2,000 words. But long-time readers will not be surprised, I have never been one to buy into the conventional wisdom of keeping everything short because people have short attention spans. Anyways, stepping off my soapbox, grandparents: please consider the various issues I have discussed when considering gifts and bequests to your grandchildren.

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 21, 2020

Gifting and Leaving Money to Your Grandchild

Many grandparents ask me about the tax and practical ramifications of gifting or bequeathing money or assets to their grandchildren. Some wish to make gifts while they are alive, others choose to make gifts upon their passing, and still others give both while alive and after passing.

I wrote the first draft of this blog post prior to COVID -19, but it is more relevant than ever, given many people have been laid off, lost their jobs or been set back financially, and many grandparents want to help them until they regain their financial footing. Today I will discuss some of the tax and other planning considerations for grandparents wishing to make these gifts or transfers.

Please note for brevity, I will use “grandparent” in lieu of “grandparent/grandparents” and “child” in lieu of “child/children” where applicable.

Tax Considerations


In Canada, unlike the United States, there is currently no gift tax. (Here’s hoping this remains the case.) While there may not be a gift tax, a grandparent may need to take specific steps for effective tax planning. Remember, you should never make a gift that puts your own retirement finances at risk.

Deemed Disposition

The deemed disposition rules are one of the tax issues that apply to gifts. A grandparent will be subject to a deemed disposition tax where they gift or transfer an asset (other than cash) that has appreciated in value to a grandchild, as the CRA will tax the capital gain.

For example, Grandma Johnson is very tech savvy and purchased 100 Shopify shares at $250, which are now worth $1,200 or so a share. She decides to gift the shares to her grandson Tom. Grandma Johnson will have a deemed disposition, resulting in a capital gain of $95,000 ($1,200-250 x 100 shares). 

In English, this means she will have to report a capital gain on her personal tax return of $95,000, even though she gifted the shares and did not sell them. If she is a high-rate taxpayer, she will owe approximately $25,000 in tax on shares she did not receive any money for. Thus, she potentially has a cash flow issue.

The folly of gifting a principal residence

Occasionally a grandparent thinks they will save money on tax and probate by transferring or gifting their principal residence (PR), or a part of it, to their grandchildren.

In truth, a grandparent generally should not gift a principal residence, as any gain on disposition of the PR will be tax-free as long as they continue to own and live in the PR (in addition, typically, a grandparent will need most if not all the value of their home to fund their retirement). While the deemed disposition of their PR in most cases will be tax-free, the grandparent will lose their principal residence exemption going forward on the portion of their PR that they transferred to the grandchild. Not only that - the grandchild will be taxable on any future growth of their share of the PR, assuming the grandparent continues to live in the home and the grandchild does not move into the house.  

Appreciated assets left in a will 

If a grandparent leaves appreciated assets in their will to a grandchild, the grandparent will again have a deemed disposition (this time triggered by their death as opposed to a gift) that must be reported on their terminal tax return (January 1 to date of death).

Takeaway #1 - You will generally want to gift cash. If you wish to gift assets with appreciated values, ensure you have enough excess cash to pay the income tax on the deemed disposition and you do not put your own retirement lifestyle at risk. You should also speak to your financial advisor or accountant before undertaking any substantial gift.

Takeaway #2 - Never transfer your home without first obtaining professional tax advice.

Attribution

Where a gift of money or assets is made during a grandparent’s lifetime to a minor child (under 18 years old), the grandparent will be subject to attribution on the gift, as well as the tax on the deemed disposition (on appreciated assets other than cash) discussed above.

This means that the grandparent reports the income – dividends or interest, for example – and pays the tax at the grandparent’s marginal rate, not at the grandchild’s tax rate. For example, if you gift marketable securities that pay a dividend of $500 a year, you pay tax on the $500 dividend.

In summary, capital gains realized by a minor child are not subject to attribution, but income such as interest and dividends is subject to attribution. There is no attribution if your grandchild is 18 and over. 

Attribution on assets left in a will 

Where a grandparent passes away and assets are bequeathed to a grandchild, there is no future attribution of income.

Takeaway #3 – If you intend to gift marketable securities to your minor grandchild, it may make sense to gift non-dividend paying stocks to avoid the attribution rules on dividends. This is not a rule, but an option to consider.

Attribution – RESPs, TFSAs and RRSPs


For children 18 years old and over, there is no attribution if you contribute to their Registered Education Savings Plan (RESP), Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP). A minor child (under 18) cannot have a TFSA, so attribution is a moot point. However, assuming they have contribution room, a minor can have an RRSP and there is attribution on gifts for RRSP contributions. There is no attribution on RESP contributions on behalf of a minor.

See the detailed discussion in Part 2 of this post (in two weeks) for traps and tax considerations before making these contributions.

Avoiding attribution – Prescribed rate loans


A grandparent can avoid the attribution rules by making a prescribed interest rate loan (the current rate is 1%) to a family trust. Prescribed rate loans are not subject to the Tax on Split Income (TOSI) rules.

