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 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.

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 1, 2020

Mixing and Matching: The Financial Ins and Outs of Blended Families

In February 2018, the Vanier Institute of the Family reported that there were nearly 518,000 stepfamilies, or blended families, in Canada in 2016. This total accounted for 12% of couples with children. The institute further broke down stepfamilies as simple (only one spouse brought children into the blended marriage - 61%) and complex (both spouses brought children into the marriage - 39%).

These statistics reflect that the Brady Bunch is not the uncommon family situation it once was. Blended families have gone mainstream.

Blended families bring a host of issues, from family integration to increased stepsibling rivalry to financial and tax issues. Today, I will address the key tax and financial issues.

Financial assets coming into the marriage


Unlike the typical marriage, where there are often minimal financial assets and the couple begins the slow climb to build those assets, blended families tend to occur later in life, where one or both parties have not only children but also substantial assets.

Both spouses have often gone through divorces and are very cognizant of protecting their assets. This results in some of the following issues:
  1. In many cases, while both parents love and treat each others’ children as their own, the reality often is that one or both parents want to protect some or all of their assets for their biological children.
  2. One spouse feels the other spouse should treat the stepchildren and biological children equally when it comes to finances and inheritance.
  3. The children of one or both spouses fear their family’s assets or inheritance will be taken by the new spouse.
These are very complicated financial and emotional issues and are a minefield that must be navigated with care.

Key areas of financial and tax concern


The financial issues for a blended family are too numerous for a single blog post. Today I will cover the following issues:
  1. The money discussion
  2. Marriage contracts
  3. Wills and powers of attorney
  4. Prior documents
  5. Estate planning
The Money Discussion

In a blended marriage, saving and spending habits are typically already in place for each spouse, and those habits may not be the same. The spouses’ financial assets may also be significantly different. Each spouse will have thoughts on their legacy. It is thus practical and responsible to discuss these issues before you enter into the blended marriage.

These discussions typically center on how expenses are shared, whether to open joint bank accounts, how assets purchased after the wedding will be owned, how to fund the children’s RESPs, and how to plan their estates.

While some of these topics can be contentious, it is always better to discuss financial topics before the discussion is forced on you.

Marriage contracts

Marriage contracts are very important in blended marriages where there are substantial assets and private corporations brought into the marriage. These agreements (technically known as prenuptial agreements when signed before the marriage), deal with support and division of property if the blended marriage dissolves or one spouse dies. It is also important to get advice on how family homes and other assets brought into the marriage are treated under the family law of that province. These variations in law may tie back directly into the marriage contract.

Discussing a marriage contract can be very unsettling for people entering a first marriage. In second or third marriages, the sobering reality of divorce proceedings often makes both parties more amendable to discussing and negotiating a marriage contract. It is suggested the contract take the form of a prenuptial agreement (i.e.- entered into before the marriage, not after). 

Many experts recommend discussing your marriage contract with your children (especially if they are older and responsible) to possibly alleviate their concern that their inheritance will be “taken” by the new spouse.

Wills and powers of attorney

Readers of this blog know I have written ad nauseam on ensuring you have an updated will and ensuring you have financial and personal care powers of attorney (POAs), the latter covering medical treatment and healthcare treatment. The POA gives authority to an individual to act as your agent.

Updating or preparing these documents is vital when entering into a blended marriage. This is because most provinces have rules relating to wills upon divorce that can affect or void how your current will is distributed. While provincial laws may or may not negate provisions related to your former spouse, you clearly in almost all cases want to remove any reference to your ex-spouse.

Your POA document will also often designate your former spouse, so you will want to update these documents and not leave it to provincial law to assign this key role.

As noted above, each province has different rules in respect to wills and POAs, so legal advice should be obtained.

Prior documents

It is important to review documents to determine if beneficiaries need to be updated. Some of the more important documents to review include the following:
  1. Life insurance polices
  2. RRSPs
  3. Pension plans
The last thing most people want to do is leave their insurance, RRSP or pension plans to their former spouse.

Estate planning

Estate planning is complicated enough in a first marriage; second or third marriages multiply the risks and complexity. Say you leave all your assets to your spouse because their will also has provisions for your children. But as noted above, if your ex-spouse remarries, certain provinces may void their prior will and leave your children out of luck. Alternatively, they could change their will and “write out” your children. How do you ensure your wishes are undertaken?

