Are Money and Success the Same Thing? Part 2

In my blog post yesterday, I left you to contemplate some very insightful definitions and interpretations of success and how you would answer the question; are money and success the same thing? After re-reading those definitions and interpretations, my answer is that money and success are not one and the same.

However, that being said, I acknowledge that there is also a thread that closely connects success and money in many circumstances, such that the distinction is often blurred. Thus, today I thought I would expand the question to include not only are money and success the same thing, but can money bring you success or success bring you money? For those that feel I should be true to the original premise and question, I apologize for the re-phrasing, but hey, it's my blog :).

I believe there are circumstances where money can certainly help buy or leverage success while in other situations, money may derail success. On the flip side, there appear to be circumstances where success brings you money.

So let’s look at money and success in five of the key aspects of all our lives: family, career, health, spiritualism and impact on society. 

Family

I agree with John Maxwell’s definition of success noted in yesterday's blog, or at least a variation of it. When it comes to family, love and affection are familial success, not money. Nevertheless, we know families can be torn apart because of money; often because money is very tight, but surprisingly often when there is too much money in the family.

With respect to family, money and success are clearly not the same thing. In respect of my re-phrased question, money will not bring you familial success, but in some circumstances, too much or too little money can tear away at the fabric of love and affection. Familial success in my opinion has little bearing on monetary success.

Career

If we are honest with ourselves, career success often leads to money and thus, this is the one aspect of our lives where I can see how a number of people equate money with success. Yes, there are many people for whom the job is the key and money is only secondary. But when we chat about someone, the first topic is usually about their job, which leads us wonder how much money they make. Or alternatively, John makes so much money as a lawyer, he must be successful.

I definitely think there is some truth in Wayne Dyer's comments noted in my blog yesterday where he says  “Successful people make money. It's not that people who make money become successful, but that successful people attract money. They bring success to what they do.” 

Thus, in the case of a career, even if you don’t agree money and success are one in the same, I think you will agree, there are career related circumstances where money can buy success or success can lead to money.

Health

Striving for money can affect one’s health, be it striving for enormous wealth or enough to just support your family. Alternatively, money may relieve stress (no need to work hard) and buy you better health care.

In this circumstance, I think it is clear money and success are not the same thing. Having money won’t mean you’re successful in health, aka healthy, happy, active (whatever other words you think defines healthy), the only affect money can have on successful health is that it may enable you to buy the best healthcare possible. We all know the best healthcare does not guarantee successful health, but in very selected cases, money may buy you health because of the access to care money provides.

In the end, Bob Marley said it best. On his deathbed he told his son Ziggy, “Money can’t buy life”.

Spirituality

This is one case where money is meaningless. People’s spirituality comes from deep inside and money means nothing. However, it is somewhat ironic that when looking for money to build the addition to the church, synagogue or mosque, the first line of attack are those parishioners with money.

Impact on Society

Many people have a positive impact on society by giving their time for the greater good through volunteering. However, other people with money leverage their money to achieve real or perceived success through philanthropic deeds associated with money, such as building a hospital. Some people feel that is not true success, it is just a donation of money, while others would argue building a new hospital is a true success, regardless of whether the person just wrote a cheque or wrote a cheque and volunteered their time.

I think in this situation, money and success are not one in the same, but money can clearly have a positive impact on society and therefore, promote a form of success.

Conclusion

Wow, this blog post just kept going. If you are still with me, give yourself a gold star. So after rephrasing and rambling on over 1400 words, have we learned anything? I have learned (as I worked out this little philosophical debate in my head) that money and success are not one and the same, but do impact one another. Meaning in certain circumstances, money can influence success, and success can determine how much money you have.

On that note, I wish success to you all; however the heck you define it.

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.

Are Money and Success the Same Thing?

Moneyville runs a weekly feature called Fame and Fortune, where famous people discuss various financial lessons they have learned and provide financial advice. The last question is always “Are money and success the same thing?” In the columns I have read, I do not ever recall a featured guest answering yes to this question. Yet, the fact that the question is asked insinuates that some people feel the answer is yes. I would further suggest, that we all have met people who we think would answer yes to this question; or should answer yes, based on their actions.

