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.

Wednesday, September 28, 2011

Problems posting comments when using Internet Explorer

It has come to my attention that some readers using Internet Explorer are unable to post comments on my blog. I am told this proposed solution should work:

Tools > Internet Options > Privacy tab > Advanced button > Check “Override automatic cookie handling” > Accept First-party Cookies and Accept Third-party Cookies

I don’t know how this will impact your security as you are surfing the web, or what unintended consequences there will be from accepting cookies.

Alternatively, there do not seem to be any issues with commenting when using Chrome or Firefox.

I appreciate your readership and I value your comments, so please make the effort if you have something you’d like to say.

Thanks, Mark.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

How your Family Dynamic can affect your Estate Planning

Estate planning is a complicated and delicate process. Where you have more than one child, the planning process is full of minefields, some are in clear sight, but many are hidden. Parents have to navigate these minefields with respect to the determination of executors, the distribution of family heirlooms and the distribution of hard assets. The above decisions may be impacted by the financial wherewithal of your children, your relationship with your children’s spouses, your grandchildren or lack thereof, and in some cases, favouritism of certain of your children.

The above are what I call vertical family hierarchy issues. These are issues resulting from parents making decisions that will affect their children and potentially, the way their children will view their parents after death.

What parents do not often consider is how these vertical decisions impact horizontally: i.e. how the interrelationship of your children must be considered in your estate planning. Any parent who does not consider these relationships runs the risk of creating a divisive wedge amongst their children as sibling rivalry and jealousies may rear their ugly heads.

In this blog, I will attempt to identify several estate planning issues that not only have vertical consequences, but also have horizontal consequences requiring parents to consider their children’s relationships in context of their planning.

The Family Business

Where there is a family business and the succession plan is to pass on the business to the next generation, several issues must be considered. The issues include the following:

How many children have an interest in the family business?

If you have more than one child, is one specific child best suited to the role of CEO or president? If so, based on your children’s current relationship(s), do you foresee them working together or will they butt heads or worse? If the eldest child is named president, have you reinforced a perception the younger child has held for years, that the eldest is favoured and always assumed the most capable?

How do you value the business?

This is not an issue if all the children are given equal shares of the business, since they will have an equal ownership no matter the actual value attributed to the company. But what if you decide to leave the business to one child and equalize a child or the other children with say cash or other assets? The value of the business can fluctuate wildly over the years, with the result being that the child who inherits the shares may in essence have inherited a significantly larger asset than the other child(ren). Alternatively, the shares of the company may prove to be worth substantially less than the assets distributed to the other child(ren) if business conditions cause the value of the business to diminish. As a parent, can you do anything to avoid potential disparities in value? I have seen situations where asset distributions were equal at the time of death, but the inherited business grew astronomically and the children who did not inherit the company shares felt wronged by their parents.

Finally, if you have undertaken an estate freeze while alive, (see my blog on introducing a family trust as a shareholder and the related discussion on estate freezes) which child will inherit the voting shares? You risk alienating the children who do not receive the voting shares, since they may feel that you did not think they had enough acumen to vote and run the company.

The Family Cottage

The family cottage is often a contentious asset. In some families all the children want to keep ownership of the cottage and in some families only one or two siblings want the cottage. As a parent, you must speak to your children and determine who wants the cottage. Where more than one child wants the cottage, you have to consider whether those children have a good relationship and if they will be able to share ownership of the cottage without starting a world war. If not, do you have to consider selling the cottage in your later years to avoid creating a divisive issue amongst your children?

Another important factor to consider is whether the children interested in keeping the cottage have the financial wherewithal to pay their share of the cottages expenses on a yearly basis? If not, how do you overcome this potential issue, especially if one child has the financial resources and another does not?

Also, where there is a large inherent gain on the cottage, you have to determine whether your estate will be able to pay the income taxes without forcing a sale of the cottage and causing the estate to unwind your original intention to keep the cottage in the family? In this case, you may be able to use life insurance to cover off this issue.

The Will

A will may be construed as a document that reflects a parent’s opinion of their children and confirms the children’s opinion of themselves. If you infer one child is more responsible than the others (by selecting a certain child(ren) as an executor and excluding others), you risk igniting the fire of past resentments amongst the children and potentially causing resentment of you even in death.

Assuming you can navigate the determination of the executor(s) amongst your children without creating jealousy or animosity (if not, a corporate executor may be required), how do you distribute your assets upon death in a manner that mitigates any damage that can occur to your children’s relationships?