Spousal trusts

Spousal trusts in general will allow your assets to flow tax-free into the trust for the benefit of your spouse. Your spouse, subject to terms of the trust, will be the beneficiary of the income and capital for as long as they live, and then the terms can specify that the remaining assets are transferred to your children and stepchildren. These trusts are complicated, and you need to engage a lawyer who specializes in estates to assist you with your planning. It is also prudent to have your accountant work hand in hand with the estate lawyer to cover off your financial and tax issues.

Direct gifts in your will

Another option is to leave distinct inheritances to your spouse, biological children and stepchildren in your will, create separate trusts for each, or do both. Again, tax planning is imperative, as there may be deemed tax dispositions on the gifts to your children if the inheritance is not a cash-only gift.

Gifts during lifetime

Depending upon your financial situation, it may be simpler to give gifts to your children while you are alive to help with home purchases, grandchildren’s educational needs or any other expense. Before undertaking this strategy, you should ensure you create a financial plan to ensure you do not put your retirement or your spouse’s future living expenses in jeopardy.

Insurance

Many people in blended marriages are conflicted or feel pressure to ensure their new spouse is taken care of, their biological children receive the inheritance the parent envisioned, and their stepchildren receive a similar inheritance to the biological children or at least something substantial. As there is only so much money and assets to go around, it is common to use life insurance to build additional liquidity to cover or assist in paying estate taxes, ensure vacation properties or businesses do not need to be sold, and provide funds for inheritance equality for children and stepchildren.

The above is a very cursory review of some of the complex issues facing the parents of blended families. As noted throughout the post, it is essential you obtain proper family, estate and tax advice as you navigate the financial issues of a blended marriage.

This post covered steps you can take to protect your assets when getting married - steps that are taken well in advance of a potential divorce. These days, as we weather the economic effects of COVID-19, we’re facing a challenge to our portfolios that few could have anticipated. But there are things you can do to protect your wealth. Have a look at this recent COVID-19 roundtable discussion featuring top economic and investment professionals.

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 18, 2020

The Business Owner’s COVID Contemplation

As I track the headlines, stay up to date on the many new government programs, and advise my clients during this pandemic outbreak, I find myself coming back time and again to its impact on business owners.

Almost no industry is unscathed from COVID-19, but the business owner has had a herculean assignment. They have been tasked with keeping their business afloat (where possible) through typical or ingenious ways, while being asked to keep as many employees on payroll as possible, while watching their retirement dreams delayed or diminished before their eyes.

In today’s post, I bring you the analysis of Jeff Noble. Jeff is a colleague of mine at BDO, where he specializes in helping family enterprises, private companies, and not-for-profits transition their organization through their business lifecycle. During this time of COVID-19, Jeff’s thoughts on adopting an investment mindset are especially valuable for any business owner contemplating the future.

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By Jeff Noble

Entrepreneurs are a risk-taking bunch. Creative, innovative and ambitious, they invest, re-invest and double down in their business. They give up liquidity in exchange for higher returns.

For the past decade, our private company and family enterprise clients enjoyed an unprecedented time of growth and financial success. Markets were bullish. Global and Canadian economies grew. Business valuations escalated. Capital was inexpensive and available for expansion, acquisition, and innovation. Lifestyles expanded as consumers accumulated goods and used services. The value of homes soared.

Then came COVID-19. It stunned the economy and battered the markets. Everywhere. All at once.

The COVID contemplation


Business owners remember ‘BC’—before coronavirus—and are anxious to reach ‘AC’—after coronavirus. Many are using this time to consider the intentional, strategic decisions they must make not just now but also after the outbreak ends. These decisions are based on a ‘COVID contemplation’ and are happening in real time. These choices will affect life, family and future. To master this COVID contemplation, ask yourself these questions:
  • How do I keep my family safe, healthy, happy, fulfilled, and independent?
  • How do I keep myself happy and fulfilled?
  • Should I continue investing in my business or sell it?
  • Do I monetize part—or all—of my business and redeploy the capital?
  • Do I sell and divide the proceeds among my heirs and successors?
  • How do I create and build a better, more valuable business?
  • Do I look for acquisition opportunities and accelerate my growth?


Adopt an investment mindset


Going forward, private company owners should use an investment mindset when considering how to grow their wealth. By adopting this investment mindset, the owner takes into account not just their business but rather the entire family net worth.

