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, October 31, 2011

Dealing with Financial Windfalls & how to stave off the Money Leeches

I am always intrigued when I read an article about a lottery winner or superstar athlete who has filed for bankruptcy. Although it is almost akin to purchasing one of the movie star rags in the supermarket, I can’t stop myself from reading about the trials and tribulations of those that blow immense fortunes.

Why I am intrigued is somewhat puzzling. As an accountant, I have come across many people who have come into money suddenly and I have observed first-hand how that sudden fortune can be overwhelming for those without a financial background.

Against the above backdrop, I found an interesting article in Advisor.CA by Stanley Tepner, First Vice President and Investment advisor with CIBC Wood Gundy titled Dealing With Financial Windfalls.

Mr. Tepner describes a financial windfall as “any distribution of financial assets that leaves the recipient with dramatically greater liquid wealth than they had been accustomed to managing before the distribution. The windfall may be the result of a major inheritance, the sale of a business or property, or the proceeds of divorce or insurance settlements.”

In my CA practice, I have seen several individuals come into windfalls. Some by virtue of their business or professional situations are better prepared to handle their sudden increased wealth. In my experience, individuals who sell a business for millions of dollars have often built a strong professional network around themselves as their business grew and typically they will have less problems dealing with the windfall as they already have an advisory team in place. The biggest issue many of these people face is boredom, as they miss the excitement of the deal and the “buzz” of business activity. Many of these people often rejoin the workforce in some capacity.

On the other hand, people who have a financial windfall from an inheritance or divorce are often knocked off balance and they require a strong professional support group to be put in place as soon as possible. The loss of personal and financial equilibrium I have observed in these cases is why I find Mr. Tepner’s advice for these cases compelling. He suggests that “as enticing as it is for financial advisors to demonstrate investment acumen or planning smarts, the best piece of advice you can give to a new windfall recipient is to stop and do nothing. Clients should not make any consequential decisions until they have had time to absorb their new circumstances.”

Stanley goes on to say that his advice applies as much to spending and giving money away as it does to investing the new found wealth. I find this advice bang-on. People who have inherited money or received a large divorce settlement are often still grieving the deceased or the end of their marriage (I will ignore the cynical who say many are waiting for their inheritance at the death bed or the divorced person married for the money in the first place). In addition to dealing with the emotional issues attached to death and divorce, money attracts two different types of unwanted attention: relatives and friends looking for a hand-out and those looking to invest those funds.

If a windfall recipient follows Stanley’s advice and parks the money in a short-term savings vehicle such as a GIC, they not only provide themselves some breathing and thinking room, but they will have a built in “out” when approached by the various money leeches. This is an important second step to take not discussed in the article. By in essence freezing the funds (or telling a little white lie that you have frozen the funds; but actually locking in the funds is a better alternative to resist temptation) you cannot gift, loan or otherwise invest that money for say six months or longer. This is a bit of a twist on Stanley's advice, but a strategy I suggest someone coming into a windfall consider, since it stops the leeches dead in their tracks.

By the end of six months or whatever period is selected, the recipient will have had adequate time to consider whether they wish to gift, loan or otherwise invest their money. Hopefully they will have taken advantage of some outside counsel and thus, any decision to give money away will not be impetuous.

Dealing with a financial windfall can be stressful. I would suggest that if you or someone you know is in this position, or will be in the future, you do nothing and freeze all decisions relating to money for six months to one year.

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, October 28, 2011

Investment Bankers are from Uranus, the Protesters from Pluto

Last Saturday, Mark Schatzker of the Globe and Mail wrote an article titled Occupy Toronto: The one-week anniversary. I found this satirical article very funny.

One of Mark's "best quotes" was the following: “It’s weird protesting on Bay Street. You get there at 9 a.m. and the rich bankers who you want to hurl insults at and change their worldview have been at work for two hours already. And then when it's time to go, they're still there. I guess that's why they call them the one per cent. I mean, who wants to work those kinds of hours? That's the power of greed.”

As someone who has dealt with several investment bankers over the years, I almost fell on the floor laughing. This quote, although a figment of Mark's fertile imagination, actually encapsulates the polar opposite views on money and work-life balance the bankers and protesters have. I can envision the protesters on the street chanting, while the investment bankers, who work incredibly long hours look down upon the protesters like they are aliens from another planet, because they don’t value the almighty dollar. Meanwhile, it does not take much imagination to conceive of the frustration of the protesters, who cannot voice their complaints to the very people they despise, because the bankers are working day and night to make money; so much so, that they are not accessible.

I am not sure everyone will agree, but I think this was a brilliant observation by Mark. Whether you side with the Bay Street bankers or the protesters, Mark has poignantly pointed out how diametrically opposed the two sides are.