Note, when I say trust above, I mean a properly set-up legal trust, not an informal “in-trust” account in the grandparent’s name. Informal in-trust accounts are not legal trusts and can cause unintended income tax and family issues and should be avoided.

Family Law


Grandparents (and parents) should always obtain family law advice for significant gifts. The laws are different for each province. In general, most gifts or inheritances are excluded property when the funds are not co-mingled or used for a matrimonial home; however, always first check with your family lawyer.

Grandparents often lend or gift grandchildren money to assist them in buying a house. There are various trips and traps when the loan is not legally documented and the interest on the loan not paid.

Takeaway #4 – Each province has its own Family Law Act and you should obtain family law advice for any significant gift or loan of cash made to a grandchild. Doing so will hopefully avoid your grandchild losing part of the value of that gift upon a marital break-up because the gift or loan was not property set up or the grandchild did not understand how to keep the property excluded.

That's all for Part 1 of this key topic that I get asked about a lot. In Part 2, we'll cover gifting by grandparents using a Registered Education Savings Plan (RESP), Tax-Free Savings Account (TFSA), or Registered Retirement Savings Plan (RRSP). We will also briefly discuss estate planning considerations for grandparents.

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 7, 2020

Is the Financial World out of Sync?

I hope everyone had a good summer. At times our great weather almost made me forget we are living in a COVID-19 world.

And then I looked at the daily health reports, the economy and the markets - and remembered that we are truly living in a time of pandemic. From a financial perspective, wherever you turn the signs are there: yet the stock and real estate markets seem to be vastly out of sync with the stark economic reality of the pandemic world. Let’s explore that disconnect. 

Bay Street and real estate vs. main street


At the beginning of the pandemic, I like most of you personally felt the financial stress and dislocation caused by COVID.

But I also felt my clients’ concerns and worries, which were extremely distressing over the first couple months. Together we worked to solve the financial challenges related to their businesses (which were often temporarily shuttered), and to understand the government programs – which were released at what seemed like a daily clip and often revamped later on. During this initial period, the stock market fell 35% or so, as one might have expected, and the housing market ground to a halt.

However, after the initial drop off the cliff, the stock markets started a steady climb back to their January 1, 2020 levels, and the housing market heated up. I am aware of two cases in the Toronto area where not only was the sale price of houses substantially over the listing price, but there were so many buyers that the seller had the buyers write letters explaining why they want the property.

This return to form in the financial and housing markets continues — even as wide swathes of the Canadian population struggle. Millions of people are receiving the Canada Emergency Response Benefit (CERB). Small business owners can’t restart their business or are working just to break even or keep the lights on for better days. Employees across the country have been temporarily laid off or have lost their jobs.

Let us review the possible reasons for the financial and housing markets’ strength in a weakened economy.


Stock markets


Over the years, the stock market has taught us that we usually cannot predict its direction. As a result, it is generally best to hold your portfolio and even buy when everyone is running for the exits.

Yet COVID investing seemed different. While some of us were smart enough or bold enough to buy at the pandemic’s deepest lows in March (not me), most people needed all their discipline not to liquidate their equity holdings in some part. I am in no way a market historian, but this pandemic crash looked scarier. The world’s economy came to a standstill and the economic destruction seemed like it would take years to overcome.

So why did the markets turn on a dime and go bullish? Why have they showed no sign of flagging? Why do they continue to defy the larger economic trends? The reasons are varied, but based on articles I have read by financial experts and the numerous discussions I and my client's have been in with investment managers, these are the top ones I have read or heard:
  1. “Don’t fight the Fed.” It’s an American phrase referencing the Federal Reserve, but the point is valid in Canada too. The Bank of Canada (like the Fed) has provided an unprecedented liquidity injection to keep the market afloat.
  2. Markets reflect a long-term view. They have discounted our current economic and social issues for an expected brighter future.
  3. The markets have built in a vaccine discovery in the next 6-12 months.
  4. Interest rates are so low that you must be in equities or you will have a negative absolute return after inflation in GICs and T-bills. This reason is put forth by investment managers in every conversation I have been involved in.
  5. The travel, entertainment and retail industries do not have a significant impact on many stock market indexes.
  6. Technology and healthcare have flourished in many cases during COVID, and these sectors make up a significant portion of the U.S. indexes that many Canadians invest in. (On the Canadian exchanges, Shopify has also helped carry the Canadian market rebound.) The stock market recovery reflects the success of technology and healthcare - not the health of the larger economy.
  7. The larger companies have hoards of cash to keep them afloat and take advantage of companies with lesser balance sheets.
  8. Some people have flipped from being scared of being in the market to having a fear of missing out on the rebound.
While the market has soared, some experts warn that the market is in a bubble of historic proportions. So, keep in mind, these are unusual times, and the market can turn around and surprise us to the downside just as easy as it can continue to climb.

In retrospect, maybe I should have seen the stock market bounce-back coming, but I clearly misunderstood. Based on the 8 reasons discussed above, clearly the stock market can be strong while the world’s economy is essentially shut down. But I have asserted only that I am blunt, not that I’m smart.


