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. 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, June 28, 2021

Gone golfing for the summer—Plus sign up for newsletter

This summer, as usual, I will take a break from the blog and spend some time golfing and enjoying the good weather—I hope with family and friends. I will likely post a couple Best of The Blunt Bean Counter posts during this time.

I will also use my time this summer for some life contemplation, including where and how the blog fits into the picture as I wind down to my retirement.

I wish my readers a great summer and ensure you take some time off; you deserve it after the last 16 months or so.

With my summer break approaching, it’s a great time to sign up for BDO’s newsletter. It goes out every two weeks and gives great business insights on a variety of timely and critical business topics. I often link to them in my posts.







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 14, 2021

Let me tell you! William Bengen knows how to define success

Today I bring back my old “Let me tell you!” series, where I delve into topics that are more philosophical than financial. In this blog post, I discuss the three life questions financial guru William Bengen asks himself each night before he goes to sleep.

Mr. Bengen is a bit of legend in financial circles. He created the ubiquitous 4% retirement rule: that people can withdraw 4% of their savings every year in retirement and still support themselves financially. I have written about this rule several times in my “How much do you need to retire” posts. The last time was in February.

But Mr. Bengen also has some interesting thoughts beyond finances. In February he joined the Rational Reminder Podcast to discuss retirement planning, and also shared his thoughts on success in general. (By the way, I was also interviewed for this podcast last year.)

Bengen defines success  


Podcast hosts Benjamin Felix and Cameron Passmore typically ask all guests the same last question: “How do you define success in your life?” I found Mr. Bengen’s answer fascinating.

“That's a wonderful question for everyone, I guess," he said. "Before I go to bed each night, I've done this for a number of years, I ask myself three questions.

"And the first question is, today, did I learn anything new, or did I create something? The second question is, did I do anything to help anybody, particularly people I love, but even if for a stranger, maybe helping an old lady across the street, or helping a child understand a math problem? And the last point is, have I given proper attention to this, the mystery and wonder of the world in the universe, and being alive and being able to experience all this? If I can answer yes to all those three questions during the day, I felt I've had a successful day.”

While the above quote has nothing to do with Mr. Bengen’s brilliant financial planning, it shows a truly insightful mind that looks at success as more than just fame and financial success. As I wrote two fairly popular blog posts on money and success in 2012 (see here and here), his comments intrigued me. Today I break down his thoughts.

"Did I learn anything new ... or did I create something?"


Wow, did this answer strike a chord. In 2018 I wrote a post making the case that if you are not learning, you are forgetting. My father-in-law has espoused this mantra all his life, and his children and grandchildren live by it. A hunger for learning has so many positive aspects. It keeps your mind active, allows you to pass knowledge down to your family and friends, helps you in your day-to-day business interactions and opens your mind to concepts and thoughts you may have previously dismissed. I do not want to dismiss the second part of Mr. Bengen’s question - “did I create something” - but that would be a more limited question in most cases.

"Did I do anything to help anybody today?"


While Mr. Bengen initially spoke about helping family, he expanded that to helping anyone. As I think most of us tend to help our family as a given, I will veer off into the topic of helping anyone.

While helping an old person across the street or holding a door open is quick and simple (is it me, or is holding the door open a lost courtesy? I do this all the time but constantly have doors slammed in my face when walking behind other people), I personally appreciate those who give time to causes.

Time is precious and to give to others is incredibly special. I have a good volunteering track record compared to the average person: being a Big Brother, granting wishes under the Make-A-Wish Foundation framework, and sitting on a couple charity boards. But when I see how much more others do, I am often humbled. Coming out of COVID, I suggest you consider giving of yourself whenever and wherever.

One can also help financially. One can argue this is an easy way out, but I disagree. Organizations need volunteers, but they also need money. I recently wrote a post explaining why donating marketable securities provides an altruistic benefit and a tax benefit.

"Have I given proper attention to this, the mystery and wonder of the world in the universe?"


I really like this last question. We are often startled by nature and the general wonders of the world; however, I would suggest this happens far too little. My only comment here is that COVID took many of us to negative places, mentally and physically (offset by some heroic front line and other efforts by special people). It would probably do us some good as we start moving back to a “new normal” to appreciate some of the mystery and wonders of the world, to recharge our positive selves.

My concern with any of my “Let me tell you!” posts is they become preachy. But I hope today’s post on Mr. Bengen’s nighttime routine provides you some helpful thoughts for reflection.

Note on new email system


For those of you who are subscribers and received this post via email, you may have noticed a small difference in the email notification. I have changed to follow.it as my email provider, part of my ongoing efforts to use the most up-to-date technology. If you would like to subscribe to the blog, enter your email in the box at the top right corner of this page.

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 31, 2021

“My Kids Will Never Fight Over My Estate”

In December 2019, I reviewed the book “Bobby Gets Bubkes: Navigating the Sibling Estate Fight.” In that book, estate lawyer Charles Ticker attempts to explain how to avoid, or at least limit, sibling estate fights when drafting your will. In the comments section to that post, Michael James, who writes the excellent finance blog Michael James on Money, made the following remark:
Sounds like an interesting book. Sadly, I'm guessing most people incorrectly think that their own kids would never squabble in these ways, so they think they don't need to follow the book's advice.
Michael’s “guess” is very perceptive. Based on my experiences over 35 years as an accountant, many parents look at their children and their sibling relationships with rose-coloured glasses or, in some cases, with blinders. As a consequence, they ignore clear warning signals that their children have significant sibling rivalry issues and don’t work well together. In some cases, you can almost predict a sibling estate fight.

Let me be clear. I am not saying every estate has a sibling fight. Many families settle and distribute the estate in accordance with the will and their parent’s wishes with little acrimony. However, this is far from the case in many estates, as human nature can turn ugly when there is money and sentimental items at stake, especially where sibling issues have reared their heads during the parents’ lifetimes.

Today, I am going to list factors in no particular order that can cause siblings to squabble over an estate.