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, October 26, 2011

The Outrageous Penalties that can be assessed for not filing IRS Information Forms

The recent U.S. tax amnesty program that concluded in September was controversial to say the least. Even Finance Minister Jim Flaherty weighed in saying that “U.S. authorities are spreading unnecessary stress and fear among law-abiding Canadians in their aggressive pursuit of offshore tax cheats.”

In the last week or so there have been a couple articles stating that the IRS may be softening its position in regard to Canadians, however, in the meantime, the filing requirements remain unchanged.

There has been much written about the requirement to file U.S. returns. However, in this blog I want to discuss other U.S. forms that may be required for Canadians who have to file U.S. tax returns whether as U.S. citizens or deemed U.S. residents.

As I noted in prior blogs, I used to file U.S. tax returns, but have not done so for almost two years. Thus, this blog is just for information purposes; please see your U.S. advisor to ensure compliance with your filing requirements and confirm any penalty provisions applicable to you.

Form TD F 90-22.1

This form was front and centre in regard to the amnesty filing program. This form is required to be filed by any U.S. citizen or resident who has a financial interest in, or signature authority on, a foreign bank account (i.e. any account in Canada, whether a bank account or investment brokerage account).

Failure to file this form could result in penalties ranging from $500 for a negligent violation, to $10,000 for a non-willful violation to a maximum of $100,000 or 50% of the value of the account for a willful violation. The potential penalties seem absurd for not filing an information form. Some think the hidden agenda of this form is to provide the IRS full disclosure should you die and be subject to U.S. estate tax.

Form 8891

This form is used to report any Registered Retirement Savings Plan (“RRSP”) or Registered Retirement Income Plan (“RRIF”) you hold in Canada and the related income from your RRSP or RRIF. Before you have a heart attack, the income does not need to be reported if you elect to defer recognition of the income on your RRSP or RRIF until the time you receive it. By making this election you should be able to offset any U.S. tax by claiming a foreign tax credit for the Canadian income tax you pay upon the withdrawal of funds from your RRSP or RRIF. This form must be filed each year for each RRSP or RRIF you hold.

There is interestingly no penalty set out on Form 8891. I have been told by some that the penalty for not filing this form is up to 35% of the value of the RRSP or RRIF, however, I have seen others speculate that since no penalty is specified, the penalty could be as low as $135. In either event, I would file the form and not chance the higher penalty.

Form 5471

This form must be filed by Canadians filing U.S. returns who own at least 10% of the stock in a Canadian corporation. There are different filer requirements, so speak to your advisor as to which category you fall into. Under some filer requirements, you are basically required to translate your corporation’s Canadian financial statements into U.S. financial statements. This is a lengthy and very expensive exercise.

The penalty for non-compliance is $10,000 per missed filing and a reduction of foreign tax credits.

Form 3520

This form is required to be filed by any U.S. person who received a distribution from a foreign trust. For estate planning purposes many Canadians create family trusts that include themselves or children who are U.S. citizens or residents and thus fall under this filing requirement.

In addition, and more relevant for most Canadians, some U.S. tax specialists think that this form must be filed to report both Registered Educations Savings Plans (“RESPs”) and the Tax-Free Savings Accounts (“TFSAs”).

The penalty for not filing this form is equal to the greater of: (1) $10,000, (2) 35% of the property transferred to the trust, (3) 35% of the gross distributions from the trust, and (4) 5% of the gross value of the trust assets.

The above discusses some of the U.S. information forms U.S. citizens and residents may be required to file. The penalties do not seem proportional to the importance of the forms, so for the sake of Canadians required to file U.S. returns, let’s hope the IRS truly does soften its position on penalties for at least past transgressors.

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, October 24, 2011

Advice for Entrepreneurs

In one of my blogs, I said that I have developed a sixth sense in “sifting out,” among the people I meet, those which will most likely be successful. Based on this comment, one of my readers suggested that I write a blog on the “distilled” advice I would provide to an entrepreneur starting a business. I really liked his/her suggestion and thus this blog was born. My comments, based on 25 years of observation are discussed below.

Personal Relationships

In my opinion, the most important issue facing any entrepreneur involved in a relationship or married, is their significant other. Starting a business requires a significant time commitment and comes with a large element of risk. If your significant other is not willing to support you both financially and spiritually, either your business or marriage/relationship is doomed. Where there is resistance to starting the venture, or the other person does not have the same risk threshold, they seem to just drain the enthusiasm and energy from the entrepreneur. Thus, in my opinion, if there is not buy in from your significant other, your chance for success is diminished before you start.

Be Honest With Yourself

The first thing you must ask yourself before you commence any business is; are you an entrepreneur by choice or circumstance? If it is by choice, move to the next paragraph. If your reason is circumstance, such as being laid off due to a recession, you must realize that unless you are starting a service industry or similar industry where you have portability of your clients or customers (i.e.: you start your own law practice and when the economy picks up, if you are hired by law firm, you can take your clients with you to the new firm), this will potentially be a lifelong commitment. If you cannot make a long-term commitment, do not start your business, as it will most likely be doomed to fail.

