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, 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.