In my opinion, the brevity of the Moneyville column forces a cliché answer from most of the guests. The guests typically say things such as “money is fleeting” or “money does not buy love” or “people should not be defined by their money”. However, this simple question is actually very complex when you peel back the layers. Success can be defined and interpreted in so many ways. I believe that money and success are not one and the same, but are so closely intertwined in some circumstances, that money may allow you to buy certain variations of success, while in other situations it can derail success.

Today, I will not get into how we look at money, a topic I discussed in a July 2011 blog post, but will focus solely on the success side of the question.

What is Success?

The definition of success is elusive. If you ask 100 people, you would probably get 100 different answers as to how they define success. So I turn to some famous and less famous people and their definitions and interpretations of success (and money) are as follows.

Ralph Waldo Emerson, a famous American essayist and poet, wrote this poem about success (although there is some debate if he indeed wrote this poem):

"What is success?
To laugh often and much;
To win the respect of intelligent people
and the affection of children;
To earn the appreciation of honest critics
and endure the betrayal of false friends;
To appreciate the beauty;
To find the best in others;
To leave the world a bit better, whether by
a healthy child, a garden patch
Or a redeemed social condition;
To know even one life has breathed
easier because you have lived;
This is to have succeeded."

John Wooden, considered by many as the greatest basketball coach ever, had this definition, “Success is peace of mind, which is a direct result of self-satisfaction in knowing you made the effort to do your best to become the best that you are capable of becoming."

According to John Maxwell, an evangelical Christian author, success is when “Those who know you the best love you the most.”

A less spiritual interpretation of money and success is provided by American author and motivational speaker Wayne Dyer who states, “Successful people make money. It's not that people who make money become successful, but that successful people attract money. They bring success to what they do.”

Finally, and I am not sure who said this, but another more financial oriented definition of success is “The world defines success in terms of achieving one's goal, acquiring wealth, status, prestige and power.”

I have been told by other bloggers that the average reader only pays attention for 400 words (I assume my readers are not average, since I breach the 400 word limit regularly) and since I am already over 600 words, I will stop here. However, tonight, when you are relaxing in your La-Z-Boy recliner (ignore the screaming kids and barking dog), contemplate how you would answer the question of whether money and success are one and the same? I will conclude my thoughts tomorrow.

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.

Legislative Update on Personal Service Businesses and Limited Liability Professional Partnerships

On Wednesday, Jim Flaherty, Minister of Finance, tabled a Notice of Ways and Means Motion to implement outstanding technical tax amendments. Included in the amendments are changes to the taxation of Personal Service Businesses (“PSB's”) and professional limited liability partnerships.

PSB's

My blog of January 24, 2012, “Is Your Corporation a Personal Service Business?” generated significant interest amongst many “incorporated employees”. I keep getting asked about the status of the legislation, so today; I thought I would provide an update. The Notice of Ways and Means has introduced an amendment for PSB’s which essentially means that the general rate reduction of 13% currently available to PSB’s will be removed. The Federal tax rate will thus increase to 28% from the current 15%. For Ontario, you will tack on an additional 11.50%, bringing the corporate income tax rate to 39.50%. If you have filed previously as a PSB, your rate would have been 26.50%. If you have filed as a non-PSB with income eligible for the small business deduction, your rate would have been 15.5%.

Clearly this amendment is punitive. The amendment states that it applies to taxation years that begin after October 31, 2011. Thus, this legislation is now as good as passed, so if you have not already considered this legislation in planning, you should do so for any year-end that began after Oct 31, 2011.

Professional Limited Liability Partnerships

The CRA takes the position that the income earned during the fiscal year is not added to a partner's adjusted cost base (“ACB”) until the first day of the following year. However, any partner draws reduce the ACB in the current year. Thus, if you draw $10,000 and make $40,000, your ACB in the current year is negative $10,000, even though you are truly net $30,000. Where you are a limited liability partner, you have a deemed disposition when you have a negative ACB. For example, in the case above, you would have to report a $10,000 capital gain.

This provision was intended to deal with limited partners such as those in a tax shelter. However, it has caught full-shield limited liability partnerships for various professionals. However, the Notice of Ways and Means has introduced an amendment for professional partnerships that will allow the income earned in the current year to be considered in the ACB calculation, such that the negative ACB issue should be alleviated.

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.

