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, September 24, 2012

Should the CRA Reward Tax Snitches?

John Greenwood of the National Post recently wrote a two-part series contrasting how the Internal Revenue Service (“IRS”) and the Canada Revenue Agency (“CRA”) deal with income tax evaders and cheaters. In my opinion, the CRA should implement a "whistleblower program" similar to that of the IRS.

In Mr. Greenwood's first article titled, “UBS Whistleblower gets $US104-million award from the IRS”  he details the astronomical $104,000,000 settlement paid by the IRS to UBS whistleblower Brad Birkenfeld; whose detailed information provided the IRS with enough ammunition to cause UBS of Switzerland to pay the IRS a $780,000,000 cash settlement and to hand over details on thousands of U.S. citizens holding offshore bank accounts. As the Swiss have always protected their banking secrecy (bankers can be criminally charged for revealing a client’s identity), one can only imagine the devastating information Mr. Birkenfeld (who was sentenced to 40 months in prison and was only recently released) provided the IRS to cause the Swiss to breach their historical secrecy.

Mr. Greenwood in his article also discusses how the IRS uses financial rewards to catch tax evaders (the reward can be as high as 30% of the income tax collected) and then uses that information to prosecute and/or go after the tax evaders. In comparison, the CRA provides no financial incentive to step forward, and in some cases punishes the whistleblowers. Critics of the CRA suggest the agency rarely pursues tax fraud even when provided with detailed information and names.

In Mr. Greenwood’s second article,  he alleges that Mr. Birkenfeld provided the CRA with copious notes, even though Mr. Birkenfeld had no incentive to do so. When asked what it had done with this information, a spokesman for the CRA states "the agency does not comment on specific cases, and nor does it discuss investigations it may be conducting". However, it appears the CRA has yet to prosecute anyone criminally.

I suggested in one of my most popular blog posts titled Will I be Selected for a CRA Audit, that “there is nothing worse than a scorned lover, a business partner you have had a falling out with or a dismissed employee to trigger a CRA audit.” However, the aforementioned whistleblowers are typically snitching about “small potato” tax evaders and in some cases, they may be more concerned with being vindictive than in providing honest information. So how can the CRA find multi-million dollar business evaders?

Mr. Greenwood suggests that “the best way to infiltrate the greed business, is by greed itself” and by offering whistleblowers financial incentive to turn in their colleagues and clients.

The CRA would argue otherwise and states that 611 Canadian taxpayers have come forward under the voluntary disclosure program and declared income relating to offshore UBS accounts and that 531 of these cases have been processed revealing $109 million of unreported income.

Personally, I think Mr. Greenwood and the IRS have it right; financial reward trumps loyalty or morality. The only reason the CRA has 611 voluntary disclosures is because the IRS broke down the Swiss secrecy wall and this caused Canadians with Swiss bank accounts to become concerned that their information was not safe with the Swiss.

So, what type of person would snitch out a “tax evader” given that many people seem to condone tax cheating or evasion as a national pastime in both the U.S and Canada?

In this CNN Money article, titled Rat out a tax cheat, collect a reward, Tim Gagnon, an academic specialist of accounting at Northeastern University, suggests that “the most common informants tend to be dissatisfied middle-ranking employees in big companies”. Gagnon states that "I think it happens more in middle management than upper management, they're workers in the middle ranks who feel frustrated about what's going on and are not advancing or don't think they have a shot of moving up, because otherwise, it's hard to break loyalty."

Based on the discussion above, we know vindictive ex-spouses, former business partners and middle management employees fit the whistleblower profile, but how about my own kind, accountants?

Accountants know the most intimate financial details of their clients and even where their clients have hidden the details of an offshore account from their accountant; their accountant may have a sixth-sense and suspect possible evasion.

It is interesting to note that the first person to make a claim under the whistleblower program was an accountant in public industry, as detailed in this article. In this case, the accountant tipped off the IRS about a tax lapse his employer ignored and he received a $4.5million award.

The in-house accountant's tip netted the IRS $20million in taxes and interest from the company. The IRS paid the tipster, $3.24million, net of 28% for tax purposes. Nothing like giving a reward and then taxing back 28%.

Buy the way, if you ever get such a reward, you report the income on line 136 of your income tax return under "snitch income" and report the expenses relating to personal protection under line 236, under "bodyguards".

So, should the CRA go to a whistleblower program? Would you turn in your employer or client if you could receive 15-30% of the evaded taxes?