Business plans and cash flow statements

My first suggestion is to walk before you run. Make sure you start slowly and have everything you require in place. To ensure you have everything in place, you need a business plan and cash flow statement.

Developing a business plan forces you to consider all aspects of your new businesses from production to the marketing and professional fees you will incur. A business plan acts as an initial road map, and although it will change, it provides initial direction.

In almost all cases, the banks will require a business plan and statement of cash flow. For any new business, the revenue line is an educated guess at best, however, the expenses and cash outlays are fairly predictable and as such, you will have some cost certainty. Once you know your costs, you know the minimum amount of revenue you will require to pay off your creditors and lenders.

Partners and employees-Know Your Abilities

Most people are either sales oriented or business oriented. If you are strong in both aspects you have the best of both worlds. Whether you start with a partner or hire an employee later, know your strength. If you are a sales person hire a good bookkeeper or accountant to help you. If you are the business person, hire a good marketing person or get advice on how to market your product or service.

Type of business

If you are developing computer software or apps, you are entering an industry with few barriers to entry and your costs may be limited to the utilities in your basement. However, if you intend to start a service or manufacturing business you may have serious barriers to entry and financing issues.


Whether you are starting a services business or manufacturing business, you will likely require financing. Although you may be able to access some small business loans (research which loans are available to start-up businesses), financing is often problematic for a start-up business and, even when you can obtain financing, you will almost always require some personal capital. Thus, where possible, you should try to start your business after you have worked a few years and built some capital. If you are lucky enough to attract venture capital, the VC's will want to see that you have significant "skin" in the game. Many young entrepreneurs access family money, either as loans or as equity. However, since many start-up businesses fail, you should ensure that if you borrow or capitalize your business with money from your parents, you do not put their retirement plans in jeopardy.

Where possible, have a line of credit or capital cushion arranged in advance.


If you cannot afford to hire a marketing consultant to ensure that you have a market for your product or service, then utilize the internet for research and, more importantly, talk to people in the industry. Although some people may view you as the competition and avoid speaking to you, others benefited from a mentor when they started and may be willing to speak to you and, if you are lucky, they may be willing to provide some mentorship along the way. Either way, get out there and pound the pavement and speak to people.

Don’t discount your services or product

One of the biggest mistakes I have seen entrepreneurs make is discounting their services or products to get business. The problem with this is that your customers will refer you to their friends as a cheap provider and you will get referred customers who are only looking for discounted services. This cycle is very hard to break. Sell for a fair price, but don’t become known as the person with the “cheap prices” unless you can truly make money in that manner.

Keep Your Books Yourself

This is a bit of an unusual suggestion, but if possible you should initially keep your own books and learn about accounting. You may require a bookkeeper to assist you, but you will always be a better decision maker if you understand your own books. You do not want to be dependent on your bookkeeper.

Watch Your Accounts Receivable

It is imperative that you get in the habit of collecting your accounts receivable on a timely basis. This is important for both cash flow and establishing with your customers that you will not allow them to drag out payments. As you grow, you must print out your accounts receivable listing at least every 30 days and either follow up yourself or have your office assistant/A/R clerk call to promptly collect your overdue A/R.

Give it Time to Grow

Most businesses require three to five years to begin to mature and solidify. Thus, you will need patience and an understanding that you will not be “raking in the cash” for several years.

Your Psyche

Many entrepreneurs at some point in their business lives have been perilously close to bankruptcy or have actually had a business go bankrupt. While not always the case, entrepreneurs seem to have nerves or steel or at least give that impression. You may be able to be successful without those steely nerves, but they would be an attribute if you start a business, so you can face down the many challenges that will confront your business.

Post Mortem

It has been my experience that when entrepreneurs reflect upon their businesses, they almost all say that if they knew about the physical toll, long hours and financial stress they would endure, they would not have started their business.

But that is the wisdom or weariness of age. New entrepreneurs are driven and they have boundless energy and they do succeed in spite of the above noted risks and stresses. However, it is vitally important to plan and to try to implement or consider many of the factors I have noted above to make the journey a little less bumpy.

The BDC currently has a program to support young Canadian entrepreneurs in which they donate $1 for every time the above badge is downloaded

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, October 21, 2011

Why Survey: Are your Employees not your best source of Client Information?

Wow, what a stunning revelation. According to a recent survey by RBC Wealth Management, the top three concerns of high net worth clients are the transfer of wealth at death, minimization of taxes and financial needs during retirement. Who would have guessed such? How shocking! Could/should RBC's wealth management advisors not have conveyed this message to the wealth management department in the first place?