Why siblings squabble over an estate


  • Greed – Very simply, money causes some people to lose their minds and perspective. This can destroy sibling relationships.
  • Grabbers – I have seen this many times. One child “grabs,” or takes, items before the will is considered, or even ignores the wishes of the will, which starts a spiral of hurt and mistrust among the siblings.
  • Sentimental items – Children often fight over these items. In many cases, this issue can be avoided if the parent simply provides a specific item-by-item allocation in their wills of sentimental items such as jewelry. Parents can also cause huge sibling issues when they promise or tell a child they will receive a certain item and then do not specifically allocate that item to the child in their will—or worse yet, allocate the item to another child. Parents: always make your will consistent with what you have told your children, or communicate the change to them.
  • Grandchildren – There is no right or wrong answer here, but parents really need to think through how to allocate their estate when one of their children does not have children of their own or each family has a different number of grandchildren. Is the estate split equally by family? And if giving money directly to grandchildren—does each grandchild receive the same amount, or is the allocation equal by family and a grandchild with no siblings receives more than a grandchild with siblings?
  • Business assets – When parents leave a business to one sibling and equalize other siblings in cash or investments of equal value, one would think they have accomplished peak fairness. Yet some businesses explode after the parents die, making the child that took over the business very wealthy. Alternatively, the business may stumble or even fail, leaving that child in far worse financial situation than their siblings. Either way, the disparity in financial position creates acrimony. And it’s just one specific nuance of conflict in family business succession.
  • Asset in one child’s name – Parents often put assets in a child’s name for probate or tax planning purposes. But as the saying goes, ownership is nine-tenths of the law. Some siblings may depart from the parents’ assumption that they will act just as trustees of that asset for their siblings. They make think of themselves as the actual owner of the asset.
  • No parents, no buffers - One comment from Charles’ book I found truly relevant was “that once the parental referees are out of the picture, the gloves come off.” I have seen this so often. Parents really do act as buffers and referees for their children. Without a referee, disagreements can break out.
  • Spouses and in-laws – Spouses and in-laws in the ear of one child stoking their belief that the parents divided assets unfairly have caused many a sibling fight.

Parents: Have that discussion


Many of the above issues are human nature, which can’t be avoided entirely. But parents need to consider all the above possibilities when drafting a will. Readers of my blog will know that I am a huge proponent of discussing your will to a full or partial extent with your family and explaining your intentions. I think this can sometimes avoid or minimize sibling estate issues.

It is sad that sibling estate fights are even a topic, but they do unfortunately often become an issue. Parents, my suggestion to you is consider these issues, get good estate planning advice, consider a family meeting, and take off your rose-coloured glasses when planning your estate.

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 17, 2021

The stunning story of a patient investor who made good

Investment managers and professionals swear by two mantras. The one that gets the most buzz is to understand your risk tolerance. But it’s the other that I want to discuss today: have patience and conviction with your investments. This holds true whether you have hired an investment manager or investment advisor to manage your investments, or are a do-it-yourself investor.

I recently encountered a stunning example of the value of patience in investing. I was preparing a client’s tax return (note: the client has given me permission to discuss this example, without using their name). In preparing her return, I flagged that she may need a T1135 Foreign Income Verification form, which reports foreign holdings. My client had about 2500 shares of Apple stock, and I was unsure whether the shares has an adjusted cost base of more than C$100,000—the threshold to require that form.

The client said no, the original cost was far below the $100,000 threshold. It was just that she had held her Apple shares for around 14 years and not sold them. The client also provided me a summary of her stock purchase history. She had purchased 100 shares of Apple stock in 2008 for around C$16,000 and basically held onto them. She had only sold off a small portion once: in 2012, to help fund a house purchase.

The summary provided was startling. The 2,500 Apple shares that she owns had a fair market value of $375,000 (as of mid-April). Yet all she did was buy the original 100 shares 13 years ago for $16,000 and wait. Time and stock splits, and Apple’s overall strong performance, took care of the rest. What a textbook case of a patient investor (especially so given Apple’s stock price has been all over the place).

As someone who in shredding my tax returns a couple years ago realized how many flyers I had taken, how many disruptive stocks I had purchased looking for the big winner, I felt really ridiculous. I felt even worse when I realized that my first blog post on The Blunt Bean Counter in Sept 2010 was called Why Didn't You Buy Apple for $25?

In that post I discussed famed money manager Peter Lynch, who among many other suggestions noted that by just paying attention to what is going on around you and having some basic common awareness, both the novice and the sophisticated investor can find growth stocks in their day-to-day lives. I then commented in the 2010 post: “think of how much money any of us could have made paying attention to the iPod fad. Kids were suddenly walking around with white wires hanging out of their ears attached to these newfangled ‘Walkmans.’ In retrospect, how could we have missed this and not bought Apple?”

Why I did not buy Apple after writing that blog post is beyond me—and my clients’ timeline is fairly similar to that initial post.

Apple is just an example. You could have purchased most any Canadian bank in 2008 and had spectacular gains if you held the stock. Maybe not as large as Apple, but still substantial with significant less volatility.

So the moral of the story: Patience and conviction in your investing are especially important. That does not mean once you buy a stock you hold it for life; you still must review whether your original reasoning and thesis for purchasing the stock is still valid and whether the company is still growing. But good companies tend to stay good companies, and flipping from one to another or looking for the next disruptor is not necessarily the best strategy. Take it from me.

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 3, 2021

The tax benefits of donating stocks to charities

There were many intriguing issues a couple months ago when the Reddit subgroup WallStreetBets drove the shares of GameStop, BlackBerry, AMC Entertainment, and others skyrocketing. The issues ranged from retail vs institutional investors to the power of social media stock groups to the way the Reddit group used excessive shorting to manipulate the stock price against the shorters themselves.

I will not comment on these issues today. What I want to discuss is the altruism shown by members of the WallStreetBets group. When I logged on to the forum to see what all the fuss was about, I noticed a lot of digital trash. But what I found remarkably interesting was the numbers of posters saying they would contribute x amount of their proceeds to charity and urging others to do the same. What a congruence of capitalism and altruism.

This blog post deals with the tax benefits of charitable giving and, more particularly, donating public stocks with unrealized capital gains to your charity of choice.

The Reddit folks were not the only winners this year. Those lucky enough to have kept their jobs during COVID in many cases built up excess cash reserves as their spending plunged on entertainment, travel and some retail. Many of those people and other Canadians shut in by COVID turned to stock market trading to entertain themselves and make money (as seemingly any number of stocks and sectors produced outsized gains during various periods throughout the fall and into 2021).

So, if you have significant realized or unrealized gains in 2021, how can you help society and improve your tax situation? The answer: donating part of your winnings or shares in public securities with large gains.

I have discussed this topic before, but given the current circumstances, I think it is a good time for a refresher on the tax benefits of making donations, especially as many charitable organizations are hurting due to COVID. Please note I will only discuss the donations of cash and public securities today.

Donation of cash


If you have realized capital gains on stocks in 2021, you can make a cash donation (the same holds for any cash donation whether from a realized stock gain or just excess cash in your bank account). You can claim a donation credit of up to 75% of your net income. Where an individual makes a charitable donation of cash, there is a federal non-refundable tax credit of 15% on the first $200 of donations. For donations in excess of $200, the non-refundable tax credit increases to 29%. In addition, the provinces provide provincial tax credits.