As a tax accountant, I have no issue in assisting people minimize their income taxes in a legal manner. However, I feel all Canadians should pay their fair (even if minimized) share of income taxes and I cannot condone tax evasion. That being said, I would have a hard-time becoming a whistleblower if I found out a client was evading income tax. I would feel that I was breaching the confidentiality of my relationship with the client and I would probably just fire the client. Nevertheless, whistleblower legislation of any kind would surely change the accountant/client dynamic.

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 20, 2012

It's Bean Two Years

Last week, one of my partners at the office commented "that he could not believe how many blogs I had written'. Since I had not really paid much attention to my running total, I went back and determined that I have posted 210 blogs to date. Today will be number 211. That is a lot of blogs when you consider the technical nature of many of my topics and the fact that I tend to write long blogs, despite advice to the contrary.

Today's blog post also marks the second anniversary of my blog which debuted September 20, 2010.

I have been told by several people that when they Google a tax topic, The Blunt Bean Counter is often one of the first links displayed. I am not sure whether I should be impressed with that information or consider the possibility that I write on such boring topics that no one else bothers to write on those topics. I have however, managed to write several blogs on some taboo money topics that have been fairly original in nature and received some recognition.

Over the last year I have received some critical acclaim; being nominated for a Plutus award (I did not win), having multiple mentions in Rob Carrick’s Reader, and being noted as a must read in Money Sense on four or five occasions. I have also been quoted in the newspaper a few times and even been interviewed.

Another blogging accomplishment this past year was creating the Bloggers for Charity initiative, in which Boomer & Echo, Canadian Capitalist, Michael James on MoneyCanadian Finance BlogRetire Happy BlogFinancial Highway, Canadian Financial DIY, Where Does All My Money Go, Young and ThriftyCanadian Personal Finance Blog and my blog, raised $12,575 by auctioning off our blogs for a guest blogger for the day.

All in all, my decision to write has worked out very well, especially considering I really had no game plan other than to write a blog. Despite the time it takes to write many of my posts, I really enjoy writing them and it is rare that the task is burdensome. Now, how many blogs I have left in me is a question I cannot answer at this time?

Finally, although I do not have the largest financial blog following in Canada by any means, I have many readers who take the time to write to me privately, encouraging me or congratulating me when they like a blog, or offering constructive criticism when they don’t like something I wrote. I would like to thank those loyal readers of The BBC – thank you!

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 17, 2012

What "You May Be Worth Someday" Statements

I recently had to complete an updated net worth statement for my firm’s partnership banker. After completing the statement, my net worth seemed higher than I expected. However, as I reviewed the statement, I realized that this document would be more accurately considered, at least in my case, as a “what you may be worth someday statement".

I say this because if I removed my house from the net worth statement (I intend to live in my house as long as I am physically able) and discounted my partnership interest to account for the multiple variables that could affect that value, either up or down, my net worth statement looked a lot leaner. If I made these adjustments, my net worth statement would reflect how I view my current net worth and provide me a better visual of my retirement building net worth.

This revelation made me smirk. You see, a common complaint I hear from my clients is that they are “worth way more on paper or dead and not worth much in tangible today value”. I smirked a second time when I realized my wife had to sign off on the form. I constantly drive her nuts when I tell her that we have to pay far more attention to our retirement funding and now she was going to see a standard net worth statement that was misleading in my mind.

So why do I consider net worth statements misleading? If you are an employee and you do not own your own business, the statements are misleading because the majority of your net worth is most likely real estate based. Real estate value generally comes in three forms; your principal residence value, cottage value and investment property or vacant land value.

Let’s break down these components. While there is no denying the value of your principal residence, the reality is many people wish to continue living in their principal residence until they are either unable to physically do so, or it becomes a financial requirement to sell or reverse mortgage their home. Thus, I consider a house a net worth backstop and the only value you can currently attribute is the incremental value you would recognize if you were to either downsize your home, sell your home and rent or reverse mortgage your home. In fact, as I reflect further, you probably need another variation of a net worth statement, a "retirement net worth statement" to account for the difference in net worth between your current home and the cost of your downsized home or debt related to any reverse mortgage. 

In regard to investment properties, the value is a fairly hard number; since the property or land is not required for shelter. However, the value of the second property or vacant land can only be maximized if you do not have to liquidate on an urgent basis and you sell when market conditions are strong. Thus, the current value attributed to an investment property could be significantly overstated depending upon the current economic climate and the demand for the investment property; however, it should definitely form part of your net worth statement.