The investment mindset considers the unique wealth dynamic of private company owners—where every success depends directly on the success of the business. This dependency creates risk and threatens the finances, lifestyle, and the very livelihood of private company owners and their families.

Just as investment counsellors work to create diversified wealth portfolios, business owners can adopt this practice with the objective of avoiding the risks associated with business concentration. The ultimate scorecard is not your margin or topline or even your bottom line. The ultimate scorecard is the change in the value of your business from year to year. Does this trend in valuation and outlook for the future justify your ongoing investment?

Appreciate the importance and impact of purposefully shifting risk away from the operating business towards other non-related investments. For many entrepreneurs, this focus on balancing liquidity and risk will be a strategic change of mindset. For example, there may be ways to unlock and release value from the corporate balance sheet and deploy that capital outside the business to develop a separate wealth stream, optimize working capital, and continually work to increase cash flow for investment in and out of the business. Regularly monitor the value of your business as you would any other investment. The objective is to create stronger, more stable balance sheets for your business and for your family. Use this goal as a filter when investing to decide where the best investment is for your family’s money.

This means integrating the company into the total family wealth portfolio. This family wealth portfolio consists of all tangible assets, includes the operating business (or businesses) and such things as home, vacation property, investment portfolio, life insurance, savings, and even high-value collections such as jewelry, art, cars, and boats. This emphasis puts balanced wealth creation ahead of lifestyle—creating diversified, de-risked family enterprise wealth and multiple income streams. Ultimately, you and your family will be better protected from economic volatility and shocks to your business.

6 strategies for your business and your family wealth

  1. Seek out alternative and supplementary revenue streams. For example, look at online sales, new customer segments, acquisitions, or alliances with a complementary business.
  2. Reduce supplier concentration. Look for new suppliers who can provide your current or similar goods and services—or for new suppliers to provide new or complementary goods and services.
  3. Take an objective, unbiased look at your business model—how you make a margin. Examine businesses that operate in different sectors, and adapt practices that could improve your model.
  4. Establish a level of return you want to make on your invested capital. Be sure to include a ‘risk premium’ over and above the actual and opportunity cost of that capital. Then, when looking to invest in your business—capital, equipment, buildings, people—understand the return that investment will generate. If that return does not match or exceed your objective, consider a different investment outside of your business.
  5. Work through your balance sheet. Look for ways to remove capital. These could include recapitalization with leverage or selling some equity to a third party or to management or family successors. With this capital now removed from your business, work with professional advisors to find investments that balance risk against your operating business.
  6. Enhance your business. Critically look at your business weaknesses and opportunities with the assistance of an expert. Look for ways to enhance your businesses value through technology, more professional management, new or reduced product lines or any number of ways to ultimately make your business more attractive to a buyer down the road. I often partner with my colleagues at BDO who specialize in enhancing the value of a business.
COVID-19 devastated the economy. It will recover. Some businesses may not survive. Many others will manage through. We expect the best of these will be well positioned to thrive in the post-crisis economy. Entrepreneurs will continue to work hard, innovate, and be creative. Those who view their business through an investment lens will create true, sustainable wealth for their families and generations to come.

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.

For more on how to respond, adapt, and move forward from COVID-19, check out the BDO collection of resources.

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 4, 2020

Alter Ego Trusts and Joint Partner Trusts – An Example

Way back on March 9th, I posted a guest blog post by Katy Basi on the basics of Alter Ego Trusts and Joint Partner Trusts. Who would have thought it would be 8 weeks later before I was able to publish Part 2 of this excellent series by Katy?

In Part 2, Katy uses an example situation to reflect the benefits of these trusts and some of the complicated tax issues that can arise when utilizing these trusts. I thank Katy for her excellent blog posts.
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By Katy Basi

Our previous blog provided a simplified explanation of Alter Ego Trusts (AETs) and Joint Partner Trusts (JPTs) and set out some pros and cons of using these types of trusts. The following is a sample fact situation illustrating why and how an AET or JPT can be useful – your advisors would be able to let you know if you are a good candidate for this type of planning.

Let’s take the example of John, a 72-year-old debt-free widower with two adult children. John owns his home in Ontario, having a value of $1.2 million, and he is planning to live in his home for the remainder of his life (he will leave his home feet-first, in his words). He also owns a non-registered portfolio of listed stocks and bonds worth $600,000 (cost base is $350,000) and a $500,000 RRIF. John sits down with his advisors (investment counsel, accountant and estates lawyer) and they all recommend that he set up an AET. Why?