RBC completed 2,500 surveys during sessions with their high net worth clients and, according to Howard Kabot, vice-president, Financial Planning, RBC Wealth Management Services, they found that their clients “are very concerned about estate planning. What happens to their wealth during retirement and after they are gone are their main priorities… Clients tell us that they want to make sure their families are appropriately taken care of and that their financial plan is as efficient, effective and prudent as possible."

If I was RBC, I would be concerned that my high net worth clients are going to ask themselves the question, "why did I have to tell RBC this, should RBC not already have been aware of my concerns via my advisor?". I have written about most if not all these “estate planning concerns” in my blog during the last year because I know that they cause apprehension to my high net worth clients. I didn’t conduct sessions and surveys, I just listened to my clients concerns during meetings and lunches etc.

This survey reminds me of a variation of this theme. Years ago a friend of mine worked at a company that in its infinite wisdom decided to engage an efficiency consultant. She told me she could tell her employer everything they needed to know about how her company could become more efficient for the cost of a free lunch. The company paid the consultant hundreds of thousands of dollars for advice that was discarded a year later when the organization became dysfunctional. Why companies do not first access the opinions of their human internal resources (employees) in these type situations is somewhat mystifying.

Obviously, I am just picking on RBC to make a point; this could be a survey by CIBC, BMO or Scotia or any other large company. In addition, before you marketing types attack me, I know this survey was probably partly undertaken by RBC to learn about their clients and partly to be released as a study. But why do companies spend money on endless surveys and consultants when their employees should have most if not all the answers?

One would think that RBC should have been able to determine its clients’ top concerns through a session with its own wealth advisors. These findings could then be confirmed with 50 or so clients to make sure the advisors are in sync with their high net worth clients.

My firm is by no means the most progressive in the world, but we constantly request feedback and suggestions from our staff on internal and client matters. We even have outside consultants solicit opinions from our staff in confidence so they won’t withhold their true feelings out of fear of recrimination.

In my opinion, most of these surveys are a waste of time and money and the resources would be better spent talking to your staff on the ground. Assuming your employees are on the ball, you will get most of the information you need from your staff and their interpretations and understandings can be confirmed by a limited survey of your clients. More importantly, if your clients’ opinions do not agree with what your employees expected, you will have identified a huge expectation or communication gap which adds further value to the whole exercise and then you can commission a full fledged survey.

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, October 19, 2011

How to Save Tax with Flow-Through Shares

Flow-Through Limited Partnerships are marketed as income tax shelters by many investment advisors. They are however, investments in junior resource companies, with the associated risk. Today I provide the ABC’s of these often misunderstood tax-assisted investments in a guest blog titled How to Save Tax with Flow-Through Shares I wrote for Jim Yih of the Retire Happy Blog .

The Retire Happy Blog was the winner of the Globe and Mails Canada’s Best Personal Finance Blog contest, a well deserved honour and is definitely a blog worth checking out if you have not already done so.

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, October 17, 2011

The NBA Strike- How Not to Split a Billion Dollar Pie

The National Basketball Association (“NBA”) has already cancelled the first two weeks of the 2012 basketball season. There are various issues being negotiated as discussed in this article, but most of us just see a huge income pie, with millionaires fighting for a bigger slice of that pie. Currently 57% of the basketball-related income is allocated to the players and 43% allocated to the NBA owners. The owners are striving to change that allocation to 47/53% at a minimum.

The proportion of the labour dispute that relates to negotiation on philosophical issues as opposed to greed is unclear. What is clear to the casual observer is that both sides are forgoing millions of dollars by cancelling the first two weeks of the season and they risk losing multi-millions of dollars if the season is cancelled. These monies will never be recouped. With a pie this large, can’t everyone be happy?

I find it somewhat perplexing, if not disgusting, that all these millionaires cannot come to an agreement, so I decided to look at why these negotiations have not proven successful. Academically and psychologically, one possible explanation for why the NBA negotiations have failed to date is the Fixed Pie Concept. Max Bazerman, a Straus Professor at the Harvard Business School, speaks about the mythical fixed pie concept. He states that the fixed pie concept is an assumption by the negotiating parties that the resource pie is fixed and this assumption, is one of the most destructive assumptions parties bring to negotiations. “The mythical fixed pie mindset leads us to interpret most competitive situations as purely win-lose. For those who recognize opportunities to grow the pie of value through mutually beneficial tradeoffs between issues, situations can become win-win.”
Based on this concept, the NBA players and owners must stop fixating on the current pie and whether a 57/43% allocation is fair or not, and start considering acceptable compromises which permit them to expand the size of the pie. The NBA pie has grown enormously in the last ten years or so through marketing to Europe, shirt sales, music videos, etc. The players and owners must now determine if they can jointly continue to grow the NBA pie such that even with a more equitable split, all parties still win. In the alternative, maybe there is a shrinking pie syndrome occurring and both sides feel the pie has been maximized. In either event, the pie is enourmous, just split it.