The distribution of material items is fraught with danger. How does one ever balance sentimentality and value? If you provide one child a sentimental heirloom, you risk that child complaining the other children got more value, while the other children complain they were not left sentimental heirlooms. What if you have art? How do you balance the value of art that has significant value differentials?

What about the situation where one child has been financially successful and another has not. If your will provides for a greater distribution to the child with less money, how do you ensure you do not create resentment with the financially well-off child? The less well-off child, who should be ecstatic, may actually be insulted, as they interpret the larger inheritance as their parents saying they were "financial losers" as opposed to being grateful for the larger inheritance. In these cases, one must tread carefully, but an unequal allocation may be more readily accepted where you explain your reasoning to your children before your death.

Another issue is grandchildren. Where the number of grandchildren is different in each family or one child does not have any family, do you give equal amounts to each family or equal amounts per child? How about where one of your children may be incapable of providing for a grandchild’s education and you feel a trust would be appropriate? Will any consideration other than equal consideration be construed as favouritism by your children?

Finally, many parents have provided loans to their children to assist with university, purchasing a house or what have you. How do you deal with prior gifts or loans? If you forgive the loans, you may have an unequal distribution and cause an issue amongst your children? Thus, you may want to consider a reduction of any distributions in the will for any outstanding loans.

This whole blog may be construed as ludicrous on a certain level. Some may say this blog is evidence as to why they will not leave anything to their children. Others may say I will leave my children whatever I feel like and if the distribution is unequal, so be it. However, it has been my experience that the majority of parents truly do not want to create any dissension amongst their children and aim to provide for an equal distribution. Even though they will have passed on, many parents still don’t want to alienate any of their children or cause resentment upon their death.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

Monday, September 26, 2011

Estate Planning for the Black Sheep Child

Think about ten families you know and there will most likely be at least one black sheep child in one of these families. What is a black sheep child? Melanie Marten in an article on black sheep children described the black sheep of the family as “the son or daughter who transgresses the acceptable behaviors and life paths.” 

Within each family, the transgressions can be small, where the child is simply considered irresponsible, to large transgressions which can divide families down religious or philosophical lines. In some families, a black sheep child may appear “normal” to the outside world, but because they do not follow their parent(s) "suggested path", they are considered the black sheep of that family despite their relative normality.

In my personal and professional life, I have observed four typical black sheep situations:

1. Marriage- The parent(s) disapprove of their child's choice of spouse for religious, ethnic, or family reasons and thus, that child becomes a black sheep of that family.

2. Substance abuse- In this case parents have often worked tirelessly to help the child. In some cases the child becomes estranged from the family, but in others, the child is still part of the family and when the will is considered, it becomes a complex issue as to how to protect the child from themselves.

3. Family business- This will seem strange to some, but in some families, there is such pride in the "family business" that when a child decides to embark on a path other than the family business, they can become a black sheep child.

4. Spendthrifts- In this situation, the child is often not disenfranchised from the family, but is considered irresponsible and often is singled out. This situation can become tricky for estate planning purposes as this child is often close with the other children whom the parent(s) are more trusting and proud of.

You may note I have used parentheses for parent(s) above. That is because the parents often do not agree on how to treat a black sheep child for estate planning purposes. This can cause extreme friction within a marriage and make estate planning problematic. For example: assume a typical marriage, where mom and dad's wills leave essentially everything to each other. If mom does not want to leave a black sheep child anything in her will, dad will have to have a specific inclusion/trust in his will in case he dies first; if not all the property will roll to his wife who will then not leave anything to the black sheep child.

So how does a parent deal with a black sheep child when constructing their will? Unfortunately, there is not a cookie cutter answer, since why a child is a black sheep will be potentially different from family to family and each child will have differing financial characteristics. In addition, some children are black sheep because they don’t have the same financial values as their parents and the child could care less whether they inherit money.

Where the black sheep child is close with other siblings, treating them different in the will may create animosity amongst the siblings when the estate is distributed, especially where the irresponsible child does not see themselves as such. Thus, parents must take care when constructing their wills in understanding the sibling dynamic, even if they have feelings otherwise. I have a fairly lengthy blog discussing estate planning in context of the family dynamic on Wednesday.

Where a child is financially irresponsible, has or has had substance abuse issues and/or is estranged to some extent from the family and the parent(s) still wants to leave them money in the will, then creating a separate testamentary trust (a trust established upon death) to be administered by an arm’s length party may make sense and avoid any sibling conflict post death of the parent. The benefit of a trust, especially for a financially irresponsible child is that it can have provisions to ensure their inheritance is not squandered and can last a number of years.