In John’s case, this recommendation relates to the 1.5% estate administration tax in Ontario (aka probate tax) that would otherwise be payable on the value of John’s home and investment portfolio upon his death. Having an AET created to be the new owner of these assets results in a probate tax savings of approximately $27,000, so the recommendation is certainly worthy of consideration – who doesn’t like to save on taxes? John’s RRIF cannot be transferred to the AET, but he has named his two children as equal beneficiaries of the RRIF. As a result, there will be no probate tax on the RRIF as long as at least one of his children survives him.

As noted in our prior blog, an AET can be created when the settlor (John in our example) is 65 years of age or older. An AET is a living trust, meaning that it is created while John is alive (as opposed to a testamentary trust, which would usually be created in John’s will, taking effect only upon his death). John can transfer assets to the AET without triggering capital gains tax on these assets, unlike the result with other living trusts. Upon John’s death, the assets owned by the AET are deemed by the Income Tax Act (the “ITA”) to have been disposed of by the AET at fair market value, potentially triggering capital gains tax at that time (but no probate tax).

An AET is subject to income tax at the highest marginal tax rate. Hence, as a practical matter, while John is alive the net income earned by the AET on the investment portfolio (after expenses are deducted) would usually be paid or allocated to John by the AET by the end of every calendar year. John would then include this income in his tax return, allowing John’s marginal tax rate to apply (the AET deducts the income allocated to John in its tax return, leaving the AET with no income after the allocation). If John does not need the after-tax income, he can gift it to the AET if desired. The net result is that John effectively pays the tax on the investment income in the same manner as before the creation of the AET – the paperwork is just more complex.

John and his advisors must consider the income tax that will be triggered by John’s death in determining whether an AET is helpful. Thankfully, an AET is permitted to claim the principal residence exemption (unlike most other types of trusts), so any capital gain accrued on John’s home that is triggered by John’s death will not create a tax obligation (provided that the AET’s tax return is prepared and filed properly – professional accounting advice is a necessity here). However, the AET will be taxable on the capital gain triggered on the investment portfolio. Capital gains are only half taxable, but the taxable half of the capital gain will be taxed to the AET at the highest marginal tax rate (53.53% in Ontario). John’s RRIF is fully taxable upon his death, but the RRIF is included in John’s terminal return (the personal tax return filed for John from January 1 of John’s year of death to his date of death). (We note that either John’s children could pay the tax on the RRIF, or the funds in the AET could be used to pay this tax. In either case, the tax rules relating to graduated rate estates will need to be considered carefully in order to ensure that this payment does not create a tax problem.)

Let’s compare this result with the outcome if John did not have an AET. Upon his death, John’s RRIF and the taxable capital gain from his investment portfolio are included in John’s terminal return. John’s RRIF is large enough to soak up all of John’s marginal rates of tax (we reach the highest marginal tax rate in Ontario at an income level of $220,000). Therefore. a sizeable chunk of his RRIF, and the taxable capital gain from the investment portfolio, are subject to tax at the highest marginal rate. This is the same result as with the AET, so the income tax effects of having an AET are neutral for John. This is not always the case, however, and the income tax implications should be carefully considered by anyone who is looking at AET planning.

John has decided that the AET works for him. He has considered the cost of having his estates lawyer draft the deed creating AET and other documents (e.g., trust resolutions), and the cost of having a real estate lawyer transfer title of his home to the AET. John’s investment counsel has assured him that there is no cost to transfer his investment portfolio to the AET. John understands that he will be required to file annual tax returns for the AET, and has an idea from his accountant as to the annual fee for this service. (AET tax returns are due by March 31 – March 30 in a leap year – so earlier than John’s personal tax returns.) John is comforted by the fact that he is a trustee of the AET and has been given complete control of the AET while he is mentally capacitated to manage his financial affairs. He has concluded (somewhat pessimistically) that his life expectancy is such that while he will incur costs to set up and administer the AET, these costs are substantially outweighed by the probate tax savings provided by the AET.

If John has a spouse or common law partner, as defined under the ITA, he could create a similar trust, being the JPT. If both John and his spouse (Joanne) are 65 years of age or older, they can both transfer assets to the JPT without triggering capital gains tax. (If Joanne is younger than 65, she will have to wait until she turns 65 to transfer assets to the JPT on a rollover, or tax-free, basis.) All income generated by the JPT will need to be allocated to either John or Joanne (care must be taken here to ensure that the attribution rules under the ITA are considered – no shifting of income from one spouse to another is allowed). The JPT continues until both John and Joanne are deceased, at which time the tax results are as detailed above.