Housing market


One would have thought that many people would hesitate to purchase real estate during COVID-19 due to the uncertainty of their jobs and the economy. However, the housing market in Ontario and many parts of Canada has seemed impervious to the pandemic, which I would not have envisioned in late March.

The experts seem to agree on the below reasons for a strong housing market. I’d also like to say a big thank you to my colleague George Dube – a veteran real estate investor and accountant – for his insight.
  1. Large shortages in the supply of homes and a relative abundance of buyers led to competition and bidding wars. On the supply side, many people just hunkered down and did not want to risk selling into a pandemic market.
  2. Those who were fortunate to keep their jobs had fewer places to spend and decided in many cases to renovate and fix their current homes rather than purchase a new home, reducing supply.
  3. Many people decided to purchase cottages rather than move to new city homes. If I can’t travel for vacation, people said, I want to have access to a cottage property. This is especially true while we still don’t know when COVID will recede and when we will see an effective vaccine. People staying in their homes reduced the inventory of homes for sale.
  4. Interest rates are so low, so the cost of carrying a mortgage for the foreseeable future is extremely low and unlikely to change based on government economic policy.
  5. The lack of activity in March and much of April led to a catch-up period releasing pent-up demand.
  6. People concluded working from home is going to be the new normal in some fashion. They realized the money they had saved to eventually buy a home in the city could be redeployed to purchase a home in the suburbs or in a more rural area. This led to a spike in many areas outside big cities. While this moderate exodus would theoretically soften prices in urban areas, the fact is that the fundamentals in those markets are strong enough to keep prices high. It should be noted that this exodus from the cities has reportedly caused some softening in the personal condominium market, as many of the people looking outside the large cities would have been condominium purchasers.
All this being said, it is worth differentiating between housing and other real estate subsectors. For example, the retail and larger commercial office building markets are seeing the “expected” drop in demand given COVID, due to the loss of foot traffic and employees being told to work from home. On the other hand, in the industrial sector, the massive growth in online ordering has increased the need for space to accommodate logistics and warehousing.

So, is the financial world out of sync? I personally feel the answer is still at least a lukewarm yes, if you like me feel there is or should be some kind of direct correlation between the economy and the stock and real estate markets. But as I have noted above, the correlations can sometimes run parallel and may not intersect, so that may be a misguided view. We shall see in another year or two whether the stock and real estate markets got ahead of themselves, or whether this was just the first phase of even stronger markets. Interesting times either way.

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 24, 2020

The Best of The Blunt Bean Counter - Let Me Tell You – Quotes and Proverbs to Ponder


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 2018 blog on I wrote on quotes and proverbs to ponder. I have found the first couple especially relevant during the pandemic.
________

Let Me Tell You - Quotes and Proverbs to Ponder

As I noted previously, I am writing occasional blog posts under the title “Let Me Tell You” that delve into topics that may a bit more philosophical or life lessons as opposed to the usual tax and financial fare. Today, I discuss three of my favourite quotes and proverbs. I think these words of wisdom provide some insight into my psyche, but I will leave that for you to decide.

I have tried my best to attribute these sayings to the proper person; but regardless of whether I have the correct acknowledgement or not, the key is the message, not the messenger. 

Make a Decision and Go with It!


I have discussed this quote once before, but I am bringing it back, since it is one of my favourites. The quote as best I can tell is from a poem by S.H. Payer’s “Live Each Day to the Fullest”. It goes as follows:

"When you are faced with decision, make that decision as wisely as possible, then forget it. The moment of absolute certainty never arrives".

Think about that last line: “The moment of absolute certainty never arrives”. Whether a decision is personal or financial, it has been my experience that people can freeze in their tracks with indecision and are often unable to act on their issues, until they feel they have found that moment of certainty.

However, we all know that the moment of certainty very rarely identifies itself or if it does, it is likely not in a timely manner. This is why I love this quote; time constraints often force us to deal with an issue before there is certainty. People who make the best decisions, under the circumstances and move forward without regret or second-guessing themselves, are best equipped to solve and deal with life and its often confounding decisions.

We Are Not Immortal – Live Your Life to the Fullest While You Can (but save a few bucks for retirement)


In October of 2015, I wrote a blog post titled “Believe it or Not - We Are Not Immortal” in which I discussed how denying our mortality had a significant impact emotionally and financially upon our families. The take-away from this blog post was that you should provide your spouse and loved ones a financial roadmap so that they are prepared as best they can be, should you pass away.

In the comments to that post, one of my reader’s, Vernon L provided a quote that read:

“Man, he sacrifices his health in order to make money. Then he sacrifices money to recuperate his health. And then he is so anxious about the future that he does not enjoy the present; the results being that he does not live in the present or the future; he lives as if he is never going to die, and then dies having never really lived.”

What a great quote! While it in part touches on our mortality, it has a wider breadth, in that it comments on how we live, or more accurately, how we often live improperly.

After reading the quote, I immediately googled it to determine who made such a perceptive comment on human behaviour. Initially, the quote appeared to be attributable to the Dali Lama. However, as I researched further, it appears the consensus is that it has been inaccurately credited to the Dali Lama and it should be attributed to John James Brown (pen name James Lachard) a writer and former CEO of World Vision Canada. So, while I am not 100% sure whom to attribute this quote to, let us just leave it at it is very sage advice.