Cohesive Professional Advice

I have written a couple times about how important it is to ensure a client’s investment advisor, lawyer, insurance agent, banker, business consultant and accountant integrate their advice into one efficient coordinated plan. A plan that takes into account the client’s investment, retirement, income tax and successions needs. 

I have noted that when advisors operate in silos, only the client suffers. Even worse are situations where advisors operate at cross purposes, often trying to protect their own fiefdom and fees.

Thus, when Adrian Spitters, a senior Financial Planner with Assante and the blogger behind The Retiring Boomer blog, offered to write a guest blog on the importance of cohesive advice amongst professionals, I jumped at his offer.

In his blog below, Adrian discusses several situations in which the joint efforts of his clients team of professionals, prevented some potentially disastrous legal results and produced some significant income tax savings. Without further ado, on to Adrian’s blog.

Cohesive Advice

by Adrian Spitters

"Most Canadians find that they lack the financial knowledge, or the time required, to  research all the options available to them and to make the important financial decisions they need to make at critical points in their lifetimes." Individuals, who decide to forgo advice and think they can do it on their own, may find themselves ill-prepared for some of the most important financial and life changing decisions they will encounter in their lifetimes; especially since many of these significant decisions are complex and require cohesive planning from several professionals.

There are a lot of good financial, legal, accounting and insurance advisors to choose from. However, some are lone cowboys that focus on what they do best and give good advice, but rarely consult with their clients other advisors to understand how their recommendations affect their client’s overall financial well-being. This can lead to problems down the road.

For example, I had a client who resisted undertaking a detailed financial plan and financial check-up. Unfortunately, only when he took ill, did he relent and provide me all his financial documents (personal and business).

With his permission, I had a tax lawyer that I work with review his legal documents, as I had some concerns. The lawyer noted there was a $500,000 cash gift clause in his will that was potentially at cross purposes with an Alter Ego Trust that had been set-up previously. He asked my client if his intention was to give his wife $500,000 through his estate and an additional $500,000 from his Alter Ego Trust. My client replied that he only intended to give his wife $500,000 in total.

It turns out that years ago when my client remarried, he had a new will drafted that gave his new spouse a life interest in the home and $500,000 cash from his investment portfolio. As the years passed, it became apparent his only son and new wife did not see eye to eye. To deal with this situation, my client’s accountant recommended he settle an Alter Ego Trust.

My client then met with a new lawyer to create the Alter Ego Trust. He instructed the lawyer that it was his intention to give $500,000 of his estate to his spouse and the rest of his estate to his son. The lawyer, unaware that a $500,000 provision for his wife already existed in his original will, wrote this provision into the Alter Ego Trust. This resulted in a potential $1,000,000 obligation to his spouse, while potentially leaving his son out in the cold, which was not his intention. The new lawyer then redrafted the will to reflect the actual wishes of my client.

Another example of the benefit of cohesive advice is a client couple who wanted to retire and sell their respective 25% interests in a company that they owned with another couple. I had some concerns about certain assets reflected on the company's balance sheet, so I recommended to my clients that they have the financials reviewed by a lawyer and an accountant that I work with to determine if my concerns were well-founded and whether they had any recommendations. My client's agreed to the review. When the tax lawyer and accountant reviewed the company financials, they discovered that the company owned a condominium and also had a corporate insurance policy with significant cash value. As a result, the company did not meet the requirements of a qualified small business corporation (QSBC) and neither shareholder was entitled to their $750,000 lifetime capital gains exemption as the company was currently constituted.

Since the value of the company was approximately $1,200,000 and the shares had no adjusted cost base, the additional income tax owing would have been in the neighbourhood of $250,000 if the company could not be restructured to qualify for the capital gains exemption. However, we were able to work with their accountant and lawyer to restructure and purify their company by selling the condominium. I also arranged to have their insurance agent transfer the insurance policies form the company into their personal names. This process took two years and once the offending assets were removed they found a buyer to purchase their company shares. While there were some costs and taxes involved in selling the condominium and transferring the insurance policies out of the company into their personal names, these costs were minimal compared to the approximately $250,000 in combined tax savings to the shareholders.