In Ontario, my home province, the actual tax savings for a donation range from approximately 40% (if your net income is around $50,000) to 50% (if you are a high-rate taxpayer) of your actual donation, for any donations in excess of the $200 limit. Thus, from a cash perspective, your donation only costs you 50-60% of what you donate to the charity. A good deal for all parties.

Donation of public securities


For those of you sitting with large unrealized gains on public securities, a donation of these shares is even more tax effective than a donation of cash from the sale of your shares (this applies to non-registered account donations only, not RRSPs etc.). That is because when you donate public securities listed on a prescribed stock exchange, the taxable portion of the capital gain is eliminated, and the net after-tax cost of the donation is reduced substantially.

For example, if a high-rate Ontario taxpayer sells a stock for a $10,000 gain (say the proceeds were $12,000 and the cost was $2,000), they would owe approximately $2,700 in income tax on the capital gain in the following April. If they donate the gross proceeds of $12,000, the donation would result in income tax savings of approximately $6,000 when they filed their return. The net after-tax cost of the donation is approximately $8,700 ($12,000 + $2,700 tax - $6,000 tax credit).

However, if the taxpayer donated the stock directly to a charity, the organization would receive $12,000, the taxpayer would receive a refund of approximately $6,000, and they would owe no taxes on the capital gain, making the net after-tax donation cost only $6,000.

Clearly, where you have a stock or bond you intend to sell and you plan on donating some or all of the proceeds, a direct contribution of the security to a charity is far more tax efficient. Also note that most charities make the process relatively pain-free.

Donation of securities from a private corporation


Canadian-controlled private corporations (CCPCs) can be taxed in various ways, so I am not going to get into the ins and outs of donating. Speak to your accountant, but it generally won’t matter that much after tax whether you do a personal or corporate donation. When it does matter, the choice of personal vs. corporation depends on your situation.

However, for most CCPCs, they will be able to add 100% of the capital gain ($10,000 in the example above) to their capital dividend account (CDA) and get this money out tax-free (assuming there are no negative attributes to the CDA account). For a detailed discussion of the CDA, see this blog post.

COVID has been far from equal in how it’s impacted different industries and the people working in them. If are one of the lucky ones whose job has not been affected—perhaps it even thrived—and you played the market and had capital gains, you may wish to donate some of your gains to help a good cause. You will help make the world a better place. And as an added bonus, you will reduce your taxes.

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 19, 2021

Solving the sibling wealth gap

We Canadians are famous for staying private about money. But finances can undermine family unity in insidious ways. At the top of this list is wealth disparities among siblings.

To help address wealth gaps among siblings, I’ve asked my colleague Jeffrey Smith to share his experiences on this subject when advising high net worth families. Jeff is a Senior Manager in BDO’s Wealth Advisory Services practice, based in Kelowna, BC.
________________

By Jeffrey Smith

As a child, I never really noticed wealth disparities at family gatherings. Everyone seemed to be the same: grandparents, parents, aunts, and uncles. No one had a lake house or cottage, or did multiple family vacations; everyone met Fridays at my grandparents to visit. We were all the same, or so I thought.

Now, many years later, I see these differences within families—in both my own and others. The issue comes up regularly when doing financial and estate planning for families and advising them on how to manage their wealth.

Many families suffer from friction caused by one sibling having more money than the other. Whether this is due to differing lifestyle choices or career impairment due to health, sibling relationships can break down due to income and wealth disparity. Parents can’t solve all these problems for their children—sometimes the biggest challenge is to not intervene—but they can at least avoid increasing the conflict.

Two siblings, two lifestyles


Consider this fictional example with some true-to-life themes.

A large family with many children includes two brothers who have been very close from the time they were toddlers. That all changed when they graduated university. The older one (let’s call him “Dan”) finished his schooling a few years before the younger one (let’s call him “Stewart”). By the time Stewart graduated, Dan had married into a wealthy family. This allowed Dan to live a life of leisure, at least in Stewart's eyes. Meanwhile, Stewart began looking for his first job.

He also began to feel jealous of Dan. For the first 25 years of their lives, they were equals; now Dan leads a privileged life, where money is almost no object. Animosity grew as Dan invited Stewart to expensive events and enjoyed his possessions, which Stewart couldn’t afford. Unfortunately, what was once the closest of childhood relationships deteriorated into occasional chats based more on obligation than brotherly love.

Sibling wealth disparities are so different from other differences in wealth. Comparing yourself to a friend or co-worker, you can internally justify why they may appear to be ahead of you financially. Maybe they inherited a large sum or came from a wealthy family; however, when comparing your financial success to your brother or sister, those justifications sometimes fall. (Though not in Dan and Stewart’s case.)

From the perspective of an outsider, siblings would have had the same advantages and disadvantages growing up, been influenced by the same parents, and had access to the same financial and academic resources. Therefore, when one sibling finds more financial success, people can make assumptions about intelligence and work ethic.

Is that reasonable, though? What if one sibling suffered from a medical impairment or financial hardship early in life? What if finances are different because of divorce or one having more children than the other? What if one married into wealth? What if the wealth variances are solely a reflection of drive, determination and work ethic?  Obviously, a complex and delicate area.

When wealth gaps occur, it can impact the sibling relationship. As wealth is generated, lifestyle changes naturally occurpeople may eat out more or travel more. The experiences and bonds that were created growing up on a level playing field now have unequal pressure. This can harm the relationship, sometimes irrevocably.

The role of planning


While sibling wealth variances based on independent individual circumstances are subject to many variables that cannot be controlled, family related wealth variances can be controlled or minimized in many circumstances. Families need to avoid negative pitfalls from poor planning that may inadvertently lead to significant wealth disparity for the next generation. Let’s consider a situation that is fictional but reflects real-life realities.

A successful farming family plans its family business succession. The parents decide to retire, and help their son continue the farm by giving him the equipment and an equivalent amount of cash to their daughter. The parents decide they wish to retain ownership of the land for retirement income via rent. 

At first glance this all seems fair. The son receives debt-free equipment and the daughter receives cash to do what she pleases. Everyone appears happy, except for one bit of information that is far more important than it seems: What price is the son paying to rent the parents’ land?

The question arises at a client review of their net worth and income. As the family’s advisor, I would ask why the son is paying far less than market value for renting the farm. The answer? Rent was based on the parents’ expected cash needs and did not consider fair market rents.

Here is where wealth disparity is inadvertently created by mom and dad. The son has been operating a farm. Depending on the amount of time, amount of savings, and how one wants to quantify the savings and overall impact on the son’s business, the total benefit could reach millions of dollars. Therefore, the son receives a significant benefit compared to his sister because of his parents’ retirement.