This quote refers to money and the financial and health consequences of chasing the almighty dollar. But of course, enjoying your life and living in the present is not 100% correlated to money. We have family, religious and altruistic components of our lives that enrich and make our day to day living fulfilling (as discussed in this blog post I wrote).

I have written numerous times about having a bucket list and ensuring you cross items off your list during your working life. The longer we wait to undertake these bucket list items, the greater the chance we are not physically able to do them, or worse, not around to do them.

While this quote goes much deeper, we all need to live in the present and enjoy our lives and family, plan for retirement (where hopefully health and money permitting, you clean up your bucket list and make a new one), and always understand that you are very lucky for each day on this earth.

It is Never My Fault


Somebody sent me this quote/life lesson that was circulated on Facebook last year. I have no idea whom to attribute it to, but it very succinct and accurate in my opinion. It goes as follows:

Three Ways to Fail At Everything in Life:
  •  Blame all your problems on others 
  • Complain about everything 
  • Not be grateful

Craig Soroda who provides leadership training noted in this blog post that the above three points are known as blame, complain and defend (“BCD”). He provides a quote by well-known football Coach Urban Meyer that says “BCD has never solved a problem, achieved a goal, or improved a relationship. Stop wasting your time and energy on something that will never help you.” 

Personally, I go back to the old school thoughts of my father. Dad always taught me that I must take responsibility for whatever I did, not to complain, and to never give up. I think being grateful just came from the way I was raised by my parents.

In brief, these quotes can be summed up as follows:

1. Life is fleeting, live it and enjoy it as best you can, but save a few bucks for retirement.

2. Don’t dither on decisions, make an educated decision and move on.

3. You are responsible for your own life, don’t blame others,it is counter-productive, and people don’t like whiners.

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 10, 2020

The Best of The Blunt Bean Counter - Obtaining a Clearance Certificate for an Estate

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 October 2018 blog on Obtaining a Clearance Certificate for an Estate, a question I am often asked about by clients and readers.
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Obtaining a Clearance Certificate for an Estate

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

What is the Purpose of a Clearance Certificate?


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

Do You Have to Obtain a Clearance Certificate?


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

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

I suggest being safer than sorry is generally the most prudent route.

When Do You Request a Clearance Certificate?


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

How to Apply


This is what the CRA says is necessary to apply:

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

Interim Distributions


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

The Finalization Process


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

The CRA says “that the assessment can take up to 120 days, assuming you provide all of the necessary documents. However, in certain situations, the CRA may need to do an audit before it issues the clearance certificate”. In my experience, the process often takes much longer, even where an audit is not undertaken. 
 
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 27, 2020

The Best of The Blunt Bean Counter - How to use the BDO Estate Organizer

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 2019 blog I wrote on how to use the BDO estate organizer. I have written numerous times over the years urging you, my readers, to get your financial affairs in order, by stress-testing your finances in case you pass away suddenly. While clearly a morbid topic, the rationale for the discussion is this: if you do not get your affairs in order and you pass away suddenly, you leave your family a financial mess at a time of emotional distress, anxiety and confusion.

The organizer can assist you in writing your financial story and ensuring your financial information and wishes are documented for your family and trustees. I would suggest COVID-19 has caused many people to consider their mortality, and the pandemic may provide you some free time to undertake this task.
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How to use the BDO Estate Organizer

Not to be morbid, but since Roma Luciw of The Globe and Mail has called me “morbid Mark,” I reiterate once again: if you do not communicate and document your financial affairs for your family or executors, you at best leave your family a messy estate at a time of distress and at worst cost your estate and family thousands of dollars.

Today I will walk you through completing the Organizer and some of the important issues that arise in completing the document.

Key Tips in Using the Organizer


Family Information (p.2)

The most important item in this section is citizenship. Many Canadian don’t realize this, but parts of your estate can trigger tax consequences if you are a citizen of another country. This typically applies to U.S. citizens, since the U.S. taxes based on citizenship; while most other countries tax based on residency. Although it should be noted, Canadians who are non-residents of the U.S., can be subject to U.S. Estate tax.

Perhaps the biggest issue for U.S. citizens is home ownership. As discussed in this blog post, the U.S. has a $250,000 or $500,000 principal residence exemption, depending upon your marital and citizenship status. The fact that a tax-free home sale in Canada can result in taxes in the U.S. is often very shocking to Canadians filing U.S. tax returns.

Your U.S. citizenship can trigger many other tax consequences — such as U.S. estate tax —based on differing laws south of the border. And of course, U.S. tax compliance should begin well before estate planning makes an appearance in your life. If you are a U.S. citizen or green card holder, you should be filing U.S. tax returns. If you are not filing, you should seek U.S. tax advice.

If you are a citizen of another country, you may want to determine if citizenship in that country would have any income tax consequences upon your passing.