Cottage properties are a bit of a hybrid. Cottages may be similar to a house in that you intend to use your cottage until you are physically unable, or they may be like an investment property, you wish to sell upon retirement. Finally, some people intend to sell their cottages to their children for "hard cash".

If you have a business, your net worth and retirement are often both dependent upon the value you realize for your business. The vagaries of realizing that value are why I consider a net worth statement misleading. If you have a service business such as mine, there is less risk initially in starting the business since if it does not take off, you take your clients and work for another professional firm. However, once the business is established, its value is subject to market conditions such as supply and demand (the accounting profession is top heavy in age), technological advancement of the practice  and its condition when you are ready to sell or, in my firm’s case, transition to the next generation of partners. I have had many a client sell their business sooner rather than later because they were concerned that when they were ready to sell their business, the business or economy may have taken a turn for the worse and they would not realize what they required for retirement. Sometimes these clients have sold at a substantial discount for “a bird in hand”. What I will realize on my share of my firms partnership interest will be determined by such things as the economy, tax laws (say a flat tax is enacted) and our succession plan.

Finally, net worth statements have the same flaw as many retirement plans; they do not account for the impact of income taxes. If I reduced the value of my RRSP by 46% and reduced the value of my partnership interest for the inherent income taxes, again my net worth statement would look significantly different.

So what is the takeaway from this post? First, don’t get mesmerized by a real estate inflated net worth statement. Second, you should probably assume a discounted value for your business, and finally, remember; your future tax liability has not been accounted for on your net worth statement.

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 12, 2012

The BBC’s Ramblings - From Recovering Bodies for No Financial Gain to Canadian Universities

If you have been following my blog for a while, you know that I often write about income tax topics. However, what I really enjoy writing about is the psychology of money. How we look at moneyhow it relates to our happiness, whether we are selfish about money and in particular, how money can cause friction between family members.

Reflecting back upon some of these blog posts, it occurred to me that it is an extremely rare occurrence to find someone in desperate straits that is not taken advantage of financially by someone who can alleviate that desperation. So I thought today I would highlight such a case, even if it is slightly morose.

In addition, with my kids back in University, I have decided to post a small rant about how Canadian Universities espouse the philosophy that they provide the opportunity to study a wide range of topics to expand their student's minds; meanwhile, the reality can often be quite the opposite, a restricted learning experience.

Helping People Find Closure for Free

We all know of, or have heard of situations, most of them somewhat morose, where a person or company takes advantage of someone’s distress for personal financial gain. These situations can be as offensive as the sale of human organs for transplant or the more mundane selling of T-shirts that proclaim “I survived” the latest disaster.

Consequently, I felt some hope for humanity and altruism in its purest form when I read a very unusual story in the July 26th edition of The Globe and Mail by Josh Wingrove, titled “Idaho couple with odd hobby bring drowning victim home”.

The title of the article immediately caught my attention and soon thereafter I was captivated by the story. The article discussed the selfless work done by Gene and Sandy Ralston an Idaho couple, who help recover bodies lost under water when the authorities have given up recovery actions, due to the depth of the water or location of the bodies.

The story discusses the sad tale of Kelsey Smith and her husband Jaxson, whose car had fallen through the ice in Yellowknife. His body had not been recovered for five years. Mrs. Smith not only had to deal with the tragic accident, but was having trouble finding any closure as she was unable to bury his body.

Mrs. Smith who was determined to find her husband’s body turned to the Ralston’s. The Ralston’s undertake this altruistic recovery task for free (they ask only for reimbursement of expenses). To quickly summarize the article, the Ralston’s took just 20 minutes to locate Jaxson Smith’s body, and were later able to recover his body.

The Ralston’s are extraordinary people and I found their story inspiring. They are two people who help those in dire straits and could charge thousands of dollars for their services; yet, they do not charge a fee and undertake their recovery missions solely to allow closure for grieving or distressed families. I think they would certainly be the exception in any psychology of money study.

Universities - The Misleading Concept of All Around Education

My two children attend two different Ontario Universities and have done so for a few years. Almost all of my friends have children in University. Recently at a party, the parents got into a discussion on how we feel that most Canadian Universities do not follow through on their philosophy of the University experience being "learning for the sake of learning", where a student wishes to choose that route.