In this example, we can help this fictional family by identifying and quantifying the unintended wealth inequality. They would then be able to equalize it, and likely strengthen the sibling bond in the process. But it does underline that one must look at all factors when transitioning a business. If you don’t consider all related transactions, you too could be creating unintended consequences.

What grandparents can do


It’s not just parents who need to watch for planning missteps on wealth. Grandparents can cause hard feelings and friction when they name grandchildren directly in the will. When a sibling does not have children, they may feel like they’re penalized for not having children.

Depending on the amount of money and number of grandchildren, the estate may erode significantly. Consider whether instead your children should receive equal units and then they control how much is passed on to their children; or you still leave money to grandchildren, but allocate equal amounts to each family regardless of how many children. There is no right answer, but these important planning areas warrant conversation and consideration. There are ways to keep the playing field equal, and in doing so keep the peace within the family.

Managing emotions can be difficult when discussing finances. But money and success should never ruin the foundation of family and relationships. Having good, open conversations, being honest about how you feel, and expressing what is bothering each party can mend the most fragile of family relationships and create stronger bonds.

Jeffrey Smith - CPA, CA, CFP, CLU - is a Senior Manager in BDO’s Wealth Advisory Services practice and can be reached at 250-763-6700 or by email at jrsmith@bdo.ca.

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

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

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

Monday, April 5, 2021

Confessions of a Tax Season Accountant — 2021 Edition

In the old days of this blog, some readers may recall I wrote a series of posts titled “Confessions of a Tax Accountant” during income tax season. Those posts would discuss interesting or contentious income tax and filing issues that arose as I prepared my clients’ tax returns. Two years ago I condensed the confessions down to a single confession. Last year COVID struck. I didn’t confess last year. I just prayed.

Today, to bring some normalcy back to the blog, I will again provide a single tax season confession for the 2021 tax season.

Home office claims

The most important change for your 2020 tax filing is how you claim your home office expenses. I detailed these changes a month ago, so please refer there for more details.

A couple new tax credits


For 2020, there are a couple new tax credits:
  • Digital News Subscription Credit – This non-refundable credit may be available if you paid for a digital news subscription in 2020. The limit is $500. You can find the details here.
  • Canada Training Credit – Per the CRA, “Eligible workers of at least 25 years old and less than 65 years old at the end of 2019 and later years, and who meet certain conditions will accumulate $250 a year, up to a lifetime limit of $5,000 to be used in calculating their Canada Training Credit, a new refundable tax credit available for 2020 and future years. Based on the information on their return, the CRA will determine their Canada training credit limit for the 2020 tax year and provide it to them on their notice of assessment for 2019 and will be available in My Account.”

U.S. capital gains reports


I apologize for repeating this point—it’s at least the fourth time I’m mentioning it on the blog—but it is a major pet peeve of mine. Here goes: We continue to receive realized capital gains reports for clients for their U.S. holdings brokerage accounts that are not properly converted for Canadian taxes.

To properly report your U.S. or any foreign stocks trades, the original purchase should be converted at the exchange rate at the date of purchase (or, if not available, at the average exchange rate for the year of purchase), and the sale should be converted at the exchange rate on the date of sale (or, if not available, at the average exchange rate for 2020).

I continue to receive capital gain reports with both the purchase and sale converted at the 2020 average exchange rate. Since the U.S. dollar has risen over the years, a purchase made several years ago likely would have a large foreign exchange gain component that is not being reported.

Property received by inheritance


As baby boomers or, more particularly, their parents age and pass away, many Canadians have inherited real estate, stocks or other capital property. A tax season issue I have been noticing is that people who have inherited property and then sold it often do not know what their adjusted cost base is on the inherited property. This is problematic in determining the related capital gain.

The reason for this cost base gap is most typically that the child who inherited the property does not have a copy of their parent’s terminal tax return (final tax return of the parent for their year of death). On a terminal return, there is what is known as a deemed disposition that reports the fair market value of a deceased person’s real estate, stocks or other capital property. The deemed disposition amount would become the child’s adjusted cost base for when they sell the property.

This is best explained by an example. Say Mr. A and Mrs. A were the parents of Susan. Mr. A and Mrs. A owned a cottage property that was purchased many years ago for $200,000. When Mr. A passed away 10 years ago, he left the cottage to Mrs. A (this is typically a tax-free spousal transfer with no tax implications). However, Mrs. A passed away five years ago when the cottage was worth $900,000. When Mrs. A’s accountant filed her terminal return, they reported a deemed disposition of the real estate at $900,000 and paid capital gains tax on the gain of $700,000 ($900,000 value at death less $200,000 original cost). Susan’s adjusted cost base upon inheritance became the $900,000 deemed disposition amount.

Where you have inherited real estate, stocks or other capital property, it is important that you obtain and keep a copy your parent’s final tax return so you can provide your accountant the return to ensure the correct adjusted cost base if reported when you sell the property.

Medical receipts


Many clients provide multiple tax receipts for the same pharmacy or medical practitioner. Your accountant will love you if you ask the pharmacy and your medical practitioners to provide a yearly summary of all payments, so your accountant only has to deal with a few receipts instead of multiple receipts.

Here’s hoping you have a 2020 refund or owe less tax than you anticipated. 

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

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

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

Monday, March 22, 2021

How much do you need to retire in Canada? (Part 4)

In the first three parts of this series, the focus was on the safe-withdrawal rate for retirement. Today, in the final installment of this series, I revisit factors I discussed in my 2014 retirement series that can impact both the funding of your retirement nest egg and your withdrawal rate in retirement. The randomness and unpredictability of these factors can derail even the most detailed retirement plans.

How long am I going to live?

In Canada, depending upon which study you utilize, the average male will now live to approximately 80 years old and the average female to around 84 years old. There is also around a 50% chance that one spouse will live to age 90 if both are alive at 65 years old and a 20% chance one spouse will reach 95, again depending upon which study you review. These numbers are not intended to provide absolute actuarial accuracy but to reflect your planning needs. Bottom line: There is a good chance one spouse will still be alive at 95 years old.

The fact that we don’t know how long we’ll live creates the ultimate dilemma of retirement: do you scrimp in the early years of retirement, when you are likely healthier and full of energy, to ensure you have money to support yourself if you live longer than average?

I have seen far too many people die without spending their nest egg and enjoying their retirement (and as the Michael Kitces studies noted earlier in this series reflect, most people’s nest eggs seem to last longer than expected). I am in the camp that values those early retirement years, without being reckless about saving. Based on the studies, I would consider erring slightly on the side of early-retirement spending.