From a taxation point of view, a testamentary trust may result in income tax savings as result of the trust being subject to the same graduated income tax rates as individual taxpayers, unlike the high rate of income tax imposed upon inter-vivos trusts (trusts established while the settler is alive).

How a family treats a black sheep child will vary considerably amongst different families, however, where it is decided a black sheep child will be included in a parent’s will, consideration should be given to sibling dynamics and the utilization of a testamentary trust.

As noted last week, Roma Luciw has written an excellent column titled Baa baa black sheep, are you in the will? which expands on some of the concepts discussed in this blog.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

Wednesday, September 21, 2011

Happy Anniversary to Me

I posted my first blog “Let’s See Where This Goes” on September 20, 2010. One year later I am still blogging away, with some people other than my family reading.

In looking back at my first year, my first break was when Seeking Alpha asked if they could publish Resverlogix: A Cautionary Tale, a blog I posted in late November 2010. Seeking Alpha published this blog in January 2011.

I was also fortunate to be recommended by such noted bloggers as Larry Macdonald, Ram Balakrishnan the Canadian Capitalist, Jim Yih of the Retire Happy blog, Michael James and Mike Holman of Money-Smarts. In addition, Jim was kind enough to provide some initial guidance and Tom Drake of the Canadian Finance Blog and Money Index provided some savvy technical advice. None of these bloggers needed to consider my blog or help me in any way, but they did and I appreciate it.

In addition, the Globe and Mail has also contributed immensely to the growth of my blog. Rob Carrick has mentioned me numerous times in The Reader and Dianne Nice and Roma Luciw have been kind enough to feature me in their columns. I would like to thank all of them for being receptive and willing to listen to some of my ideas.

Finally, I am flattered to have been asked to write guest blogs for Jim, Ram and Boomer and Echo.

Since several of my blog topics are income tax related, the blogs can sometimes be somewhat complex. I have attempted to simplify these topics and explain in non-technical terms where possible, and I hope I have made some of these more complex topics understandable to my readers.

I also strive to write original pieces where possible. Although very few topics are original to financial bloggers, I always write my blogs first, and then check to see what was written previously. In this way I at least sprinkle my blogs with some originality. I have received a few emails complementing me on the original nature of many of my blogs, which reinforces my desire to continue using my current technique. In addition, the Confessions of a Tax Accountant blogs that I posted during income tax season received some kudos for the originality of the concept.

I marvel at some of the aforementioned bloggers who blog three, four and five times a week. I don’t know where they find the time, let alone the constant flow of ideas to write so many blogs. I have settled on generally posting two blogs a week. I do however, have some concern that the income tax blogs have a finite topic list. I also wonder how long I can continue to come up with something useful to say on money, the psychology of money, families and estates and business, all of which I find more enjoyable to write about than income tax.

So as my first year of blogging comes to an end, I would like to once again thank all the people I have noted above, my marketing manager Lisa, who reviews all my blogs and most importantly, my regular readers.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

Tuesday, September 20, 2011

Holy Black Sheep Batman

There are sheep all over the Globe and Mail today. Thanks to Roma Luciw for referencing me in her column today, Baa baa black sheep, are you in the will? Roma’s insightful column discusses estate planning for the Black Sheep child. This is often a very sensitive issue within families and requires one to navigate the family dynamic, estate and tax planning.

Roma the web editor of the Globe Investor personal finance site, also writes a weekly column on personal finance issues in the Globe and Mail. In addition, she is also one of the contributors to Home Cents which provides expert tips on how to make money and save money.

I will have a blogs on Estate Planning for the Black Sheep Child and How your Family Dynamic can affect your Estate Planning next week.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

Monday, September 19, 2011

20 Things I Don’t Understand About Income Tax

Rob Carrick recently wrote a great column in The Globe & Mail entitled, “20 things I don’t understand about personal finance”. The article caused me to smirk and chuckle several times. As they say, imitation is the sincerest form of flattery, so here are the top 20 things I do not understand about income tax:

1. Why can’t spouses file joint income tax returns as is permitted in the United States? It would equalize income tax rates, simplify our tax system, reduce the administrative time required to prepare and process personal income taxes and reduce the amount of paper the Canada Revenue Agency ("CRA") receives each year.
2. Why are parents only allowed a transfer of $5,000 of their child’s unused tuition, education and book credits? The parent is often the one who paid the costs of tuition, why is the credit transfer restricted. At a minimum, this cap should be re-evaluated in the wake of rising tuition costs.