In addition, depending upon the politics of your home country and your children’s familiarity with that country, you may wish to sell your foreign assets as you age to simplify your estate.

Important Documents (p.5)

My Will 

If you do not have a will, it's time to have one drafted. As discussed in this blog post, 65% of Canadians do not even have a will and 12% of wills are outdated. Yes, your read that correctly: only 3 of 10 Canadians have an up-to-date will. 

If you already have a will, you should review it to determine if there have been any significant life events since you last updated it. In addition, you will want to ensure all your beneficiary designations (RRSP and TFSA, for example) agree to your will and are up to date. Many people have inadvertently left significant assets to ex-spouses by not updating their designations.

There have been substantial changes to the tax laws in the last few years, which can affect the tax treatment of trusts created by will and provisions for disabled children. If you have created trusts in your will or have a disabled child, you may want to contact your accountant or lawyer to see if these changes necessitate any change to your will.

Some provinces allow for dual wills, one for assets subject to probate and one for assets not subject to probate.

Powers of Attorney

You should have two powers of attorney (POAs), one for your financial affairs and one for your health care.

POA’s for health care have evolved over the last few years for such matters as heroic measures and even assisted-death provisions. You may want to consider updating this document depending upon your personal and religious views on these issues.

Financial Information (p.6)

As noted earlier, you will want to ensure that the beneficiary designations for pension plans and registered plans are in line with your will and your intentions. Often these designations are out of date.

After completing the Financial Information: Liabilities section of the organizer, review and ensure you have enough insurance (see discussion below) or liquid assets to pay off any of these liabilities should you pass away. You may also wish to assess whether this is a good time to have a financial or retirement plan prepared or updated.

Insurance Information (p.11)

After completing this section, sit back and consider these three things: 

1. Do you have any unnecessary insurance policies you purchased long ago and never cancelled?

2. Do you have enough insurance based on how much you spend annually, the debt you hold and significant funding expenses you still need to incur, such as tuition for your children? 

3. If you have significant funds in your corporation (especially if you will have excess funds in your corporation you will not need in retirement), have you considered purchasing a corporate-funded insurance policy?

Employment Information(p.13)

Some issues to consider is this section are:

Ensure that you detail any stock options, deferred stock units, deferred profit-sharing plans or any other of these more complex plans. Heirs often face confusion with these plans when someone passes away, so the more clarity you can provide (e.g., dates, units, tax cost basis, purchase price), the easier it will be for your family to deal with these plans.

Most employers are very good at assisting the family after the death of a loved one, but you will put your family in the best position possible by providing as many details as you can.

Income Details (p.14)

Some issues to consider in this section are: 

1. Are you taking advantage of all income splitting opportunities? You should review this with your accountant, especially given the implementation of the Tax on Split Income (TOSI) rules.

2. Consider if your investment returns are in line with your expectations and whether you even know what your returns are. See this blog post for a discussion of this topic and some useful links.

Real Estate (p.15)

Prepare a free-form schedule that should include the following at a minimum: 

1. A notation of the year you last claimed the principal residence exemption (PRE) on the sale of your home. This will allow your executor and estate to tax plan upon death or going forward in respect of future PRE claims if you have, say, a house and cottage. See this blog post for the new reporting rules on PRE claims.

2. If you elected in 1994 to crystalize $100,000 of capital gains on property you still hold, attach a copy of your 1994 form T664 to this document. The government allowed one final election to utilize your capital gains exemption before phasing out the exemption on real estate and marketable securities in 1994.

Note: Qualified small business corporations (QSBCs) continue to be eligible for the capital gains exemption — see this blog post for details.

Financial Advisors (p.16)

Ensure you have introduced your spouse or significant other to all your financial advisors. It is much easier for a surviving spouse to deal with the aftermath of a passing when they already have a level of comfort with the advisors they will have to deal with. 

Executors (p.17)

You should review your executor appointments to ensure they are the correct people for the job.

If you have not informed your executors they have been named, you should inform them. You may want to inform the executor that you have completed the organizer so that they will know it exists and where they can find it.

If you do not have someone you can name as an executor or there is possible family conflict, consider naming an institution as an executor. 

Digital Information (p.18)

If you have digital assets of value (e.g., cryptocurrency, websites), ensure you have obtained tax and legal advice and have considered them in your will. See this blog post on the topic from estate lawyer Katy Basi.

Katy also guest posted this excellent piece on a 21st century issue: how to deal with reproductive assets in your will.

Funeral Arrangements (p.19)

This is truly a morbid topic, but ensure someone is aware of any pre-paid or funeral wishes.

Final Comments


This estate organizer is one heck of a homework assignment. But it is one of the most selfless things you can do for your family, especially if you have significant assets or complex financial affairs.

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 13, 2020

The Best of The Blunt Bean Counter - Let Me Tell You – The Four P’s of Presenting (Virtual Edition)

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 September 2017 blog I wrote on giving speeches and presentations. Given the recent spike in virtual presentations, I thought some of my thoughts may be applicable to today's  COVID-19 world.