Most Universities have parent days where the faculty speak to the parents of children who are entering University and inform them about how great their University is. Many of the schools espouse that their institution advocates for the freedom of learning. They claim they want their students to expand their minds, and our children should not worry about majors, and just take courses that interest them and they will then find what they love to do.

While talking to my friends at the party, one frustrated parent told us how their child was prevented from taking a psychology course that they wanted to take for the sake of learning. This was because the course was already full, since the declared psychology majors had first dibs. Another parent noted that their child was compelled to declare a major, which then funnelled them into a stream of requisite courses, that did not allow them to “expand their mind” with courses they wanted to take for intellectual curiosity. We all had similar stories or experiences.

As I am not an expert on Canadian University curriculums, I don't wish to speak to what I don’t know. However, as a parent, I can tell you that I and most of my friends have been disappointed in how many course choices our children have been blocked from taking and how quickly they are forced or streamed into majors.

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 10, 2012

Canadians Continue to Break TFSA Rules -So Why not Help Them?

Last week it was widely reported by several media outlets that thousands of Canadians have once again broken the TFSA rules. More specifically, they have breached the over-contribution rules. Dean Beeby of the Canadian Press notes in this article that the Canada Revenue Agency (“CRA”) sent out 76,000 letters (down from the 103,000 letters last year) informing Canadians they have over-contributed to their TFSAs and are subject to penalties of 1% per month on the excess over-contribution (The CRA may waive a penalty if they consider there to be a genuine misunderstanding and the over-contribution is removed within a reasonable period of time).

Generally, I believe blame should start and stop with yourself. However, where thousands of people are making the same mistake, it is obvious the CRA and the institutions administering TFSAs are still not enunciating and communicating the rules clearly to Canadians, despite their good intentions in some cases.

In general, there are two ways over-contributions arise in a TFSA:

1. Individuals contribute an amount greater than their yearly contribution limit.

As described in this CRA document on TFSA contributions, your yearly TFSA contribution room is made up of the following: 
  •  your TFSA dollar limit ($5,000 per year plus indexation, if applicable);
  • any unused TFSA contribution room from the previous year; and
  • any withdrawals made from the TFSA in the previous year, excluding qualifying transfers or specified distributions.  

2. Withdrawn TFSA contributions are “put back” in the wrong year

As described in this CRA document, TFSA withdrawals can only be returned to your TFSA in the year after you have made a TFSA withdrawal. This is because in the contribution room formula noted above, your contribution room increases for any withdrawals made only in the previous year, not the current year.

For example: if you withdrew $3,000 from your TFSA in February, 2012 and you put back any portion of that $3,000 (assuming you have no other contribution room) at anytime in 2012, you will have over contributed in 2012. The over-contribution results because the $3,000 withdrawal should not be added to your contribution room until 2013.

So, after several years of thousands of Canadians misunderstanding the withdrawal rules for TFSAs, why doesn’t the CRA request, or financial institutions on their own volition, take the simple step of requiring its representatives to ask the following two questions before a TFSA contribution is accepted?

1. Have you confirmed your yearly TFSA contribution room to your income tax assessment or with the CRA through your online account or any other means?

2. Does your contribution include an amount put back on account of funds withdrawn during the current calendar year? If so, do you understand the current year withdrawal does not increase your contribution room until next year and unless you have other contribution room, you will have an over-contribution subject to penalties?

I would suggest that if these two simple common sense questions were mandatory questions financial institutions asked its customers before they made TFSA contributions, the CRA would have no need for 76,000 letters next year and taxpayers would have no one to blame, but themselves.

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 6, 2012

The Globe and Mail - Let’s Talk Investing Interviews

I would like to thank Rob Carrick of The Globe and Mail for interviewing me for the “Let’s Talk Investing” series. I link the three interviews below.

Following the first interview (Why you should give your Kids their Inheritance while you’re Alive), my so called friends and family let me know that I had a face and personality made only for blogging, and offered to buy me media training for my next birthday present. I dejectedly stated in a weak defence, that I did not have any takes in any of the interviews, and I should at least be given credit for that. They did not buy that, but I did not expect much mercy.

However, the reviews for my second (How to keep the Kids from Fighting over your Will) and third interviews (Your Inheritance and the Taxman) where much more positive, so much so, that I was offered a TV series to be called The Blunt Bean Counter Gets Blunt.