If you think that AET or JPT planning may be helpful, be sure to reach out to your advisors for their views on your particular situation. AETs and JPTs are far from simple planning - professional advice is an absolute necessity.


Katy Basi is a barrister and solicitor with her own practice, focusing on wills, trusts and estates. Katy practised income tax law for many years with a large Toronto law firm, and therefore considers the income tax and probate tax implications of her clients' decisions. Please feel free to contact her directly at (905) 237-9299, or by email at katy@basilaw.com. More articles by Katy can be found at her website, basilaw.com.


The above blog post is for general information purposes only and does not constitute legal or other professional advice or an opinion of any kind. Readers are advised to seek specific legal advice regarding any specific legal issues and for their specific province.

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 20, 2020

Six Financial Lessons of COVID-19

The last couple months have been very distressing from a medical and self-isolation perspective. They have also been difficult from a financial and business perspective. I was recently thinking about whether we could learn any financial and business lessons from this time. I came up with six lessons, which The Globe and Mail published on Thursday. I would like to thank Roma Luciw of the Globe for her editing skills.

The article can be found here. If the article does not open, it can be accessed at no charge by signing up with The Globe.

Government program update


I also want to mention some important recent changes to government programs:

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 6, 2020

COVID-19 Government Program Updates – Plus: Why Emotions are a Poor Guide to Investing

It is extremely challenging to write financial posts on COVID-19 as the situation is fluid. Whatever the challenge in writing, it is far more difficult for Canadians and small businesses who are adapting to changes on the fly.

The programs Canadians intend to rely upon are upgraded and changed daily by governments, who themselves need to adapt to constantly changing economic conditions. This has caused significant confusion among Canadians about the qualifying conditions and application process for these programs.

For small businesses who are facing gut-wrenching decisions on staffing, the lack of clarity has been a significant issue, as they are not sure whether to lay off staff or to hold on and hope for financial assistance.

Government Program Updates


As I write this post, the original Emergency Care Benefit (ECB) and Emergency Support Benefit (ESB) programs have been replaced by a single more generous program known as the Canada Emergency Response Benefit (CERB).

On wage subsidies, the original 10% Employer Wage Subsidy Program (EWSP) has been maintained, but a sister program called the Canada Emergency Wage Subsidy (CEWS) was announced that introduces a 75% wage subsidy. These two programs will co-exist. It is hoped the CEWS has been upgraded to a level that will allow small businesses to keep their employees on payroll, rather than laying them off, and be incentive enough to rehire employees previously let go. See this detailed article to understand the CEWS and how it works with the EWSP.

Here is an update as of April 8th for the changes to the CEWS.

There have been multiple filing and payment extensions for tax returns, from personal tax, to corporate tax to HST returns. This document is an excellent summary of all the new deadlines and extensions.

If I had to suggest one thing you should do, it would be to watch this webcast by BDO - Part 2: Cash Flow Strategies and Government Incentives in the time of COVID-19. It is an oral breakdown of all these programs with questions. Register then watch here.

There are two other important programs, the Canada Emergency Response Benefit I noted earlier (This program will provide $2,000 a month for up to four months for workers who lose their income as a result of the COVID-19 pandemic) and the Canada Emergency Business Account (loans of up to $40,000). Please check back during the week as I hope to have links or further details added in the next few days.

The pace of change is so quick that some parts of this post may be overtaken by current events by the time you read it. To stay updated, I recommend this hub of COVID-19 coverage created and updated regularly by BDO.

Why emotions are a poor guide to investing


The roller coaster ride the stock market has taken us on has been far less exhilarating than the roller coaster at your favourite theme park. As of April 3rd, the Dow is down 26% for the year and the TSX is down almost 24%. However, on March 23rd, those numbers were down around 35% and 34% respectively. 

This ride really tests our risk tolerance - see the discussion in this blog post under equity exposure - and makes many of us emotional wrecks.

I have always been interested in the emotional side of investing and this topic came up during a conference call I was part of, put on by Tacita Capital, one of the investment managers on the BDO Wealth Advisory platform. The call’s main theme was COVID-19 and the state of the market, but one slide featuring a graphic by Russell Investments really caught my attention.