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Let Me Tell You - The Four P's of Presenting

As I posted last week, I am planning to write occasional blog posts under the title “Let Me Tell You” that delve into topics that may a bit more philosophical or life lessons as opposed to the usual tax and financial fare. Today I share some life lessons I have learned from making speeches, presentations and conducting meetings.

I have been making speeches and presenting for at least twenty-five years. I wish I could present smoothly like Tony Robbins, Brian Tracy or Presidents Clinton and Obama who are so engaging and polished, but that is not my skill set. Feedback from my presentations and speeches reveals that I am passionate, down to earth, practical and sometimes funny and sarcastic. I have learned through my experience that presenting is a skill set; a learned behaviour that improves with practice.

So let me share with you my four keys (or my Four P's) to help you put your best foot forward for speeches, presentation or client meetings, which I think are still applicable when done virtually:

1. Be passionate. As noted above, I have been told many times I am passionate when I speak. In my opinion, passion makes you appear genuine and can fill in a considerable void if you are not as smooth and polished as the aforementioned type of speakers.

2. Be prepared. You should always know your topic or meeting agenda cold. Nothing turns off an audience or meeting more quickly than an inability to answer a question or convey that you know your subject material. That does not mean, that you have to be able to answer every question on the spot, but you must be able to speak intelligently to your question and topic area and explain why you would need to get back to someone on a question you cannot answer (either too complex to answer quickly, or too specific and you need to double check your answer). It is also very important that you always try to anticipate and consider what questions your audience will ask prior to presenting and what your audience or clients would want know if you were sitting in their spot--practice empathy.

3. Assume a positive outcome. By being prepared and having positive mental thoughts, your speeches, presentations and meetings have more energy and confidence. Instead of going into the presentation worrying about if you will remember to speak about this or that or how you will come off, or whether you will get the business, just assume you will and project the positive attitude and you will have positive outcomes.

4. Be present. Avoid letting your mind wander during a speech or presentation. If you start thinking about something you said that did not come off right you will lose focus. It’s always a good idea to have speaking notes to help you stay on track. Stay present in your speech or presentation and you will keep or track and the small stumble will soon be forgotten if it was ever even picked-up by the audience or client in the first place.

You now have my four P’s to help you in delivering engaging and effective presentations, speeches and meetings whether in person (hopefully soon) or virtually. Hey, if it sort of works for a boring accountant, imagine what it will do for you! 

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 29, 2020

Working from Home – Get Me Out of Here!

This will be my last original blog post until September—my brain has nothing left in it after the last few months of dealing with COVID financial subsidies, loans, and my regular deferred personal and corporate tax filings. I will post The Best of The Blunt Bean Counter the next two months and hopefully golf a lot.

Like most people, I have been working from home due to COVID. I would venture to say that many of us are somewhat surprised at how well we have adapted to our home offices and how efficient we have been from home. But personally, I do not like working from home full-time, as my virtual office never seems to close.

I cannot wait until I can start going back to the office so I can meet with colleagues and clients again (in whatever modified form that takes). I am okay with a couple days a week from home, but that is it. (And I don’t even have children at home to take care of anymore—although my dogs have become much needier now that they are used to me being home full-time.)

The issue of working from home has become an extremely hot topic for obvious reasons. A few weeks ago, I read an excellent article by Eric Andrew-Gee of The Globe and Mail, “Is the office era over?”

Remote work: A case study


The article was premised on a 2010 study of Ctrip, China’s largest travel agency, which had half its people work from home four days a week for nine months back in 2010. The CEO of Ctrip, James Liang, happened to be taking his PhD at Stanford and, along with Professor Nicholas Bloom and other researchers, analyzed the results of this remote-work experiment several years before COVID hit the world economy.

The study revealed two key results about employees who worked from home:
  1. They were 13% more productive.
  2. Even though they were more productive working from home, they were not content. The study found half of the workers who had a 40-minute or longer commute said they wanted to return to the office, as they were lonely. Bottom line, the study showed working from home “was great for productivity but lousy for morale.” 
The Globe article is very wide ranging. If this topic interests you, I suggest you read the entire article (it may be behind a firewall if you are not a Globe subscriber). Below, I summarize five of my favourite points made in the article:
  1. “The logistical success of the experiment [working from home during COVID, which the author considers a delightful surprise revealed by the pandemic] has unlocked the second delightful business surprise of the quarantine: real estate savings.” It is going to be very intriguing to see how this plays out in the future.
  2. Global architecture firm Gensler asked its 2,300 employees about their preferences post-COVID, and only 12% wanted to continue to work from home—44% wanted to go back to the office or were undecided, and the rest wanted to work from home on a part-time basis. Anne Bergeron of Gensler said this: “People miss in-person collaboration. On-the-job learning that you get casually from peers is not there.” 
  3. Who is going to pay for computers, WiFi access, and ergonomic chairs going forward? 
  4. “That sense of the home as a place of calm and relaxation–a sanctuary from the demands of work–is now in jeopardy.” 
  5. Professor Bloom believes the ideal situation is “working in the office Mondays, Wednesdays, and Fridays (to create a buffer with the weekend) and spending Tuesdays and Thursdays at home. Cycling through A and B teams [the teams being groups of employees] could feed innovation, give workers a respite from the office slog and reduce the need for real estate by half.” 