In the process of working with this client, the accountant that I worked with discovered that their partners owned a holding company. He noted that the company had two $450,000 insurance policies on each of the partners. He had the insurance agent we work with review the policies. The agent found that the policies were owned by the company, the insurance payments were made by the company and the beneficiaries were the insured couple. This posed a significant tax liability should either of the insured die. When a company makes payments on an insurance policy on behalf of the insured and the insured’s estate receives the proceeds; the proceeds are taxable to the estate (Bloggers note: if the shareholders reported a personal taxable benefit for the insurance paid by their corporation on their behalf, the CRA typically does not deem the insurance proceeds taxable, although some professionals think the proceeds are taxable even if a benefit was reported).

To correct this, our insurance agent arranged to have my client’s insurance agent change the beneficiary of the policies form the insured’s estate to the company. This way the insurance proceeds will be received by the company tax free, and can then be paid as a dividend to the surviving shareholder tax free through the corporation’s capital dividend account. Soon after the changes were made the husband passed away and the spouse received the full $450,000 insurance proceeds tax free, saving her almost $220,000 in taxes.

These real life examples help illustrate the importance of seeking advice from a cohesive team of professionals, who work together to understand your complete financial picture. Otherwise you may find yourself inadvertently, negatively impacting your financial well-being.

Adrian Spitters, FSCI, CFP, FMA, is a Senior Financial Planner with Assante Capital Management Ltd in Abbotsford, BC. Adrian has extensive business experience that includes over two decades of helping individuals, business owners, professionals, and high-net worth families. For further information please visit http://www.assante.com/advisors/aspitters/ or contact Adrian at aspitters@assante.com

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.

Stress Testing your Spouse's Financial Readiness if you were to Die Suddenly

I have written about several morbid estate planning topics on my blog. However, I think today’s post easily ranks as #1 on the morbidity scale.

I will have the impertinence to suggest that you should stress test how financially and organizationally ready your spouse would be should you die suddenly, or vice versa. Essentially I am telling you to take a financial and organizational walk through your death.

As I don’t want to be known as Morbid Mark, I am going to provide a side benefit of undertaking this morbid task. Girls, instead of the usual headache excuse, tell your guy sure, but first lets stress test your death. I guarantee you will have the night off. Guys, if your wife is taking you to the ballet, just before you are about to leave, tell her you just want to financially stress test her death and I don’t think you will have to attend the Nutcracker.

Seriously though, even with today’s modern families, where both spouses often have some level of financial acumen, most families really give little thought to what would happen if god-forbid one of them passed away unexpectedly.

It is important to understand that this post is not intended for older readers, but to anyone married or in a common law relationship, no matter their age. A 40 year old can get hit by a car anytime, just as much as an elderly person can pass away due to old age. The idea for this blog came about because I realized if I passed away suddenly, I had only partially provided my wife a financial road map or our assets, insurance polices etc. Why I am even cognizant of such a morbid concern is that my father passed away suddenly 25 years ago and if I was not an accountant, my mother would have been overwhelmed trying to find insurance polices, bank accounts and various other investments at a time of intense grief and shock.

Many of the comments I make below were discussed in Roma Luciw's Globe and Mail article Why you should stress-test your finances for a sudden death, so I apologize for any duplication if you read that article, but there are additional links below.

Some of the issues that need to be stress-tested:

1. If you have pre-paid your funeral or have certain wishes, ensure your spouse is aware of where this information is located.
2. Does your spouse know where to find a copy of and/or the lawyer who drafted your will? More importantly, is your will up-to-date? If you own your own company, do you have two wills?
3. Do you have a folder for all your insurance policies? Does your spouse know where it’s located? While in good health, you should prepare a summary of all insurance policies you have on an excel spreadsheet; list the policy number, the insurance company, the type of insurance as well as the value of the insurance and staple it to the front of your insurance folder. You may also want to create a special password protected file (let’s call it the “Information Folder” for lack of a better name) on your spouse’s computer that contains this summary information.
4. Do you have a list of the assets you own and where they are located? As I discussed in my blog Where are the Assets, you should complete and update yearly a basic information checklist. Again, I suggest a PDF placed in your Information Folder.
5. As I discussed in this blog on Memory Overload, the use of multiple passwords is so prevalent that you should consider making a list of your key passwords for your spouse, that again is either put into the Information Folder or another more secure location. The objective of this exercise is to ensure your spouse will not be locked out of your various financial accounts because he/she does not know the passwords.
6. Do you have a contact list for your spouse with the phone numbers and contact information of your accountant, lawyer and financial advisor? Again, consider creating a PDF and putting it in the Information File.
7. Consider any accounts, safety deposit boxes, etc. your spouse may not be aware of. There are various reasons one spouse does not make another spouse aware of these items. However, the reason for their existence is not relevant here, what is important is that you somehow ensure that someone will become aware of the existence of these accounts or safety deposit boxes if you die. 