The graphic’s purpose was to point out how our emotions are a poor guide to investing, which I think most of us agree is a very true statement.

We start out with optimism, and the curve starts to move upwards as we get excited and moves higher as we are thrilled. We then hit a point of euphoria, which Tacita noted is the point of maximum risk. It is also the point where many people plow more money into the market assuming the good times will continue forever.

The curve then turns downward to anxiety, keeps moving downward to fear and from fear to panic, which I would suggest many of us reached on March 23 or earlier (based on what many friends, acquaintances and clients have told me). Unfortunately, the graphic reflects one more step on the downward slope, that being despondency.

The good news is despondency is also the point of maximum financial opportunity (assuming you have cash resources available). From there we thankfully start back up the curve, from hope to relief to optimism.

Every investor is sitting at their own individual stage. Whatever your investing mood and whatever your portfolio’s performance, I keep telling everyone - including myself - that the stage of hope will arrive. Here’s hoping that it arrives sooner rather than later for all of us.

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 23, 2020

COVID-19: Finances, Retirement, and the Impact on Small Business Owners

Not to assume I speak for all my readers, but my guess is that many of you are feeling like I do, knocked off kilter by limited social interaction, restricted working conditions and the disconcerting feeling of watching your retirement savings dwindle and finances sag.

I have not even mentioned the most serious issue: health. You or a family member may have contracted the new coronavirus. And if you have managed to avoid it, you may still be concerned for yourself and your loved ones, some of whom may be especially vulnerable.

Financial concerns


The financial concerns because of this virus are real. Whole industries such as travel, entertainment and oil have been hit extremely hard. Financial transactions have slowed or ground to a halt in certain industries. Many if not all businesses will be impacted by the economic consequences to fight this virus. Some will bounce back quickly, others more slowly.

We are impacted as employees, small business owners or retirees vis-a-vis the security of our jobs, the stability of our businesses and how we fund our retirement (with retirement funds down 10-30% depending upon your asset mix, in a matter of weeks). The anxiety we all feel is rooted in a reality that will not be fully measurable until the virus recedes and normal life resumes. But normal life will eventually resume, and we can take action now and in the future, to put us in the best position to rebound from the financial challenges of coronavirus.

I have received various questions from individuals and business owners. I will address those questions in this post.

Individuals


I have been asked two questions in particular by individuals:
  1. Should I reduce my equity exposure to limit my stock losses?
  2. I am near retirement - should I delay my plans?

Equity Exposure


In a perverse way, COVID-19 has forced many of us to learn about our risk tolerance and ability to handle the volatility of our current investment allocation; that volatility is often correlated to the level of equity we hold. If you cannot sleep at night with your current equity or investment allocation mix, then maybe you have too much investment risk and you need to speak with your investment advisor.

This discussion should revolve around whether your equity allocation truly suits your investment objectives and whether the potential volatility of your equity holdings is appropriate for your risk tolerance, now that you have been on the roller coaster ride and can quantify your risk aversion.

You will have noticed I have not directly answered the "should I reduce equity" question. That is because (1) as an accountant I cannot provide investment advice and (2) the answer is really based on your risk tolerance and other factors specific to your own situation. 

As a side commentary, while a requirement of the investment industry is to determine a client’s risk profile and create a portfolio that suits that profile, I would suggest this risk determination is often superficial. Most of us do not understand our true risk tolerance until a situation such as the markets’ rapid reaction to the virus knocks your portfolio down 25% in a matter of days.

The better investment managers I deal with, not only determine your risk tolerance through an interview process but also back-test your tolerance for that risk over the markets for the last 30 years or so. They do this before they invest your money. It would be interesting to see who has been more stressed recently, those with risk tolerances determined purely by questionnaire and discussion and those who also back-tested before they invested. I would guess the latter.

Retirement Plans


It may or may not be too early in this ordeal to alter your retirement plans. We have previously discussed how the sequence of returns can affect your retirement. While sequence of returns technically deals with your investment returns when you start retirement, the reality is that whether practically or psychologically, this significant drop in our retirement savings could impact when we start our retirement.

There is no one-size-fits-all answer to this issue as it will be very fact specific. If you have a pension from your job or some other anticipated flow of funds in retirement, a stock market decline may not be a large longer-term issue assuming the market bounces back at some point like it has done historically.