My personal experience: Four takeaways


My four takeaways from working at home are as follows and dovetail with the Globe’s article:
  1. I suspect my true nature is somewhat anti-social, but over the years I have adapted to become more social (or my arrogance is at such a level that I think people need to hear my opinion–remind me to ask my colleagues about this when we get back to the office). Thus, I have been surprised at how much I miss going to the office to collaborate and discuss issues with colleagues and to meet clients. Phone or video communication does not fully replace actual human interaction for me.
  2. One of my more subtle skills is that I usually have a good sense of when a client’s eyes are glassing over from too much technical talk or they are just disengaged. I am typically fairly good at bringing the conversation back around, so they become reengaged. I feel that this skill is somewhat muted when I cannot look them straight in the eyes. 
  3. In my work office I am up and about, walking the floor, going downstairs and moving, even if it is going to get some water. At home I find I am more static, and I have had multiple bodily discomforts. Who knew working from home could be so hard on the body? My wrist kills from a mouse that does not move as easily between screens at my home office, my chair is not as ergonomic as my office chair, and I have had soreness in my hips from too much sitting. But seriously, even if I purchased better computer accessories and a better chair, I would probably find I am just sitting more (even though I am working out more). 
  4. One of my clients recently told me “the virtual office never shuts down.” It just seems you need to be on even more at home—and more importantly, as in point #4 above, home loses its sense of sanctuary from work. 
We all know things are never going to be the same, and everyone has different likes and dislikes about working form home. However, I think the initial Ctrip study was bang on. Businesses are going to have to experiment to find the balance between productivity, employee morale and mental health.

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 15, 2020

Benchmarking your investments - now and forever

As I write this introduction on June 13, the stock markets have recovered spectacularly from their March lows.

Whether they continue to climb is subject to debate. Some market watchers think the recovery will be quicker than expected. They remind us that the indexes are made up of several large companies that have weathered the COVID storm to date. Those companies will also likely benefit in the near term, as they will be able to acquire less fortunate companies at attractive prices. These market watchers suggest the markets are just reflecting the future.

Others think the markets are not reflecting reality either currently or down the road, as consumer spending will be dampened for years. I have no idea who is correct, and I am not sure anyone really does.

Today’s blog post on benchmarking was initially conceived by my colleague Carmen McHale to be an education piece on what benchmarking is and how it can be used. It morphed, however, to include some discussion on benchmarking and COVID.

I have read and been inundated with articles, commentary and newsletters on investing during COVID and have been considering how my clients and I have fared during COVID. As you will quickly realize after reading Carmen’s post, benchmarking is not as simple as it seems. Neither is finding the right benchmarks for your investments. A 60% equity/40% fixed income portfolio can vary widely. The 60% can be all equities, mostly U.S., an even mix across Canada, U.S. and international, or 40% equities, 10% hedges, 10% real estate; and the 40% fixed income can be all bonds, or bonds and preferred shares (personal pet peeve, I don’t like preferred being classified as fixed income, but that is a topic for another day). So finding an apples-to-apples benchmark is very difficult.

So how does one benchmark their advisors’ investment returns (if they are not provided appropriate comparisons by their advisor) during COVID – or their own for that matter? Personally, I like the suggestion made by Ian McGugan in a recent Globe and Mail article (if you are not a Globe and Mail subscriber, access to the article may not be available).

While Ian’s article is on constructing a portfolio going forward, he makes a valuable remark near the end of the article on balanced portfolios: “even if you conclude these products aren’t right for you, they can provide a good baseline for comparison with other approaches in these unclear, unsettled and unknowable times.” For the week ending June 12, I looked at the year-to-date returns of a few balanced funds (typically 58% equity/42% bond or so) and their YTD losses ranged, but were about 1.6% on average. As Ian says, these may not be appropriate funds or benchmarks for you, but they are good baseline comparatives.

I think this just became my most long-winded introduction in the history of the blog, so without further ado, here is Carmen.

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By Carmen McHale


A benchmark is information that helps you compare the performance of your investments. I tell clients that if they are going to pay someone to manage their investments, they should expect to get returns that are at least as good as the benchmark after fees.

Indexes such as the S&P 500 are common benchmarks to assess investment performance. In fact, some investors invest through mutual funds or exchange traded funds that simply follow the index – this is often called passive investing.

By comparing your performance against a relevant benchmark index, it is possible to see how much value an active manager adds (or does not add) over a passive approach. It allows you to evaluate the performance of your portfolio and how much of the total return comes from investment decisions that were made by the advisor versus the movements of the financial markets overall.

Benchmarking for risk


When comparing your returns against the benchmarks, it is equally important to see how much risk your portfolio is taking verses the benchmarks. Benchmarking for risk allows you to see how consistent the returns are over time, and can give you an idea of if your investments are taking on more risk than the benchmark.

Risk can be measured in many ways. However, I personally like to use standard deviation, as most investors can easily understand this metric, and it is published by most mutual funds. A fund with higher standard deviation has more price volatility, while a lower standard deviation tends to produce returns that are more predictable.