Interest Rates


We have been in an unprecedentedly low-interest environment for many years, and it’s now been exacerbated by COVID. This has weakened the benefit of GICs, term deposits and similar investments to fund and keep funding retirement. Bonds have been a bit of a buffer, but if rates turn upward, bonds may not provide the backstop they have over the last few years.

There is no consensus answer for this issue. Many investment advisors are suggesting a higher allocation to equities, but this involves far more risk than many people are willing to assume. So, this is a current-day quandary that has no clear answer.

Inflation


In addition to being in a low-interest rate environment, we have also been in a period of low inflation. Post-pandemic, it is unclear if inflation will rear its ugly head again, but a strong recovery could be problematic. An economic environment of low market returns and high inflation can severely impact the funds you accumulate to fund your retirement and the real returns you achieve in retirement.

Sequence of returns risk


Sequence-of-returns risk for purposes of retirement planning refers to the random order in which investment returns occur and the impact of those random returns on people who are in retirement. In plain English, it relates to whether you are the unlucky person that retires into a bear market or the lucky person who retires into a bull market. This is important because if your returns are poor early on, your retirement nest egg will not last as long as someone who had good returns early in retirement.

The sequence of returns phenomenon is illustrated very clearly on page 7 of this report by Moshe Milevsky and by W. Van Harlow of Fidelity Research Institute. In this example, two portfolios have the same return over 21 years but in inverse order. The portfolio with the positive returns initially ends up worth $447,225 in year 13, while the portfolio with the negative returns was depleted in year 13.

If you are looking for solace about retiring at a market peak, read this blog I posted in 2019. There I discuss an article by Norman Rothery on the sustainability of the 4% rule even when you start your retirement in a poor market.

Michael Kitces, whom I referenced in my blog post a couple weeks ago, has also written extensively on the sequence of return phenomenon. As noted in the prior posts in this series, Mr. Kitces has used the worst years in history as his floor for the 4% rule, and the rule held up. Here are a few helpful links on his sequence of returns articles:


Can you solve for the sequence of returns?


Finally, Mr. Kitces and Wade Pfau, whom I noted in Part 2 of the series, both seem to agree that people can reduce the impact of sequence of returns near to or early in retirement by using something called a rising equity glidepath in retirement.

This strategy has you starting retirement with a lower equity component in your portfolio—30%, for example—and increasing it throughout retirement to, say 65% or 70%. The advice is counterintuitive, since consensus advice has always been to reduce equity as we age. But as Mr. Kitces and Mr. Pfau point out here and here (at the 6:12 mark), the glidepath actually reduces losses in your nest egg when you most need it (at the beginning of your retirement) and allows for recovery in later years as your equity increases. You may lessen your child’s inheritance, but you may protect yours.

I am not saying yeah or nay on the glidepath alternative but rather providing you with some alternative thoughts.

Your principal residence


While most of us would love to ignore the value of our home for purposes of our retirement planning, the reality is that for most Canadians, our homes will in small or large part fund our retirements. For some, their home will just backstop any retirement shortfall; for many, their retirement funding includes at least the incremental capital benefit of downsizing their home; and for most, retirement can only be fully funded by selling their home at some point in their retirement.

Parenthetically, the same applies to business owners, who often consider selling the business to support their retirement plans. Business owners do need to add several factors when planning their retirement.

The scary thing about relying upon your home is that its reliability for retirement funding depends on a key variable: its value upon sale (and continued tax-exempt status).

What will my house be worth?


Over the last 10 years, house prices have skyrocketed in most Canadian cities. The million-dollar question is whether these increases in value will continue. Interest rates may increase. Government policy may change. And baby boomer sellers may eventually outnumber younger buyers.

What can I do?


Almost all the factors discussed in this post are impossible to plan for. However, you can adapt and compensate in two ways.

Work Longer

While the old retirement ideal was to sit back and sip cocktails in retirement, many now believe in finding part-time work during the victory lap period of life—or even full-time work doing something you enjoy that pays less. People often say it makes them feel more alive and keeps them mentally sharp, while providing the added benefit of not dipping into their capital. Remembering this may provide comfort if you need to work after you retire to account for the factors above.

Reduce your yearly withdrawal rate


Although possibly challenging, if your nest egg takes a hit due to any of the above factors, you can reduce your yearly withdrawal rate from, say, 4% to 3%, by some dollar value, or the future inflation withdrawal rate as suggested earlier in the series. It’s a tough pill to swallow, but you may need to forgo some short-term plans, perhaps travel for a year or two. As we learned this year, we can all adapt far better than we ever thought if we absolutely need to.

Life is hard enough to plan when things are status quo. It really gets challenging when random economic factors impact your life or retirement planning. The best we can do is recognize these factors exist and adapt and adjust when they arrive.

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 8, 2021

Claiming your home office on your 2020 personal tax return

In 2020, we received a crash course on working from our homes. To the surprise of many of us, we quickly adapted. We redesigned our workspaces and purchased laptops, adapters, monitors (first or second or third screens), and scanners.

As we approach the 2020 personal income tax filing season, we now turn our heads to determine which expenses we can claim on our tax returns for working from our home offices.

The CRA has also had to adapt quickly to the new normal, and it has provided a couple of different ways for employees to claim home office (HO) expenses in 2020. They are discussed in detail in this BDO tax insight. As I see no reason to repeat this excellent summary word for word, I will quickly recap it and add a couple comments that may be of interest.

To be blunt, since I am The Blunt Bean Counter, I’ll share an observation. Those of us who drove our car for work and did a fair amount of driving to clients and customers in 2019 will most likely find that the additional home office expenses we can claim in 2020 do not make up for the lower car expenses you will be able to deduct this year. As a result, you’ll likely have lower overall employment expenses to claim this year.

Below I summarize the various alternatives to claim your 2020 HO expenses.

New Temporary Flat Method


This method will allow a flat $2 per day for 200 days, so $400 in total (see the BDO piece for the criteria). The best thing about this method is you do not need to track expenses or file the T2200 form, which is completed by your employer and allows you to claim expenses you incur to do your job, such as your home office, car, and telephone). Instead, you will file a Form T777S, Statement of Employment Expenses for Working at Home Due to COVID-19.

The flat method is available only for 2020, per the CRA. That said, it could conceivably extend the exception for 2021, depending on how quickly the pandemic subsides and how this impacts remote work.

This method is great for those who struggle to keep records and track their receipts, and have not incurred much in the way of deductible home office expenses in 2020. However, I would suggest that for many Canadians, filing using the flat method will leave a fair amount of expenses on the table.