3. Why people are so consumed with saving income tax that they buy tax shelters of dubious nature? There are numerous shelters or schemes out there that purport to reduce income taxes significantly. People are so hungry to reduce their taxes that they forgot their common sense – if it sounds too good to be true, it probably is.

4. Why child care expenses must be claimed by the lower income spouse? The motivation behind the child care deduction is to get people with children back to work to help drive the economy. Who’s to say which spouse was the spouse that was enabled to head back into the work force by hiring child care?

5. Why so many people ask for their RESP tax deduction receipt? Receipts aren’t necessary since the contributions are not tax deductible.

6. Why when one spouse has a tax refund and the other owes money, you can’t net the refund and tax payment against each other? Again, this would simplify our tax system and reduce the administration and paper work for the CRA.

7. Why people are loathe to realize a capital gain on an investment because they will have to pay income tax on the gain (which by the way, will be subject to tax at maximum rate of 23%)? Often individuals wait too long before selling and end up converting what would have been a capital gain into a capital loss (case in point: individuals who held shares of Nortel too long because they did not want to pay the income tax on the inherent gain). I have a whole blog on this topic upcoming.

8. Why do so many people think they can contribute the maximum RRSP limit to both their spousal RRSP and their own RRSP? It is one RRSP limit per person, regardless of the number of RRSPs contributed to.

9. Why people complain about income tax preparation fees, which help reduce the risk of costly potential future re-assessments, yet they are willing to "blow" thousands of dollars on investments in ridiculous companies or options trading they heard about on the radio without blinking an eye? 

10. Why don’t people who can deduct their car expenses, not note their odometer reading on January 1st and December 31st of each year. This would provide them with at least the total km driven in a given year, even if they are not willing to keep log books? The CRA has relaxed their administrative position concerning log books recently, but I still think there is no substitution for a log book and at minimum, noting your odometer readings at the beginning and end of each year.

11. Why the withholding taxes on RRSPs are graduated? Withdrawals up to $5,000 are subject to a 10% withholding tax; withdrawals between $5,001 and $15,000 are subject to a 20% withholding tax; and withdrawals of $15,001 or greater are subject to a 30% withholding tax. These graduated rates often cause significant income tax owing in April since the size of the withdrawal has no correlation to the taxpayer’s marginal income tax rate. All withdrawals should be subject to higher withholding rates (or withholding at the highest marginal tax rate) to prevent this issue.

12. Why does the CRA constantly send information requests for documentation to support child care claims in relation to nannies? Taxpayers are required to report the nannies social insurance number when claiming a child care expense. All that is required by the CRA is to match the social insurance number to the T4 filed by the employer for the nanny. The CRA has other programs which match items in a person’s tax return to a T-slip, why can’t they include this?

13. Why do people pay no attention to the RRSP contribution limit information on their income tax assessments when planning their RRSP contributions for the year? An individual’s RRSP contribution limit for the upcoming year is printed right on the Notice of Assessment for the prior year. It is also available on-line assuming that you register for on-line access on the Canada Revenue Agency’s website.

14. Why don’t people create a file folder for charitable donations they make during the year? If a donation is made online, they can print out the confirmation at the same time and replace the confirmation with the actual online receipt when received. Alternativey, if a cheque or pledge is made, make a copy and replace that copy when the actual receipt is received in the mail. By doing such, at year end it will be clear which donation receipts are missing and have to be chased down.

15. Why do people have money in non-registered accounts but yet they have not fully funded their TFSAs? Just transfer $5,000 each year, non-taxable is always better than taxable.

16. What do post-secondary aged children have against printing out their T2202A tuition receipts for their parents without being admonished? They are now at the age where they are supposed to be considered responsible adults – they should act like one.

17. Why do people who buy stocks not create a spreadsheet to track the cost (adjusted cost base) of the stocks purchased? In addition, when stocks are inherited from parents or grandparents, why not note the value reported on the parent’s or grandparent’s terminal income tax return so the cost base is not lost. You wouldn’t believe the number of times that shares have been passed down from one generation to the next where the recipient has no idea of the actual cost base.

18. Why do people transfer assets to try and save probate taxes without understanding the consequences for income tax. See my blog on probate taxes for a discussion of some of the possible detrimental income tax consequences when tranfers are made blindly for probate purposes.