However, if you were going to draw on your retirement funds immediately upon retirement, the reduction in your nest egg in this bear market could severely impact your retirement plans.

My suggestion is that once things settle down, you review your plans (including the preparation of an actual financial plan or a review/update of an existing plan) with your financial planner, financial advisor or accountant. You will then have objective valuation of whether your retirement date may need to be pushed back a year or two.

Small Business Owners


Small business owners face a whole bunch of concerns sparked by COVID-19 that employees don’t need to manage. These fall into both short- and long-term buckets.


Short-term concerns


Short-term practical concerns include items like how you manage your cash flow, will insurance cover any of the lost profit or expenses and what are business owners’ employment responsibilities.

Many small business cash flow issues are addressed in this document.

I have been informed by colleagues at my firm who deal with preparing insurance claim reports and the related costs that there is no standard answer to whether a company’s insurance coverage will cover any of their losses due to COVID-19. Each claim will come down to the specific wording of the policy and how that policy deals with such terms as “pandemic,” “infectious disease” and “business interruption.” A legal interpretation may be required in many cases.

The employment law questions are complex and unique in this current situation, and unfortunately, I tell my clients they need to talk to their employment lawyer.

Clients are also asking if Ottawa or provincial governments will provide aid to help keep their businesses afloat. This is a fluid situation. The feds have announced a robust stimulus package, with many details still to follow. [ Note: after publishing this post, the Emergency Care Benefit and Emergency Support Benefit were subsequently rolled into the Canada Emergency Response Benefit (see details here)]. The provincial and territorial governments may also chip in to help their constituents.

Longer term concerns


As discussed earlier, certain industries and businesses have been hard hit by the economic slowdown caused by the virus, and almost all businesses will suffer to some degree – Netflix and Amazon are likely two of the high-profile exceptions. For a couple of the business owners I work with who have been considering selling their business, this sobering event has crystalized the risk of having their retirement concentrated on one major asset: their business. This is known as concentration risk.

They have now come to realize that almost any type of business could be severely impacted by a black swan event such as COVID-19. The risk to their retirement is significant if the concentrated business asset loses value due to an unanticipated event, especially close to their retirement date.

I think once the dust settles, some business owners may get very serious about the process of getting their business ready for a sale, whether in a year or over a couple years. As part of that process, they may undertake a value enhancement process to increase the sale price, by taking the necessary management, technological and other steps to become more attractive for a buyer (unashamed plug, BDO has specialists that assist you in achieving this value enhancement and others that can then take your business to market once the enhancement has been accomplished).

Tax considerations for difficult and uncertain times


Here is a link to a BDO publication released on March 16 about tax considerations for difficult and uncertain times. It is a good read.

A final note on the personal side of coronavirus


This was not a blog post I expected to write. Typically, at this time of the year, I write about how tax season is going. Coronavirus has disrupted our lives, sometimes in small areas that punch way above their weight.

Let me say upfront, I understand restricted social interaction including the cancellation of most sporting events is a minor inconvenience to help slow down the spread of the virus. In comparison to those who have fought wars or escaped warzones or been subject to other horrific issues, social distancing does not compare.

That being said, as most readers are likely aware, I am a big sports guy and I follow the Leafs, Raptors, Blue Jays, NFL football (sorry, CFL fans, I used to love the Argos, but that was many moons ago) and golf, among others. Like many of my friends, I have been shocked by the void of not having sports available to take our minds off the coronavirus as we have had during other economic downturns or communal crises, like SARS or even 9/11. The social distancing that is saving lives has also taken away a diversion that could help sustain everyone’s mental health.

I had never given it much thought, but when I went to my computer to surf and get my mind of the virus issues, I quickly realized the majority of my internet favourite list is made up of sports and investment sites. With no sports to write about and no desire to hear more bad investment news, my internet surfing has ground to a halt. Amazon is now the beneficiary of my increased Kindle book downloads. Probably a better thing intellectually, but I still have a sports void.

For those of you who expected this week to see Part 2 of the excellent series on Alter Ego and Joint Partner Trusts by Katy Basi, I hope to bring that to you in two weeks or when current events dictate. We are living in strange times, and I’ve always taken pride in The Blunt Bean Counter being a living blog, one that responds to events in the market and in our lives. It’s not business as usual for any us, but together we will get through this. I wish you and your families the best of health and a quick financial recovery.

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.

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