The above list is far from comprehensive. However, the intention of this blog was not completeness, but to get you to take a step back and consider the unthinkable and whether or not you have prepared the proper trail to allow your grieving spouse to move forward financially with the least amount of stress. I know this is morbid and people tend to procrastinate or ignore anything related to death, but look at this as selfless instead of morbid and maybe you will be moved to act.

Sheldon from The Big Bang Theory at the Emmys

After the above post, I thought I would lighten the mood. I tweeted this a couple weeks ago, but if you have not viewed this clip, it is very funny as Sheldon Cooper at the Emmy's gives some love to accountants.

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.

Punitive Income Tax Provisions

The Income Tax Act ("Act") contains numerous punitive provisions that can catch taxpayers off-guard. Today I will review some of those provisions.

Late Filed Income Tax Returns

Many taxpayers who cannot afford to pay their income liability on April 30th or June 15th (if you are self-employed) do not file their income tax returns on time. That is the worst possible decision. The Canada Revenue Agency ("CRA") imposes a late-filing penalty of 5% of the balance owing for late filed returns and then tacks on an extra 1% a month for each full month your return is late to a maximum of 12 months. For those mathematically challenged, that is a potential  17% penalty for simply not mailing in your income tax return by the deadline. If you file on time, you will owe interest, a small cost to avoid the penalty.

If you have incurred a late-filing penalty in either of the three preceding taxation years, your late filing penalties are doubled and apply for up to 20 months for a maximum penalty of 50%. Yes, fifty percent, that is not a typo. You may be able to apply for Taxpayer Relief ("Fairness") on your penalty; however any reduction in the penalty relies upon the discretion of the fairness committee. My advice, always file on time even if you cannot afford to pay your tax liability.

Interest on Taxes Owing and Refunds

As noted above, you can easily avoid a late-filing penalty by just filing on time. Unfortunately, you cannot avoid interest on  taxes owing. Interest compounds daily at the prescribed rate on any balance of tax owing after April 30th, currently at 5% as per this CRA schedule of interest rates.

Some may find this hard to believe, but as per the above schedule of prescribed rates, the CRA only pays taxpayers filing personal income tax returns 3% on overpayments and refunds, yet charges 5% on deficient payments. Go figure.

Instalments

Per this CRA instalment guide the CRA will charge interest at the prescribed rate of 5% if you did not make instalment payments or made payments that were less than the required amounts.

You may also have to pay a penalty if your instalment payments are late or less than the required amount. The penalty only applies if your instalment interest charges are greater than $1,000. The penalty is calculated as follows:

The higher of:

■ $1,000; or
■ one-quarter of the instalment interest that you would have had to pay if you
had not made instalment payments for 2012.

The CRA then subtracts the higher amount from your actual instalment interest charges for 2012 and finally, they divide the difference by two and the result is your penalty. Since no one can follow that calculation, the CRA provides the following example:

Example

For 2012, John made instalment payments that were less than he should have
paid. As a result, he has $2,500 of actual instalment interest charges for 2012. If
John had not made any instalment payments in 2012, his instalment interest
charges would have been $3,200. Since one-quarter of $3,200 is $800, we
subtract $1,000 (the higher amount) from $2,500. The difference is $1,500. Then,
we divide $1,500 by two. John’s penalty would be $750.

There you go, clear as mud. Just pay your instalments on time, since your accountant has no clue if the instalment penalty is calculated correct or not :)

Penalty for Unreported Income (missed tax slips)

Under Subsection 163(1) of the Act, where a taxpayer has failed to report income twice within a four-year period, she/he will be subject to a 20% penalty of the amount you failed to report the second time. It is important to note that the amount of income that was unreported the first time is not relevant in the calculation. If you failed to report $100 the first time and $10,000 the second time, the penalty will be $2,000, a somewhat ludicrous result considering if the slips were missed in the reverse order the penalty would only be $20. In addition, the reality of the situation is that it is very easy for a T3/T4/T5 slip to be misplaced or lost in the mail.