19. Does the public transit credit or the children’s fitness/activity credit really incentivize anyone to use public transit or put their child in a sports/activity program? The tax benefit from these credits is so small. If the government really wanted to advocate these behaviours or activities there are better ways to do this than offer petty tax credits.

20. Should the labour sponsored funds tax credit be more appropriately called the convert $5,000 and turn it into a $1,000 credit? Enough said.

I am sure I could come up with another list of 20 plus things I don’t understand about income tax, but I will leave that for another blog for a rainy day.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

Wednesday, September 14, 2011

Income Tax on Inheritances

I often field calls from clients asking about the income tax consequences of an inheritance they are receiving or will receive in the future. The answer to the question is always the same; there are no income tax consequences in Canada to the recipient of an inheritance (save the obscure situation noted below). This statement holds true whether the inheritance comes from within Canada, the United States, Europe or anywhere else in the world.

I could end my blog right here, but as my readers know, I tend to write more rather than less, so I will take this subject down one level. Lynne Butler also has a very good blog on this topic and discusses the obscure situation where you may owe income tax on an inheritance.

Where income tax really rears its ugly head in respect of inheritances, is in the taxation of the deceased person. For income tax purposes, a deceased person is deemed to dispose of his or her assets at their fair market value on the date of death. These deemed dispositions can result in an income tax liability for the estate of the deceased, which will reduce the value of the estate and ultimately the inheritance.

It should be noted, that there is no deemed disposition of cash. Where the deceased owned capital property such as stocks, the stocks are deemed disposed of on the date of death, at their fair market value. The gain is measured from the initial purchase price of the asset. For example, if the deceased had purchased Bell Canada several years ago for $15 and the stock price on their date of death is $32, they will have a deemed capital gain of $17, even though they never sold the shares.

Where you have a depreciable asset such as real estate, the deceased may have “recapture” of prior depreciation claimed and a deemed capital gain. However, in cases where the principal residence was the only real estate property of the deceased, there will be no income tax exigible.

Where a deceased person owned multiple real estate properties, such as a home, cottage, vacation property or rental property, the principal residence exemption may be allocated partially to the other properties and thus, the deceased’s principal residence could be partially or wholly taxable.

In addition to the income tax owing on death, the deceased may owe income tax on any income earned from January 1st of the year of death to the actual date of death. This is known as the terminal income tax return. The estate may also owe income tax from the date of death until the assets are distributed to the beneficiaries.
The deceased's estate may also be liable for probate tax; see my blog on probate taxes for more details.

In the United States there is estate tax that can potentially reduce the amount of an inheritance from a US person or a Canadian person with US situs assets.

So in summary, there are no inheritance taxes in Canada, however, there are several taxes that may affect the ultimate inheritance received.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

Monday, September 12, 2011

Income Tax problems and Voluntary Disclosure - Should you hire a lawyer or an accountant?

I am often amused, if not slightly irritated, by the radio advertising wars between lawyers and accountants over taxpayers with income tax evasion or non-reporting issues. The lawyers argue that they can provide you with solicitor-client privilege and the accountants say they have previously worked with the Canada Revenue Agency (“CRA”) and/or deal with the CRA on a consistent basis and thus know their way around the system.

The lawyers who specialize in this market niche appear to have clearly won the marketing wars, as they seemingly have convinced people that legal protection and briefing for future court battles is the only way to protect yourself from prosecution. I even had a former client with a very simple issue of non-reported income who was convinced by a lawyer that he would be making a huge mistake in using me and that a lawyer was the only way to go for his voluntary disclosure (I was just about to abbreviate voluntary disclosure, but thought better of it :). Even though I had no desire to undertake the voluntary disclosure work, on principle, I told the client if he used the lawyer I would be his ex-accountant as there was absolutely no need for a lawyer in his situation. This client however had drunk the legal kool-aid and was so convinced that I was not a practical alternative that he decided to move forward with the lawyer anyways. I must give credit where credit is due; certain lawyers have marketed this issue so well that the general public believes they are the only viable alternative.

On a practical basis, I have been involved with multiple voluntary disclosures over the years. The conversation with the CRA always starts on a no-name basis and the CRA has always been true to their word once my clients have provided full disclosure. In general, I have found the voluntary disclosure agents very fair.