Detailed Method


The detailed method will allow you as an employee to claim the actual amount of HO expenses related to your work from home in 2020. As noted in the BDO tax alert, the “usual way of claiming home office expenses requires you to determine the proportional size of your workspace compared to total finished areas within your home, and the employment use percentage of your workspace in order to calculate your workspace in home deduction. Though these calculations can be tedious, the CRA has provided examples and a new calculator to assist.”

For 2020, if you will be claiming only HO expenses and no other employment expenses on your 2020 return, and you were not eligible to claim HO expenses prior to COVID, you will need your employer to complete Form T2200S, and you will need to complete the simplified Form T777S on your tax return.

If you will be claiming other employment expenses, such as your car or phone, you will need your employer to complete the standard Form T2200, Declaration of Conditions of Employment, and complete the standard Form T777.

It should be noted that if you are claiming HO expenses (see this CRA summary), you can only claim your property taxes and insurance if you earn commissions from your employment (if you earn commission, your total employment expense deduction can’t exceed your commission income). Thus, the home office claim is often not as large as most people expect.

I am often asked how much the CRA will allow as the percentage use for your home office space. I cannot provide a standard answer. Per the CRA as mentioned in the BDO piece, you are required to undertake a detailed calculation of the actual space you use for your office as a percentage of your home’s finished square footage.

I will tell you this. Over many years of preparing tax returns, the typical HO claim assumes a percentage use of between 5% and 15%most are 5-10%, and very few are greater than 15%. To reiterate, your claim must be based on your actual square footage use.

Business Income


If you earn business income, as opposed to employment income, everything is status quo. There are no changes to the rules or the way you claim your HO expenses. The CRA made these changes to accommodate employees who typically work out of a physical office but could not do so this year.

I would suggest that over the next few weeks you review your situation to determine which of the above methods best suits your particular circumstances. If you are using the detailed method, start accumulating the required receipts so you can ensure you maximize your HO claim.

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

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

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

Monday, February 22, 2021

How much do you need to retire in Canada? (Part 3)

When we last talked about the amount of money you need to retire, we discussed the critical research from Michael Kitces, a pre-eminent retirement expert in the United States. His work looks at the 4% safe withdrawal rule first proposed by William Bengen, which helps investors map out their wealth strategy in retirement.

This week let’s dig deeper by presenting some dissenting opinions on the 4% rule and detailing what the 4% rule actually means. I’ll also offer my suggestions on how to implement the rule into your wealth strategy.

How accurate is the 4% withdrawal rule?


Whenever we hear universal rules about investing, we need to question how universal they truly are.

Fortunately for us, Mr. Bengen himself shares some key fine print. He has suggested that the 4% rule was a creation of the media and that he actually more often than not used 4.5% with his clients. In today’s investment climate, he says, he would use 4.5% or even slightly higher as a rule of thumb. He also says he would increase his equity holdings from 50% to 70% in dividend paying stocks given today’s low interest rates—if they can be purchased at reasonable valuations.

At this juncture, I need to make like an infomercial and disclaim that while Mr. Kitces and others research have shown the 4% withdrawal rule to be safe, there is no guarantee it will apply in the future, especially given the historically low interest rate environment.

In fact, Wade Pfau, who is profiled in my 2014 series and is still at the forefront of retirement planning, says that “the 4% rule does not apply today, as retirees face the lowest interest rate environment we have ever seen. It also was never meant to apply for those who were not willing to hold at least 50% stocks throughout their retirements.” Mr. Pfau suggests a withdrawal rate as low as 2.4% may be appropriate given the low interest rates.

It is interesting to note that Mr. Kitces and Mr. Pfau both agree that a rising equity glidepath in retirement—starting with a lower equity component and increasing equity exposure over time (which is counter intuitive and in contrast to the typical advice that one should decrease equity exposure as you age)—may be beneficial. I will discuss this in greater detail in Part 4 of this series.

While I have no illusion that I am a retirement specialist, my experience with clients and the studies above have made me believe that the 4% rule is a good starting point for your retirement nest egg planning (especially if you are willing to adjust your yearly withdrawal rate in poor markets). In fact, during multiple meetings with clients and their various Investment managers this year, the consensus is almost unanimous that future returns will be lower over the next 10 to 20 years, but in most cases, the expected return of an equity-tilted portfolio is still well above four percent. Again, I caveat, these expected returns by investment managers, may vary from actual results.

My takeaways

  1. Determine to the best of your ability your expected yearly cash requirements in retirement and use the 4% rule to give you an idea where you stand with your retirement planning. If you need $100,000 a year in retirement, the 4% rule says you will require a nest-egg of $2,500,000.
  2. Engage a financial planner to prepare a detailed financial plan. The 4% rule has been proven to be historically accurate, but a detailed personalized plan is always beneficial. Have your financial planner run alternative scenarios using, say, a 3% and 4% withdrawal rate. If you have an investment advisor, see if they will prepare a financial plan free of charge as part of your investment fee. Keep in mind: a report from your investment advisor in some cases may include suggestions for certain products their institution sells.
  3. If you have been retired involuntarily and were only a few years from your planned retirement date, use the 4% rule of thumb to determine what you need to earn to fund your retirement. As noted by Mr. Kitces, he has often found people forced themselves to work longer than needed, and if you can make up some of your missing salary with a part-time job or consulting gig, you may be okay to take “partial” retirement early. Again, I would suggest speaking to a financial planner to tailor your fact situation to your plan.
  4. If you retired voluntarily, consider working part-time or at something you love, to enhance your capital, keep your mind sharp and—at least in my case—your spouse from killing you.
  5. If the markets go down during retirement, always pre-plan what expenses you can reduce (or as Mr. Kitces suggests, consider reducing your inflation-adjusted spending going forward), so that you can reduce your withdrawal rate for a few years.

It has been a crazy last year and many retirement plans have been turned upside down. Whether you have been sideswiped by the topsy-turvy business climate of the pandemic or been one of the lucky ones to thrive, you should still revisit your retirement planning and nest egg objective.

I am going to briefly interrupt our retirement series to bring you a timely post on claiming home office expenses on your 2020 personal tax return during COVID-19. Following that post, I will conclude this series with a quick recap of some of the factors that impact your retirement planning.

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

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

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

Monday, February 15, 2021

New for business owners: Guide to Selling Your Business

Selling a business is one of the most important decisions any business owner can make. So, in a way it’s surprising how many leave the process not exactly to chance but at least to the relative last minute.

This procrastination around succession carries with it huge consequences. Planning a sale takes time–we usually say about two years from plan to fruition. And there’s a lot to do–from enhancing the value of the business, to a valuation, to navigating the due diligence by the buyer, to tackling the final negotiations on sale price.

The process can become nuanced and technical. The tax implications are steep and long-lasting–but taking action before the sale closes helps you control the process and protect yourself, your family, and your legacy.