Just joking about the TV series. The interviews were a fun experience and I had a great lunch with Rob, lamenting the fact we are both long suffering Maple Leaf fans.

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 4, 2012

Private Corporations - Using a Family Trust to Fund University Costs

I have discussed the use of a family trust in two prior blogs – Introducing a Family Trust as a Shareholder in a Private Corporation and Should Your Corporation’s Shareholder be a Holding Company or a Family Trust?

Today, I have a back to school blog post on using family trusts to fund your child's University education where one of the shareholders of your private corporation is already a family trust or you plan to introduce a family trust as a shareholder.

I know that many readers of this blog do not have private corporations. I apologize in advance for the restricted nature of this blog post. But, this is a case where those who operate through a corporate entity have a significant income tax planning advantage. As I noted in this blog post, personal income tax planning is a fallacy for most Canadians.

I don’t have to tell anyone that raising children is expensive. One of the largest expenses is education. For purposes of this blog post, I will ignore whether you feel as a parent your child should pay for some or all of their post-secondary education and assume you intend to pay for as much of that education as possible.

Most parents at a minimum utilize a Registered Education Savings Plan (“RESP”) to help fund their children’s educations. RESPs are excellent educational funding vehicles. The government provides grants, investment returns grow tax-free and the investment income is taxed in your child’s hands, when they eventually use the funds for post-secondary education purposes (typically resulting in minimal income tax).

However, in many cases, parents do not have the funds available to contribute to an RESP on a yearly basis, or, where they have large families or children pursue lengthy and/or multiple degrees, an RESP may be inadequate to fund all their children’s educational needs. A family trust can be utilized to either fully fund your children's education or to fill the "funding gap".

Family trusts are typically either introduced upon incorporation, where the family trust subscribes for the initial common shares issued by the corporation, or at a later date (usually as part of an estate freeze) where a family trust subscribes for new common shares in the corporation after the estate freeze or reorganization.

I discuss the concept of an estate freeze in the Introducing a Family Trust as a Shareholder in a Private Corporation blog I note above. But quickly, the intent of an estate freeze is to lock in the current fair market value of the shares held by the current owner(s), typically the parents into new special shares. As the special shares have a set fair market value, the parent's future income tax liability is fixed based on the frozen value and any future growth of the corporation accrues for the benefit of the new common shares issued to a family trust or any new shareholder.

Whether a family trust acquired shares in the private corporation upon incorporation or upon an estate freeze is irrelevant; what is important is that once the family trust is in place and the corporation pays a dividend, the family trust can allocate the dividend it receives from the company to any beneficiary of the family trust that is 18 years of age or older (as a side note, when a beneficiary is allocated a dividend from the family trust when he or she is younger than 18 years, a punitive tax referred to as the “Kiddie Tax” eliminates much of the benefit of allocating dividends to these beneficiaries).

Assuming any part-time employment income the beneficiary child has earned during the summer or working part-time while at school is offset by the education tax credit he or she is entitled to as a result of the payment of tuition fees, a child 18 years or older can receive approximately $39,400 (in Ontario) in dividends from a private company tax-free. For example, if a family trust received dividends from the family business and allocates $39,400 to a child who is at least 18 years of age to pay for their University costs (tuition, books, rent, food, etc.) this could save the parent upwards of $12,000 in income tax. Alternatively, if a family trust allocated the $39,400 as two separate $19,700  dividends to two children over 18, no income tax would typically be payable. If a family trust receives $78,800 in dividends from the family corporation and allocates these dividends as $38,100 to two children, the parent could save as much as $26,000 in taxes.

It should be noted that there may be some tuition credits wasted under this plan when a dividend is paid (under the Income Tax Act, the tuition credits must be applied against taxable income until taxable income is nil, even if the credits are not required to reduce income tax to nil). If no dividend was paid, the child could potentially carryforward and/or transfer some of the credit to their parents. However, typically the forgone tax savings is minimal, but this issue must be considered.

Finally, parents must recognize that any money paid as dividends to your children, is legally their money. Thus, ideally, the money should be used to pay for University or College, to pay rent, to pay for a car, or any other expenses for the child. Any excess funds should be set aside for the child, maybe to help with a future house purchase.

There are many benefits of a family trust including the potential multiplication of the $750,000 capital gains exemption; however the funding of your children’s education is often the most practical and tax efficient.

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. Please note the blog post is time sensitive and subject to changes in legislation or law.