The NBA owners are also stating that they are adamant competitive balance in the league is every bit the issue as splitting the income pie is. The NBA is unwavering to date in its stance that every team, regardless of market size, should have the chance to win a title through constrained payroll and contract terms. This model is based on the National Football League which uses a hard salary cap to allow small market teams such as Green Bay to be competitive.

If the NBA owners are truly serious about this issue then I applaud them. Every basketball fan I know was truly appalled at how Lebron James and Chris Bosh manoeuvred to join Dwayne Wade in Florida last year with the Miami Heat to create a dream team. Most basketball fans were pleased to see the Heat lose, but teams were decimated in Cleveland and Toronto as the selfish NBA players changed the competitive landscape at their whim and flaunted it in the fans’ faces.

Personally, I don’t care if the NBA plays this year or not, which seems to be a consensus amongst many disenchanted fans. I would suggest however, that once these bickering millionaires figure out how to share their pie, if the NBA has not addressed the issue of the inmates running the asylum and the perception that the players can make or break teams without impunity based on friendships and the desire to play where they want, then the whole strike will have been for not.

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, October 12, 2011

The Top Five Areas of Estate Litigation

I have written several blogs on wills, estates and executors; some from a tax planning perspective and others  from a purely philosophical or observational perspective. I find this topic area fascinating. Thus, I am pleased today to have a guest blog by Charles Ticker, a lawyer who specializes in estates. Charles will discuss the ugly underbelly of estates, the litigation that can arise.

The Top Five Areas of Estate Litigation

The writer Ambrose Bierce once quipped: “Death is not the end, there remains the litigation over the estate”. As a lawyer who deals with estate disputes, I can certainly confirm Bierce’s observation. Today I will discuss the top five areas where litigation tends to occur.

Challenging the Will

Wills can be challenged if the testator ( person who made the will) lacked the requisite capacity. The legal test for capacity to make a will was set out in the 1870 English case of Banks v Goodfellow :

It is essential to the exercise of such a power that a testator shall understand the nature of the act and its effects; shall understand the extent of the property of which he is disposing; shall be able to comprehend and appreciate the claims to which he ought to give effect; and with a view to the latter object, that no disorder of the mind shall poison his affections, pervert his sense of right, or prevent the exercise of his natural faculties — that no insane delusion shall influence his will in disposing of his property and bring about a disposal of it which, if the mind had been sound, would not been made.

Anytime an elderly person changes his or her will in a significant fashion or decides to leave a child out of the will, the likelihood of a will challenge greatly increases. To defend the will against any possible claim, it is well worth spending the money to obtain the written opinion of a capacity assessor prior to the making of the will as to whether the individual had capacity. As well, it is helpful if the will is prepared by a lawyer as opposed to a self –help will kit. Medical records and lawyer’s records can be reviewed and may shed some light on the testator’s mental condition.

Another ground for challenging the will is undue influence. If Mom was coerced by daughter Sally to cut brother Bob out of the will, then the will may be set aside. However, it is difficult to prove undue influence.

Family Law Act Applications

In Ontario, if a married spouse dies without making adequate provision for his or her spouse, the surviving spouse can within 6 months of the date of death make an election either to take the gifts under the will or apply to the Court for an equalization payment similar to a divorce situation. Sometimes the surviving married spouse needs more time to make a decision whether or not to seek an equalization payment because the spouse does not have sufficient information or documentation concerning the deceased’s assets. In those situations, the surviving spouse can apply to the Court for an extension of time within which to file the election. Legal advice should be sought as soon as possible after the spouse’s death.

Dependant’s Support Relief Applications

In Ontario and most jurisdictions, there is an expectation that the deceased make adequate provision for the support of dependants. The definition of dependant varies from jurisdiction to jurisdiction, but in Ontario dependants can include minor and adult children , grandchildren, parents, siblings, married spouses, common law spouses and same sex partners. The dependant in Ontario needs to prove not only financial need but also that the deceased was under a legal obligation to pay support or was paying support just prior to the time of death. Once gain, there are time limits within which to launch a claim ( six months from the grant of letters probate of the will or of letters of administration) and legal advice should be sought as soon as possible. The Court, if it considers proper, may allow a claim that is filed later if there are still assets in the estate that have not been distributed.

Claims based on constructive trust and unjust enrichment

If a person has contributed money or labour or has provided value to the deceased which benefited the deceased and contributed to the acquisition, maintenance or improvement of an asset, a claim based on the doctrine of constructive trust can be brought against the estate. The Court may award the claimant an interest in the asset if there is a connection between the asset and the contribution made or may make a monetary award of compensation. Constructive trust cases are not easy to prove. There is often no real agreement that the claimant will receive compensation. Therefore, the claimant must show that the deceased received a benefit and was unjustly enriched at the expense or detriment of the claimant and that there was no legal reason for the benefit and related deprivation, that is the person contributing the money or services was not making the contribution as a gift or did not receive some other benefit from the deceased. Constructive trust claims are often seen in the context of a common law spousal relationships because at present in Ontario common law spouses do not have the same property rights on death as do married spouses.