I find this penalty insidious and have previously written on this issue in a couple different blogs.

T1135 penalty

Where you hold certain types of foreign property with a cost over $100,000, you must file the required T1135 Foreign Reporting Form. Where the form is not filed as required, the CRA can levy a penalty equal to $25 a day to a maximum of $2,500. The quantum of this penalty is just unconscionable where the income has been reported, but the form not filed. I can understand this penalty where the income has not been reported, however, where the income is reported, how can a penalty of such magnitude be charged?

Wow, that's all I can say when I read back my post and digest the various punitive provisions. While these provisions are necessary to ensure compliance with the Act, the quantum of many of these penalties is just obscene.

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.

Update on IRS Amnesty Provisions for U.S. Citizens Living in Canada

On June 27th, I wrote about the proposed Internal Revenue Service ("IRS") amnesty procedures for United States ("U.S.") citizens living in Canada, who have not previously complied with their U.S. income tax filing requirements and are considered "low compliance risk". Today I will provide an update of the amnesty procedures.

To briefly review, in contrast to Canada, the U.S. imposes a requirement to file income tax returns and information returns based on citizenship rather than residency. This requirement has caught many U.S. citizens living abroad (especially Canada) off guard who believed that their U.S. tax filing obligations would cease once they departed. In the past, the penalties associated with catching up on late filings were very severe despite the fact many filers would owe little to no tax; therefore, many individuals were deterred from filing.  

On August 31st, the IRS announced a new streamlined filing program to allow qualifying U.S. citizens living abroad to catch up on outstanding U.S. tax returns and related information returns without penalties being imposed. Under this new program, which came into effect on September 1, 2012, individuals who qualify must:

1. File tax returns for the 2009, 2010, and 2011 and pay any balances owing plus arrears interest. Each return must show no more than $1,500 of taxes owing.
2. File Foreign Bank Account Reporting (“FBAR”) forms for the six previous years (a separate disclosure form to be filed if the balance of all the non-U.S. bank and investments accounts is more than $10,000 at any time during the year).
3. Complete an IRS questionnaire that will be used to assess your “compliance risk”.

In order to qualify for the streamlined filing program, affected U.S. citizens (including dual-citizens) must have been living abroad since January 1, 2009, have not filed U.S. tax returns for 2009, 2010, and 2011 and are considered low-risk based on the completed questionnaire in #3 above. The IRS will look at the following non-exhaustive list of factors to determine if an individual is considered low- or high-risk:

· If any of the filed tax returns claims a refund.

· If there is any significant economic activity in the U.S and/or has U.S.-based income.

· If the taxpayer reported all their income in Canada.

· If the U.S. citizen is under audit or investigation by the IRS.

· If FBAR filing penalties have been previously assessed or if a warning letter was issued.

· If the U.S. citizen has bank accounts or investments outside his/her home country.

· If there are indications of sophisticated tax planning or avoidance.

The compliance risk is an estimate by the IRS of an individual’s risk that there may be additional taxes owing and/or disclosures required that may not have been captured based on the required filings above in #1 and #2.

Individuals identified as high-risk will not be eligible for the streamlined filing procedures. They will likely be subject to a more detailed follow-up from the IRS and may be asked to file returns for earlier years. In this situation, the IRS does have the ability to impose penalties and even pursue criminal prosecution if the high-risk individual’s package is not accepted.

A benefit of this streamlined program is that U.S. citizens in Canada with Canadian RRSP and RRIF accounts will be able to file the appropriate forms to elect to defer the income in the event that these forms were not filed on time in the past. Canadian registered accounts that allow the deferral of income are not treated the same way by the IRS.

For U.S. citizens, it is about time the IRS put in place a well-publicized and documented tax amnesty program, under which U.S. citizens are not treated like Al Capone. The program should be effective for the vast majority of Americans living in Canada, although, the arbitrary nature of the risk assessment will leave some U.S. citizens wanting. The cost of preparing the required U.S. tax returns and FBAR forms will be expensive, but the potential of avoiding thousands of dollars of penalties still makes this streamlined filing program very attractive for U.S. citizens that want to come clean with the IRS.

Bloggers Note: I am posting this blog to update U.S. citizens living in Canada. I am not a U.S. income tax expert and may not be able to answer many questions you may have on the amnesty.  

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.