See this example of balanced fund returns over the last five years. In this fairly typical case, the portfolio consists of 35% fixed income, 32.5% Canadian equities, 27.5% global equities and 5% cash.


 Year         Portfolio Return
(Net of fees)
    
 Benchmark Return
 2015 5.33%3.87% 
 2016 5.86%8.32% 
 2017 9.54%7.88% 
 2018 -1.66% -2.26%
 2019 16.73% 15.65%
 5 -YEAR AVERAGE 7.16% 6.69%
 STANDARD DEVIATION 6.71% 6.57%
 Range of returns at 1 Standard Deviation 0.45% to 13.87% 0.12% to 13.26%
 Range of returns at 2 Standard Deviations -6.26% to 20.58% -6.45% to 19.83%
 Range of returns at 3 Standard Deviations -12.97% to 27.29% -13.02% to 26.4%

The standard deviation of this portfolio is 6.71% while the standard deviation of the benchmark over the five years was 6.57%, but what does that mean?

Standard deviation explained


From a high level, it is apparent that this portfolio manager managed to get higher average returns over the five years, despite taking on similar risk as did the benchmark.

Now think back to your statistics classes. If you can’t quite recall the details, here’s a refresher on the basics of standard deviation. When assessing how much risk you have in your portfolio, it is wise to look at three standard deviations so you can get an idea of the potential downside you could experience in any one year (like the beginning of 2020). Here’s what three standard deviations mean with our portfolio and benchmark:
  • One standard deviation - If the data behaves in a normal curve, then 68% of the data points will fall within one standard deviation of the average, which means 68% of the time your portfolio should produce returns between 0.45% and 13.87%, while the benchmark should produce returns between 0.12% and 13.26%.
  • Two standard deviations - If you want to capture what happens 95% of the time, you go to two standard deviations from the mean. Returns should fall between -6.26% and 20.58%, while the benchmark should produce a range from -6.45% to 19.83%.
  • Three standard deviations - How about the other 5% of the time? Take it to three standard deviations to get 99.73% of the time – which means your portfolio in any given year should return between -12.97% and 27.29%, while the comparable benchmark should produce a range between -13.02% and 26.4%.
To keep matters, as simple as possible, I like to boil it down to one number to compare by dividing the five-year average return over the standard deviation (return to risk ratio):

                    Portfolio return/risk = 106.71%; Benchmark return/risk = 101.83%.

The higher the ratio, the better, so our model portfolio should perform well against the benchmark.

Our typical portfolio during COVID-19


The onset of COVID-19 can be considered an extreme shock to the economic environment, so let’s examine how this typical portfolio performed against the benchmark during this time.

The same portfolio example above had a negative return of -8.94% as of March 31, 2020 compared to the benchmark return of -9.44%. The returns of the portfolio were well within three standard deviations (-13.02% noted above). The portfolio not only has superior returns when they are in positive territory, but also demonstrated less downside in a volatile market environment.

Minimum acceptable return


When benchmarking investments for my clients, I also like to calculate something called Roy’s Safety-First Ratio, or simply SFRatio. This allows clients to see what would happen if their investments perform at less than expected returns. To do this, we create a minimum acceptable return, or threshold return. By fixing a minimum return, an investor aims to reduce the risk of not achieving the investment return.

Let’s imagine your financial plan indicates a minimum required average return of 4.25%. Now you have three portfolios to choose from:

  • Portfolio A: expected return - 13%; standard deviation - 20%
  • Portfolio B: expected return - 9%; standard deviation - 11%
  • Portfolio C: expected return - 8%; standard deviation - 6%

Which portfolio should you choose?


If you want to have the portfolio that has the highest likelihood of meeting your required return, you can calculate the SFRatio. Here is that formula:
  • Expected return of the portfolio; minus 
  • Minimum required return; divided by 
  • Standard deviation of the portfolio. 
Using this formula, here are your three SFRatios for these portfolios:
  • Portfolio A: (13% - 4.25%)/20% = 0.4375
  • Portfolio B: (9% - 4.25%)/11% = 0.4318
  • Portfolio C: (8% - 4.25%)/6% = 0.625
As you can see, Portfolio C has the highest SFRatio, and therefore has the highest probability of earning the investor their required rate of return.

Benchmarking during COVID-19


These days, financial projections are a bit of a tough call. It’s not just that the economy may look quite different in the next five to 10 years from its profile over the past decade. It’s also that their impact on the markets is difficult to predict.

Benchmarking for performance during COVID-19 is as relevant as it’s ever been. The benchmarks you use should cover the same periods of time, and you will see how your investments perform against other potential investments.

The true difference-marker during COVID-19 is benchmarking for risk. With volatility so high, risk skyrockets, so keep on the eye on the ups and downs of your investments. If there ever was a time to know that your portfolio is taking on more risk than the benchmark, COVID-19 is that time.

For more in investing during COVID-19, check out this recent roundtable discussion on protecting your wealth in the COVID-10 economy.

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