Claims against executors

Executors have a difficult job. They are trustees and fiduciaries owing the highest duty of care to the beneficiaries. They are responsible to manage the estate in accordance with the provisions of the will and keep detailed records. If trusts are involved, they must prudently invest the estate. Executors can be called upon to account for their actions and in particular any compensation they propose to take. Even if the will allows the executors to pre-take compensation they will still be required to account to the beneficiaries. If the beneficiaries do not approve of the accounting, the executor must have his accounts passed by the Court. Sometimes, the Court will remove an executor if the Court is satisfied that the executor is not carrying out his duties competently or honestly. Executors also face potential personal liability from creditors of the estate if the executor distributes the estate and neglects to pay the deceased’s creditors. To avoid this problem, executors should advertise for creditors.

Charles Ticker, is an estates lawyer based in Toronto, Canada who focuses on estate litigation and mediation of estate disputes. More information about him can be found at The information in this blog is not intended to be legal advice. Readers should consult their own lawyer, attorney or other professional for advice.

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, October 10, 2011

Can Investors Pick Market Tops?

Conventional wisdom states that one cannot time the market, that one should stay fully invested in the market and when we get significant downdrafts in the stock market (like those seen over the last few months); one should allocate more funds to purchase the “bargains” as investors flee to safety. Sounds like a strategy if we ignore the generation of investors who require night guards to protect their ground-down teeth and have a pink tinge to their skin because of all the Pepto Bismol they have taken over the last few years.

But, does this strategy work? As I write this blog on October 5th, according to Google Financial, the TSX is down 15% for the year and the Dow is down 6%. Over the last five years the Dow is down 6% and the TSX is down 2%. Over the last ten years the Dow is up 20% or 2% a year on average and the TSX is up 66% or 6.6% a year on average. When I review the ten year returns for clients who use well known private fund managers, many have 2-4% annual returns on diversified portfolios taking into account currency losses.

Those who are working towards retirement or are near retirement are certainly not doubling the value of their RRSPs every seven years or so as the rule of thumb suggests. Clearly applying conventional wisdom over the last ten years would not have served your portfolio very well. Yes, I know one must view the markets over a longer time horizon and, if we go back 20 or 30 years, returns will still be in the teens, but tell that to the guy or gal who was 50 years old in 2001 with a RRSP of $300k. There was an expectation that their RRSP would grow to $700,000 to $850,000 between their annual contributions and the expected growth over the last ten years, and where are they now? Probably in the $450,000 to $500,000 range, if that.

So I am sure you are hovering over the escape button asking yourself where the heck is Mark going with this rant? I would answer that question if I knew. Actually, where I want to go with this is: Do we need to question the ‘stay invested’ mantra espoused by many? More specifically, while I will admit it is very difficult if not impossible to time the market as to when it will move up, is it really impossible to time when the market will move down? Could one reduce their equity exposure when they feel the market is going to turn down instead of voluntarily accepting portfolio decapitation and then buy back when the market seems to have righted itself  even if they miss the initial upturn? Would one still be better off?

Since I am just ranting and musing in this blog, any statistical and fact junkies should check out Rob Carrick's The Reader. Last week Rob linked to an article in the Wall Street Journal Smart Money section that discussed 10 Bogus Investing Truth’s, one being you can’t time the market. The article provides two metrics that have done a good job for timing the market.

At this point, let me state that I know I am not a great investor. Probably the only smart investment move I have ever made is to be debt free. My RRSP and investments are probably only slightly better than average for someone of my age and profession. So I am no Warren Buffett. However, despite my lack of skill, I have been able to scale back my portfolio before significant downturns on 3 occasions over the last ten to fifteen years, thus, my thinking that maybe one can time bad markets via metrics or just gut-feel.

My first correct downturn prediction was back in the boom. During that period I scaled back my equities significantly as I had more and more clients and friends calling me with tips on hi-tech stocks I should buy. To me it was blatantly obvious the era would come to a conclusion with a thud. This was not very original thinking as many commentators and fund managers suggested such. My error during that era was in not taking advantage of the herd as they drove up prices. I should have moved in and out of positions quickly playing on the greed of the day. Instead, I stayed away because the valuations made no sense so, while I was not slaughtered, I also did not make the same great returns as those that used a hit a run strategy during that era.