So how do the lawyers create this fear of the CRA and the urgent need for their assistance? Three words: solicitor-client privilege. Lawyers who deal with people with income tax problems market this privilege as a hugely important tool in dealing with the CRA on voluntary disclosure matters. However, a voluntary disclosure is essentially just a financial disclosure exercise and privilege is a total red herring in almost all cases in my opinion. Where your client is a former contract killer who found god and wishes to catch-up on his taxes, then solicitor-client privilege would be a good thing.

If you have evaded income tax or mistakenly not reported income and have no criminal activity attached to such, I would suggest that if you have an accountant who has been through the voluntary disclosure process he or she is more than capable of helping you. Where you have a criminal issue attached to your disclosure, or information you want privileged, I would definitely recommend using a lawyer.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

Friday, September 9, 2011

Blog Roll Additions

I currently have nine blogs on my blog roll listing that I review or read fairly regulary. They include:

Boomer & Echo
Canadian Capitalist
Canadian Finance Blog
Hull & Hull
Larry MacDonald
Michael James on Money
Money Smarts
Retire Happy Blog
Rob Carrick's The Reader (I also read his columns)
Seeking Alpha (multiple blogs are attached to the site)
The Canadian Couch Potato.

However, I have numerous other blogs I read when I can. I have thus decided to update my blog roll and the blogs listed below will be added. Many are well known blogs, some less well known, but all are excellent blogs. 

Andrew Hallam

Canadian Personal Finance Blog

Estate Law Canada

Investment Talk with SPBrunner

Million Dollar Journey

My Own Advisor

Off the Clock Confessions of a Corporate Lawyer

The Wealthy Canadian

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

Thursday, September 8, 2011

Pebble Beach Golf- A worthy bucket list item

In my July 20th blog “One-item to shortly be crossed off my bucket list-Pebble Beach” I mentioned that I would be golfing at the famed Pebble Beach and Spanish Bay golf courses. This blog details these games, so if you are not into golf you may want to hit the escape button.

The first decision I needed to make in regard to this golf outing, was whether to stay at Pebble Beach, Spanish Bay, or a local hotel. Both these resorts are beautiful, but extremely pricey. However, if you stay, you are guaranteed a tee time. My friend Harvey and I decided we would splurge and stay at Spanish Bay, as the last thing we wanted was to arrive and not get a tee time.

Our second decision was whether to hire a caddy. We decided on a caddy as Harvey and I wanted to get the true feel of the course by walking and we wanted to have time to take pictures. We were provided one caddy for both of us. To our distress, he took our clubs from our bags, placed them in lighter Pebble Beach golf bags, and left most of our golf balls behind. We figured we would need many balls, however Michael, our caddy, said we wouldn’t; this was just the first of many correct calls Michael made that day. Michael’s reads and calls on many putts Harvey and I initially misread proved invaluable and saved us several strokes.

As a 12 handicap golfer (or at least a 12 handicap under my weekend rules), my goal for Pebble Beach was to shoot below 90 and birdie one hole. We decided to play the gold golf tees, which are 6450 yards. Harvey and I figured between the wind and the difficulty of the course, the gold tees would be challenge enough.

Harvey hit a great first drive, but I was so amped up to play that I had first hole jitters and mis-hit my first tee shot. Luckily I hit a great second shot and was able to scramble to a bogey on the first hole. I calmed down on the second hole; a short 460 yard par 5. I am a long hitter and I hit two long shots, such that I was just off the green in two. I then two putted to achieve my first goal, a birdie at Pebble Beach. To my amazement, I then birdied the 3rd hole, thanks to a great putt read by Michael. By the end of the fifth hole I was even par. I could not believe it. Michael, however, put me in my place quickly when he noted that Bing Crosby always said you better score very well on the first 5 holes, because after that the course will get you.

Holes 6 through 10 are the reason I have always wanted to play Pebble Beach. They run along the Pacific, with the surf crashing against the rocky outcroppings. They also have cliffs, which are what really drew me to Pebble. I always remember watching Tiger Woods with the TV camera behind him looking up this huge cliff on the sixth hole and having to hit over it. That cliff will now give me nightmares forever.