My colleagues at BDO put together a handy guide to help business owners sell their business. It covers the main topics that you should get a handle on–plus it gives tailored tips for several key industries. You can download the new guide here.

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

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

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

Monday, February 8, 2021

How much do you need to retire in Canada? (Part 2)

Two weeks ago, I reminisced about a six-part retirement series I wrote in 2014—and how COVID-19 has affected many people’s retirement. I noted that in some cases people have lost jobs, had the value of their small business eroded, or realized they would need to invest in technology for their business to compete in a new normal. In other cases, people have become contemplative and decided to retire early (such as I am doing on December 31st) or switch careers.

Today, I discuss a study on the subject by Michael Kitces, a pre-eminent retirement expert in the United States. We’ll analyze his views on a safe withdrawal rate in retirement. Keep in mind that the safe withdrawal rate is then used to reverse-engineer your required nest egg for retirement.

Markets


Over the six years since I wrote the retirement series, unless you were GIC centric or Canadian-equity centric, you likely would have had above average stock market returns. Consequently, your sequence of returns (whether your returns are strong or weak at the beginning of your retirement, discussed in greater detail in Part 4 of this series) would have likely been advantageous to your retirement. I personally have not seen anyone fall off the rails from their retirement plan, but six years of relatively good markets is not exactly a great sample size.

The famous 4% withdrawal rule


My 2014 series centered around what is the most commonly accepted rule of thumb for retirement, the 4% withdrawal rule. Created by William Bengen, this rule says that if you have an equally balanced portfolio of stocks and bonds, you should be able to withdraw 4% of your retirement savings each year, adjusted for inflation, and those savings will last for 30 years. So if you need $100,000 a year to live in retirement, you will need a nest egg of $2.5 million ($100,000/.04).

The 2014 series discussed some of the deficiencies experts feel are inherent in the 4% rule: the withdrawal rate doesn’t take income tax into account; it ignores management fees; the equity portfolio lacked international diversity (as it was US centric); that it was premised on a historically higher interest rates for the fixed income (bond) portion of the portfolio and used a constant set 4% withdrawal rate.

Since I wrote the initial series, Michael Kitces has come to the forefront as one of the great retirement researchers and planners in the United States. He has written several articles on the 4% withdrawal rule. Mr. Kitces is not only a great researcher, but he is also a very engaging speaker, who is able to passionately break down a complicated topic into plain English. I will therefore link to three YouTube podcasts that I think you will find highly informative and should listen to if you are interested in what your withdrawal rate should be in retirement.

What Michael Kitces says about the 4% withdrawal rule


Mr. Kitces has written and been interviewed about the 4% rule many times over the years. He has noted the following findings in respect of the 4% rule:
  1. The three worst retirement start dates in history were 1907, 1929 and 1966, and these form the floor of the 4% rule. It is extremely important to understand that the historical safe withdrawal rate of 4% is not based on historical averages (if they were, he notes the withdrawal rate would be much higher), but they are based on the three worst historical 30-year retirement periods noted above. These three worst periods would have allowed a retiree to just barely meet the 4% withdrawal scenario. That is why he and others consider the 4% rule a safe withdrawal rate; it is a historical worst-case scenario, not an average.
  2. The safe withdrawal rate has a 96% probability of leaving more than 100% of the original principal (these are nominal returns, not inflation-adjusted returns, but still your original principal is almost all intact in historical dollars - this was startling to me).
  3. The median value (50% of the time) is 2.8 times the original principal. Thus, you have a high likelihood of having more money by the time you die, not running out of it.
  4. Only one time does the retiree run out of money and that is in Year 31 of retirement.
So despite the inherent flaws in the 4% rule, I note in the fifth paragraph of this post, Mr. Kitces is of the view that because historical safe withdrawal rates are not based on historical averages but rather on historical worst-case scenarios, the 4% rule is more than an excellent rule of thumb.

Where to hear directly from Kitces


If you are serious about understanding the 4% rule and Mr. Kitces’s views on it, you need to listen to at least one of these YouTube/podcasts:
  • I like this April 2020 interview of Mr. Kitces by the bloggers behind the BiggerPockets blog, because it was in the midst of the COVID stock crash and Mr. Kitces was unfazed. He just analyzed the situation and explained everything clearly but still passionately. I would scroll down to the YouTube video in lieu of the podcast. One quick comment about this podcast. There are some references to “FIRE.” FIRE is an acronym for “financial independence retire early” and is only applicable if you plan to retire early.
  • Another excellent and current podcast, this one with a Canadian bent (and a different focus from the above podcast), is this August 2020 interview of Mr. Kitces by the Rational Reminder team of Ben Felix and Cameron Passmore. You may recall that the same pair interviewed me last year on various financial topics.
  • Finally, for the diehards, another interesting listen is this October 2020 podcast, in which Mr. Kitces interviews the father of the 4% rule himself, Mr. Bengen (he was actually a rocket scientist before becoming a financial planner). This podcast includes a bit more about Mr. Bengen’s history, so you may want to peruse the index to listen to the parts you are interested in if you are not interested in Mr. Bengen personally.
If you prefer reading to watching, you might want to have a look at this 2015 blog post by Mr. Kitces. It should be noted that Mr. Kitces uses a 60% equity and 40% fixed income model in this study, whereas Mr. Bengen used a 50/50 model.

Have a watch (or least a look if you don’t have time to listen to any of the podcasts) at some of the links above. We’ll pick up the conversation on this series next time by fleshing out some perspective (including dissenting opinions on the 4% rule) on what the 4% rule actually means and offering my suggestions on how to implement the rule into your wealth strategy.
 
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, January 25, 2021

How much do you need to retire in Canada?

In 2014, I wrote a six-part series on retirement called “How Much Money do I Need to Retire? Heck if I Know or Anyone Else Does!” The series was not only six parts but also over 10,700 words and I am sure over 60 hours of research, writing and editing. I recall telling myself, “Never again,” after completing this series. If you wish to read the series in full, you can find the links to the six posts on the right-hand side of my blog under the retirement planning category.

I also recall it was somewhat depressing to realize that after all that work, I couldn’t come up with a definitive determination of the actual nest egg you require. No one can. There are simply too many inputs, variables, models, simulators and varied expert opinions.

That being said, there was still a ray of sunlight in the series. I found that after using multiple models for my sample calculations, I was able to map out a range of retirement savings that likely would provide a realistic retirement goal, especially if twinned with a financial plan that is updated every few years. So, while it is likely impossible to determine your retirement nest egg to the nth degree, you can provide yourself a realistic retirement savings objective with some work and planning.