I am all A-Twitter

I have embraced social media and social networking through The Blunt Bean Counter blog and LinkedIn respectively. Twitter is another story. I found Twitter to contain a lot of drivel. However, I am now beginning to grasp the benefits of Twitter where it can be used as an information network to support and help me share my income tax, estate planning and business expertise. Thus, last week (with a little arm twisting), I started to tweet relevant income tax and other professionally related articles that may interest you, my readers.

If you want to follow me, my twitter handle is @Bluntbeancountr (yes, no E in Countr, Twitter restricts the letter count). I am also told my hashtag is #bluntbc, which is pretty cool. If you want to communicate with/about me on Twitter, I’ll be keeping an eye out for that hashtag.

If you decide to follow me, don’t worry; I will not be tweeting details of the sauce on my pasta, or how bad the Leafs are (hmmm, I may recount that one) but information relating to my business expertise.

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.

Debt - An Ugly Four Letter Word

Personal debt in Canada has reached its highest level in history. As reported by Statscan, the ratio of debt to personal disposable income (all your debt divided by your annual after tax income) hit a high of 154.34 per cent for the first quarter of 2012, up from 149.22 per cent for the first quarter of 2011. This extreme level of debt is a result of an extended period of historically low interest rates, a sluggish economy and, to some extent, an “I see it, I want it, even if I can’t afford it” attitude amongst many people.

No matter the reason, if you have debt, you need to step-back and determine if you can organize and consolidate your debt and/or make your debt income tax effective. The comments I offer below are mostly organizational in nature and are not intended to help those with serious debt issues. If you are overwhelmed by debt, I strongly suggest you consider engaging a professional debt counsellor who will not only try and help reduce your debt, but will try and address the personal habits that often create or accentuate debt problems.

Organize and Consolidate

A good first step to managing your debt obligations is to summarize your debt. Create an excel spreadsheet and list all the debt you have down the left hand side of the spreadsheet. This will include your mortgage, any lines of credit, all credit cards and any other debt you may have accumulated along the way.

Then, across the top of your excel schedule, have the following columns:

Name of creditor - company or individual to whom you owe your debt
Amount of debt outstanding
Credit limit related to the debt
Interest rate or where floating, terms of debt (i.e. Prime +)
Terms of repayment and date due
Pre-payments - Where term is fixed, what is the maximum pre-payments allowed
Penalties- Are there any penalties for paying off debt early
Deductibility - Is the debt deductible for income tax purposes (see discussion below)
Notes - This will be a catch all for any information not noted in the other columns and for notes on whether debt is connected to other debt or assets (e.g. is your interest rate lower because you have a mortgage, line of credit and investment account with an institution or is the debt or debt rate contingent on any other factor).

Finally, lower on the page, below the debt summary, create a new heading called assets. List all your assets including your house, non-registered accounts, registered accounts, rental properties, TFSA, etc. Create three columns across the top; value of asset, debt related to asset and tax deductibility (in general if the asset is an income producing non-registered asset, any associated debt will be deductible).

As basic as the above sounds, sometimes having everything written down and organized allows you to gain some perspective and take a 10,000 foot view.

Once you have completed the above task, review the interest rate column to determine which debt has the highest interest rates. In most cases, this will be your credit card debt. You should then review whether you have the capacity to use a line of credit or other debt instrument with a lower interest rate to pay off your credit cards and effectively lower your rate of borrowing.

If you have debt at various institutions, ask your main institution for a lower rate on the total debt if you consolidate the debt at that institution.

Tax Deductibility

Finally, you should review whether you have any assets denoted as tax deductible, for which you have no related debt. For most people, those assets would include shares of your own business, non-registered investment accounts that hold stocks, bonds, ETF’s etc. and rental properties. There may be other assets; however, these are the most typical. If you have any of these type assets and they are not encumbered by debt, you may be able to make some of your debt deductible for income tax purposes. Typically, this involves circulating monies; you liquidate interest deductible assets for which there is no related debt (taking care to ensure you are not creating any capital gains) pay off the non-deductible debt and then borrow to replace the original investment assets, making the interest expense deductible. Before undertaking such a transaction, professional advice should be sought.

There is no panacea for eliminating debt. However, at a minimum, you will want to undertake the various steps and review processes noted above, to start consolidating and reducing your debt as well as ensuring your debt is income tax effective to the greatest extent.