My second instance of predicting a bleak future was back in 2008. I attended several lectures and courses and read many articles discussing the US housing mess and how, especially in the southern U.S., people with no money were getting huge deferred mortgages. Again, it seemed obvious to me that the market was going to fall. I went heavy to cash, about 60%, but again, showing less than investing brilliance, many of the stocks I held were small cap resource type stocks. When the market cratered, these stocks fell 60%, so I ended up with roughly a 25% loss on my portfolio which was similar to the loss seen by many people who were fully invested. Again, no one will accuse me of being the next Peter Lynch, but for the second time, I sensed the end of a market peak and I essentially got it right, except for the stocks I kept in my portfolio.

This year I have been very heavy in cash from March or so because of the U.S. economic mess, the U.S. senate impasse over the debt limit, the European issues, etc. To me there have been lots of warning signals. However, the rapid market drop did not happen for all intents and purposes until late July reflecting the inherent issue of timing. Even when you have got it right, timing is a whole other ballgame. This year I have managed to have a 5% return on my RRSP and I am pleased with small positive returns on my other accounts. Thus, by instinct or pure luck, I have picked three market tops in the last 15 or so years.

So I return to my original question: if you can pick market peaks, or near market peaks, and re-enter the market after evidence that the market is turning up (I accept you will lose at minimum the initial upside and possibly be tricked by a false start), would you be better off than following conventional wisdom? While I will admit this blog is mostly a backlash to just watching the market drop day after day and I would not suggest that timing the market is a strategy for most people, I am not convinced that for some, timing at least the tops of the market cannot be done. Anyways, just ramblings, musings and food for thought that I am sure any market technician/historian will have a heyday with.

Blogger's edit: Two excellent articles about why you should not time the market are the Canadian Couch Potato’s blog on Why Staying the Course Isn’t “Doing Nothing” and Preet Banerjee’s article in the Globe Life, You bought and held, is it time to bail? 

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, October 5, 2011

My 7 Links Project

Jim Yih of the Retire Happy Blog, who has acted as an informal mentor to me, recently nominated me to take part in the My 7 Links Project started by Katie at Trip Base.

The purpose of this project is to assign seven of your blog posts to each of the seven categories below, and then nominate five other blogs to do the same. This project was actually an interesting little mental exercise. Anyways, without further fanfare, here are my seven links:

Most beautiful post

An income tax and money blog does not lend itself to beautiful posts. However, if I must, my blog about creating your Bucket List (this blog is at the bottom of my Sign that Will blog) wins my beauty contest for its discussion. Though not necessarily beautiful in its own right, a bucket list may lead to beautiful adventures and beautiful places.


Most popular post

Easily my most popular post is: CRA Audit - Will I Be Selected? The title says it all. This blog discusses the situations in which one may be selected for an audit both on a personal and a corporate level.

Most controversial post

The Kid in the Candy Store: Human Nature, RRSPs, Free Cash and the Holy Grail examines whether RRSPs are the holy grail to Canadians, an assertion disputed by well known financial writer Jamie Golombek of CIBC. What made this post cool to me, was that Mike Holman of Money Smarts picked up this theme and wrote an excellent blog titled Canadians Are Not Withdrawing From RRSPs At An Alarming Rate.

Most helpful post

Dealing with the Canada Revenue Agency and Dealing with the Canada Revenue Agency Part- 2 were very practical blogs about dealing with the CRA under various circumstances.


Post who’s success surprised you

I thought my post Intergenerational Communication Gap was a bit too philosophical to be successful, but it garnered some attention. It, deals with the fact the older and younger generations do not communicate with one another about money.

A post that didn’t get the attention it deserved

My post on Probate Fee Planning-Income Tax, Estate and Legal issues to consider has picked up over the last little while as far as reads are concerned, but I don’t think people appreciate how difficult it was to merge the various issues of probate into one comprehensive blog. The blog covers income tax issues, joint ownership and right of survivorship issues, legal precedents, the question of legal versus beneficial ownership of property and the legal concept of evidence of intention. All these topics have been discussed before, but I could not find any blog that brought them all together in one place. In order to do this, I had two lawyers review the blog for accuracy.

Post that I am most proud of

This is easy. My post titled Resverlogix, A Cautionary Tale wins this category hands down. Although writing this blog was cathartic, it relayed a very interesting story detailing the ups and downs of investing in one specific stock and putting too many eggs in one basket and how I tried to protect myself in case those eggs cracked or in my case, splattered.

Blogs I nominate for 7 Links

As the 7 Links Project has now been around for a while and I have lost track of which bloggers have taken part, I nominate all the bloggers on my Blog List to participate if they have not yet done so (I know many have already done so). However, I do not seem to recall seeing a 7 Links done by the Canadian Capitalist, Michael James on Money and Money Smarts, nor did I find one when I did a quick search on their sites. Since I am sure they have been nominated numerous times, I either missed them or they have decided not take part. If it is the latter, I urge them to reconsider as they are 3 of Canada's best blogs and would have some great links.. 