The 6th hole is a par 5 and I hit a very long drive down the right side. When I approached my ball I realized I was now facing the same shot Tiger had faced. Michael, who at this point had a feel for my game, said “take a 3 wood and hit it over the cliff to the right and you will probably hit the green.” I only saw cliff. I said no way because I did not trust my 3 wood to hit over the cliff and I wanted to play it safe and keep my score intact. I decided to hit my five iron, hopefully to within 50-70 yards of the green. However, that cliff just kept staring back at me and I was psyched out. I tried to take a nice easy swing and not be fazed by the cliff, however, I stopped my swing and watched in horror as my shot bounced off the cliff and dropped what seemed like 500 yards into the Pacific Ocean. I was dejected and Michael gave me a “you should have listened to me look,” however, I saved a double bogey.
The dreaded cliff

The next hole is the famous 7th hole. It is only a 100 yard par 3. I am told it often plays at 100 yards even for the US Open. From an elevated tee you hit straight out toward the Pacific Ocean, with nothing in the background, trying to account for the wind. I took out my 56 degree wedge and swung easily hitting a nice high arcing shot I expected to land in the middle of the green. However, the wind had other ideas and it rolled over the back of the green clinging to life in the rough on a downhill slope. With another double bogey, I was quickly four over.

7th hole-Par 3

Wikipedia describes the 8th hole as follows: “The long par 4 runs alongside the 6th hole leaving the peninsula and heading back toward the coastline. A dogleg right, the ocean is a constant companion along the entire right side of the hole. The landing area is extremely generous in width, but a long straight drive could leave the fairway and enter an inlet of the sea. Because the landing area is elevated on a cliff above the green, players have a good view of the small landing target a mid to long iron away. Jack Nicklaus has called this his favourite approach shot in all of golf.”

This hole was as described and the approach shot was as amazing as you’d expect given that it’s Nicklaus’s favourite. I hit a long drive and a seven iron to the left of the green and took a bogey.

I finished with a 42 after nine holes and I was pleased.

The tenth hole is the last along the coast until the 17th and 18th. I managed to par the tenth and the eleventh, but double bogeyed the 12th.hole. My first shot was slightly to the right of the green and Michael told me to use a lob wedge rather than a small bump and run and I ended up hitting a tree branch since my wedge got up so quickly. Michael apologized saying he did not think I could get my wedge so high so quick, but Michael saved me far more strokes than he cost me, so I could live with one piece of bad advice.

Michael told us that Ben Hogan called the 13th “the longest shortest par 4” and that we were playing the US Open tees. The hole is uphill into a vicious wind. Ben knew what he was talking about as I took another double bogey hitting into the hurricane.

I then took my third double bogey in a row on the 14th hole. It’s a 530 yard par 5, the number one handicap hole, and another hole that had me hitting into the wind.

Yes, that is me

I settled down with a couple bogeys and then parred out on the 17th and 18th. The 18th was a great looking hole down the coast line.

I ended up shooting 86, achieving my goal of shooting less than 90 and exceeding my birdie goal by achieving the back to back birdies on the 2nd and 3rd holes.

All in all it was an awesome day and a great experience, which, to me, was worth the cost and a worthy bucket list item.

The next day we played Spanish Bay. In talking to the starter, we were told that the best pro score ever at Spanish Bay was supposedly 68 and that it is considered a far tougher course than Pebble. We were paired with a husband and wife team for this round and quickly realized the wife had no idea how to play golf and should never have been playing on a course of this calibre. When we complained at the conclusion of the round we were told this is the number one complaint at the Pebble Beach courses; however, since they are public courses they cannot do anything about it. Personally, I am not sure why they cannot implement a minimum handicap requirement, but I digress.

I will not go into detail about Spanish Bay other than to say it lived up to the starter’s billing. The fairways were tight, the greens extremely tough to read and, most importantly, the wind at Spanish Bay made the wind at Pebble seem like a breeze.
1st hole at Spanish Bay

I shot 96 at Spanish Bay and actually hit the ball very well most of the round. I only parred the tenth and twelfth holes. I think my experience at the 17th hole par 4 best exemplifies Spanish Bay. I was 150 yards out after my drive on this hole and would usually use a 9 iron. Due to the wind I hit a six iron. I hit the ball as well as I could hit it and it still just made it to the fringe. The wind was a 4 club wind; I should have used a 5 iron instead of a 9 iron. I don’t know how you adjust to such a wind.

Anyways, despite the poor playing partner and my poor score, I really enjoyed playing Spanish Bay.

In the end, it was a golf trip to remember. My next bucket list items are more vacation oriented, but somewhere down the line, I intend to cross my second golf course off my bucket list, that being St. Andrews in Scotland.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

Tuesday, September 6, 2011

For Income Tax, “If It Seems Too Good To Be True... It Probably Is.”