At this point you’re likely saying, why is Mark rambling on about a series he wrote almost seven years ago? The reason is COVID.

The pandemic has brought retirement savings front and centre for far too many of us.

In some circumstances, people have lost jobs or their own small businesses that they expected to work at until retirement.

In other cases, people may be succeeding financially but have become more contemplative during COVID. They have begun to think about the long term and what they really want out of life. Maybe it is time for a change in career or time to retire early while healthy and still invigorated. (Full disclosure: I am one of the people in this group and made the decision to retire from public accounting at the end of 2021.) Some have even decided to retire early and follow the advice of Mike Drak and Jonathan Chevreau in their book Victory Lap. They say people should leave their day job behind once they’ve reached financial independence, and work at something they love or always wanted to do to make some supplemental income.

Canadians who pivoted to retire early caused many a financial advisor to pull their hair out. They typically advised clients to just push through the next couple years, as there is too much financial uncertainty to retire early. But based on what I have seen and heard, early retirements have not been uncommon, despite not necessarily being the financially prudent thing to do. (Although if you listen to the Michael Kitces podcasts, I will reference in this series, you will hear his research that many people should have been retiring early for years, assuming they continued to work part-time at a minimum.)

And that’s why COVID has prompted me to revisit this series. For those retiring soon, or just planning for the future, it’s a great time to rejig these topics with some new research and expert opinions. You will be pleased to know that I have learned restraint over the last six years: The 2021 series will be “only” a few parts and a mere 3,200 words give or take.

I will stop here today. The next 1,600 words or so require a clear mind, as retirement planning and determining a safe withdrawal rate in retirement are surprisingly academic topics. I will discus this methodology in Part Two of this series and am also looking forward to reviewing a couple of the top retirement experts’ studies and suggestions.

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, January 11, 2021

My Top Five TV Series During COVID

In the old days of this blog, I would occasionally veer off from the financial focus of The Blunt Bean Counter and write about travel (like my trip to Africa with my wife), general business topics (like the four Ps of public speaking), and other topics like sports and food. Over the last while, I have kept on topic. To start the new year, I thought I would lighten it up and write about TV series or mini-series I watched during COVID. Don’t fret: my next post will get back to finances when I revisit my 2014 six-part series on how much money you need to retire.

At the start of the pandemic, I was busy assisting my clients with the various new or updated government programs and helping them manage their businesses through the lockdown—so I did little TV watching. And after that I was busy with personal taxes and corporate filings until July. But since August I’ve accelerated my TV watching in between summer golf games.

Below I list my favourite series during the pandemic—some old, some new and some just released. We all have personal preferences in what we want on TV (and we also may be limited what we can watch by our TV subscriptions, as there seems to be unlimited subscription options). I like TV series that are so compelling or gripping that I can’t stop watching or cannot wait until next week’s episode. I also like a great comedy (few and far between, although I really enjoyed Schitt’s Creek the first couple of years and watched it when it came out on CBC) or, alternatively, something very unexpected, such as the The Queen’s Gambit on Netflix, which I discuss below. Here are my top five: 

Game of Thrones


I know Game of Thrones (GOT) is one of the most popular TV series ever, but I am not a fantasy fan (nor am I a sci-fi or horror type of guy) so I was never that keen to tune in. A couple years ago I watched 10 minutes of an episode to see what the fuss was about, and that show happened to be heavy on dragons and various fantastical things. So I decided GOT was not for me. But my wife and I agreed to give the series one more try, and to my surprise, the first season was gripping and had very little fantasy or dragons. By the time the series became more fantastical, I was hooked, and the dragons and fantasy felt natural in the normal course of the show. Like many, I did not love the ending, but eight seasons filled a lot of COVID time. I watched this on Crave.

The Queen’s Gambit


Per Wikipedia, “The Queen's Gambit is a fictional story that follows the life of an orphan chess prodigy Beth Harmon, during her quest to become the world's greatest chess player while struggling with emotional problems and drug and alcohol dependency.”

Beth is played by Anya Taylor-Joy, and she is awesome in the role. I loved this Netflix show because I had no idea what it was about and figured it was some boring chess show. Far from it. Beth is an extraordinarily complex and compelling character, who is super-cool, albeit with some issues, yet still a chess “nerd” at heart. This show was so unexpected, and I really enjoyed it.

It is my understanding that the show and the complex chess strategies it reflects, together with the hip character created by Anya, have created a chess craze across the world. Chess memberships are reaching record highs and chess boards are becoming scarce. Perhaps I’ll move from chess-watching to chess-playing in 2021. 

Ted Lasso


I watched this Apple TV (thanks to a free year due to an ipad purchase) show on the recommendation of a friend who is a Manchester United soccer fanatic, so I expected to watch one episode and report back it was boring. To my pleasant surprise, this show about an American football coach brought in to coach a premier English soccer club (the owner wanted the team to be poorly coached and play poorly to get back at her ex-husband, the former owner) was very funny and heart-warming without going over the top. Apparently, the star, Jason Sudeikis, first conceived the idea as an actual Premier league promo for NBC. In any event, it’s a fun, light series. 

Mindhunter


Mindhunter is the story of FBI agents Holden Ford and Bill Tench and psychologist Wendy Carr, who operate the FBI's famed Behavioral Science Unit at the FBI Academy in Quantico, Virginia. In the unit's earliest days, they pioneer the study of serial killers by interviewing some of the most depraved in American history. They visit prisons around the U.S. to talk to men such as Charles Manson and understand how they think. Knowledge will help them catch future serial killers, they hope. 

Based on a true story, Netflix's Mindhunter boasts the involvement of A-list movie director David Fincher. While the show is a bit slow at times, I found it compelling and enjoyed both seasons (supposedly a third will not happen or not happen again for several years). Some of the criminal characters were so intriguing that you almost forget they committed heinous crimes. 

Morning Show


This Apple TV show was again a bit unexpected for me. I figured it was about a morning news show and would be light and fluffy, with Jennifer Aniston (playing co-anchor Alex Levy) as the star. I was taken aback when I quickly realized this show was about a current social issue, with co-anchor Mitch Kessler (played by Steve Carell) being fired for sexual misconduct at the network. Viewers see the insidious acceptance of this behaviour and culture of fear that news media have analyzed in the last few years when high-profile men were accused of sexual misconduct.

A couple of shows that just missed the list were the Undoing, a mystery psychological thriller starring Nicole Kidman and Hugh Grant, and You, a dark series about a bookstore manager who is also a serial killer (it reminds me a bit of Dexter, one of my all-time favourite shows, if you have ever watched that series).

Feel free to let me and the other readers of this blog know your top five series during COVID by posting them in the comments below. That way others can check them out.

 
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.