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, October 3, 2011

Stocks with Capital Gains- To Give unto Ceasar or not

I have always been confounded by people who are reluctant to sell a stock that has increased in value because they have to pay capital gains tax. It goes without saying, that income taxes can have a significant impact upon your portfolio’s value over time. Obviously, the longer you can avoid paying income tax, the greater capital you will have at work. However, some people are so adverse to paying income tax on their stock gains, that they are paralyzed from making a sound investment decision.

The underlying question that I will try and address in this blog is: how much a factor should the income tax on your capital gain be when selling shares, if you cannot find a viable replacement equity? I suggest it should be a non-factor.

It should be noted that this blog will revolve around the sale of individual stocks, not mutual funds; as some corporate class funds can be utilized to defer capital gains. I have also not considered an equity monetization strategy based on the assumption that for most readers, monetization is not practical, as I have only seen it used one or twice in all my years practice.

While writing this blog, I came across an interesting statement in Sacha Peter’s Divestor Blog (a favourite on my blog roll) that was right on topic. In his blog “Links and after-tax calculations,” Sacha states that he finds it personally very frustrating to hold onto investments that have appreciated beyond what he considers to be its fair value, but he is "prevented" from selling these stocks because of the capital gains taxes that he would incur.

I commented on Sacha’s blog that I did not really understand his comment. I stated that "Capital gains tax in Canada is 23% or less and to me, that is not an onerous rate. Yes, one never wants to pay tax, but I see people hold onto stocks because they don’t want to pay the tax on stocks that have appreciated past their fair value and the stock sharply corrects. To me, 23% or less is not a large detriment to take a profit when you compare it to the 46% you pay on interest and employment income and compare it to the potential true cash loss you may incur by holding a stock that should be sold.”

Sacha’s response to my comment was “I agree with you from a practical perspective. Academically I outlined a scenario in my previous post that illustrates the situation.” Sacha then provided the  example below which follows the conventional wisdom in regard to selling stocks. This conventional wisdom is succinctly expressed by Greg Forsythe of the US security firm Schwab; "Sell an existing holding if another stock compatible with your risk tolerance is available that provides higher return potential after subtracting any taxes and transaction costs in executing the swap".

Sacha says “Let’s take a hypothetical investment between two securities. Security ABC is a perpetual bond, paying $10 per unit. Security DEF is a perpetual bond of the same issuer, with substantively the same seniority/call provisions as ABC, paying $8 per unit. Your marginal rate (to make the math easy) is 50%.

Let’s pretend you bought ABC for $80, netting a pre-tax yield of 12.5% and after-tax yield of 6.25%. If ABC is now trading at $100/share, what price does DEF have to be in order for the decision to be a net positive? Assume frictionless trading costs, and capital gains taxes are payable immediately upon disposal. For this to be a break-even transaction, your $95 ($100-$5 tax) in after-tax dollars must equal the income of the prior portfolio, mainly $10. $10/$95 = 10.53%, so you must buy DEF below $76/unit in order for your transaction to make financial sense."

Sacha continues "I will again completely agree that this academic exercise is of little use in the grey and fuzzy world of investing in that you never quite know whether you got fair value correct and whether the geniuses on the other side of the computer screen think their idea of fair value is higher or lower.”

Just to be absolutely clear, I am not picking on Sacha. I asked him if I could use his response in this blog, I am just using his response for discussion and illustration purposes. In the above response, Sacha compares two securities based on coupon rate and unrealized gains. His example requires comparable alternatives and is not necessarily his analysis for the sale of a single stand alone stock.

Now, I am not the academic or mathematician that Sacha is, but I guess my issue with conventional wisdom is should one not consider the valuation of a stock and the net proceeds that will be achieved after-tax instead of always looking for a break even alternative or stock with a potentially higher return (i.e.: an alternative may not always be available when you wish to sell a stock and thus, should the income taxes then not become a moot point?).

To illustrate, if I bought Nortel at $50 and sold it at $100, since I thought $100 was fair value, I would have had approximately $88 in my pocket after-tax. Now, look at the many Canadians who held onto Nortel as it rose in price. As I recall, many people were concerned Nortel was way overvalued, but they did not sell their shares because they did not want to pay the large income tax bill associated with their gains. Following with the above example, when Nortel was $130, you could have sold and realized approximately $112 after-tax. At $115 you would have realized $100 after-tax and, as noted above, at $100 you would have realized approximately $88 after-tax.

However, many Canadians held on and did not sell until the $60 range or less. At $60 you would have realized approximately $57 after-tax. Your net after-tax loss of not selling at a pre-determined fair value of $100 was $30 or more, even after paying the income tax.

It is my suggestion that once you feel a stock has hit full value, place a stop-loss order at that pre-determined value and look past the paralyzing income tax decision to your after-tax proceeds and return. Deal with what you will do with those funds as a standalone question.

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.