Jeff Gray of the Globe and Mail recently wrote an article titled “Lawyers targeted over charity tax schemes”  which reported on a court case in which a tax lawyer who provided a comfort (opinion) letter in connection with a charity tax shelter scheme is being sued. The article noted that this is but one lawsuit levelled against legal firms in relation to charity and other income tax schemes.

In my opinion, this article raises three distinct issues. First, what is the responsibility of the tax accountants and tax lawyers who provide comfort letters? Second, what is the culpability of the financial advisor in recommending the charity scheme? And finally, should an individual be expected to recognize a tax scheme that seems too good to be true?

With respect to the accountants and lawyers, without being self-righteous, our firm has never promoted income tax shelters nor condoned the purchase of such by any clients, with the exception of certain types of flow-through share investments.

I suspect that the comfort letters Gray discussed in his article most likely interpreted the income tax law correctly from a technical perspective; in other words, the lawyer likely concluded that the tax benefits being promoted were in line with the specific relevant provisions of the Income Tax Act, although in this case, they may have been the "shades of grey" provisions. The Canada Revenue Agency (“CRA”), however, felt that the tax shelter was a sham and denied the benefits to the individual participants. The issue (according to the article) before the courts in relation to the lawyer is whether there was negligent misrepresentation on the part of the lawyer issuing the comfort letter. The plantiffs' argue the lawyer breached “the standard of care of a senior tax lawyer” for his legal opinion on the scheme and for allowing “comfort letters” from him to be included with its promotional materials?

I am not aware of the specific facts of this case, and as a non-lawyer I have no idea if any or all five general requirements for negligent misrepresentation have been breached. Thus, I have no intention of commenting on the legalities of the case. In addition, in this situation you can call me the “Wimpy” Bean Counter as I am constrained by professional conduct rules as to what I can say about other professionals. I do however query how income tax shelters such as this can be mass marketed to anyone other than accredited investors if accounting firms such as mine, see red flags immediately?

The second issue is also somewhat concerning. One would hope the advisor in this case clearly communicated the obvious risks of this scheme and the fact that he would receive a commission for selling this tax shelter. Let’s hope the commission for selling the tax shelter investment did not influence or have any effect upon his recommendation. However, when a declaration must be signed stating that the participant is aware the tax shelter scheme may be re-assessed by the CRA, one has to wonder how any advisor could recommend such a tax shelter to the average investor?

In regards to the individual’s responsibility, I wrote about this issue in my June 14th blog titled Income Tax Planning - Tail Wagging the Tax Dodge. In this blog I discussed how I have seen many taxpayers blinded by income tax savings to the detriment of their common sense.

In the Globe and Mail article, Mr. Gray stated that Fern Delarosbil, a project management consultant in 2003 purchased the tax shelter as recommended by his financial advisor. For every $2,500 Mr. Delarosbil gave to a designated charity, he would get a receipt for $10,000. Although I have some sympathy for Mr. Delarosbil and others like him, since they apparently relied on the comfort letter and their financial advisor, when does individual responsibility rear its head?

I grant you Mr. Delarosbil is not an income tax expert and his financial advisor suggested he participate in this charity scheme, but did he not see any red flags? Did he not wonder why in this case he would receive $4 for every dollar contributed, yet if he made a donation to the United Way or his local church that the charity donation receipt would have been on a dollar for dollar basis? Was he not somewhat alarmed that he had to sign a tax risk disclosure document saying he had been clearly warned that the scheme might not work and that he could face a reassessment by the CRA? I mean if that is not a slap in the face to wake up and smell the odour of this deal, then I do not know what is.

Over the years I have seen lots of wacky tax shelters and charity schemes, from comic books, to sports equipment, to movies, to papaya farms in Costa Rica. When clients receive documents recommending these schemes they often remark to me that they seem too good to be true. In most cases I reply that they are too good to be true and unless they find the idea of being reassessed in the future, possibly going to tax court and possibly owing back taxes and interest titillating, they should stay away.

In the end, it keeps coming back to the fact that there is an insatiable appetite for any kind of tax savings vehicle in Canada, regardless of the associated risk. Concurrently, as these tax shelter schemes fall by the wayside or have made their way through the tax courts, several insurance based products have also stepped into the breach to satiate the tax savings appetite. Again, these plans appear to be technically correct, yet they cause one to raise an eyebrow given the tax benefits being touted . I would not be surprised if some of these insurance based strategies are looked at closely by the CRA in the future – in fact, the CRA has already commented that they plan to do so in at least one case.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.