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.

Holy Hotchpot—Equalizing Uneven Advances to Children in your Will

Many parents stress unnecessarily, over how thy will equalize their wills, where they have made unequal gifts to their children during their lifetime. Don't fret; today I will discuss a simple "hotchpot clause" that can alleviate your concerns.

Families with the financial wherewithal often advance funds to their “financially dependent” children to fund their living expenses or help with the purchase of a house, to the exclusion of their financially "independent children". In many cases, parents assisting financially dependent children, have the expectation that when they pass away, the funds they have advanced during their lifetime to financially dependent children will be considered advanced on account of those children’s inheritances, not separate gifts above and beyond their inheritances.

I have clearly stated in two of my most read blogs, “Is it Morbid or Realistic to Plan for an Inheritance?” and “A Family Vacation – A Memory worth not Dying for" that where parents have the financial means, it is my opinion that they should consider making partial advances on account of an inheritance while alive. Some readers have stated that they do not agree with my views. However, for today, let’s suspend the debate on whether parents should or should not provide partial advances to their children and assume a situation where a parent has made unequal advances to their children during their lifetime and they want to equalize these advances in their will.

Over the years, a legal concept now commonly known as a “hotchpot clause” has evolved to deal with the equalization of the beneficiaries of an estate, where one or more of the beneficiaries have already received money during their parent’s lifetime. When a hotchpot clause is inserted in a will, the clause will prevent a beneficiary (typically a son or daughter) from “double dipping” where the parent intended any money advanced during their lifetime to be considered a pre-payment of an inheritance, rather than an advance over and above an intended inheritance.

This concept is best illustrated by an example.

Richie and Betty Rich have three children; RJ, Archie and Veronica. Richie and Betty have an estate of $1,000,000. Their son RJ runs a successful comic book store and makes a good living, but is by no means wealthy. Archie, the youngest, suffers from an entitlement issue and has never finished school nor held a full-time job. However, he has always been the apple of Betty’s eye and can do no wrong in his mothers' eyes. Veronica gave up a promising blogging career when she married, but unfortunately her marriage fell apart and her husband left her with two young children.

Over the past few years, Betty has advanced Archie over $100,000 to fund his snowboarding lifestyle. Furthermore, Richie and Betty both have felt the need to advance $200,000 to Veronica to fund the private school education of her children.

It is Richie and Betty’s intention to have their $1,000,000 estate split equally when they pass away, however, they want the funds previously advanced to Archie and Veronica to be accounted for, such that RJ gets 1/3 of their estate, including amounts previously advanced to Archie and Veronica.

If Richie and Betty were to die in a car accident today, their current will stipulates that their estate is to split equally amongst RJ, Archie and Veronica, such that each child would be entitled to $333,333 each ($1,000,000/3), which is not the intention of Richie and Betty.

However, if Richie and Betty had met with their lawyer before they died in the car accident, their lawyer could have inserted a hotchpot clause, such that their estate would be considered to have been $1,300,000 ($1,000,000 plus $100,000 advanced to Archie and $200,000 advanced to Veronica). Thus, when the estate was settled, RJ would receive $433,333 ($1,300,000/3), Archie would receive $333,333 ($433,333-$100,000) and Veronica would receive $233,333 ($433,333-$200,000).

To view an example of what a hotchpot clause may look like, please follow this link. A word of caution; you should always engage a lawyer to draft the clause, as a hotchpot clause must mesh with the rest of your will. 

“From the basis of equitable treatment between beneficiaries, a hotchpot clause is a useful tool” comments Albert Luk, a lawyer at Devry Smith Frank LLP and past contributor to my blog. “However, one must always be aware that a hotchpot clause requires evidence of provable advances to the beneficiaries. Bad (or no) book-keeping may render a hotchpot clause ineffective. The key is to keep good records.”

There is obviously no requirement for parents to be equal and fair to their beneficiaries. However, where parents intend to split their estate equally amongst their children/beneficiaries and yet, have made loans, advanced funds for house down payments or just advanced funds to their children in unequal amounts while alive, their estate planning must include the consideration of those gifts and loans (with proper evidence as noted by Albert Luk above) and they should ensure their lawyer has drafted a hotchpot clause.

Bloggers Note: If you are interested in delving deeper into this topic, Corina Weigl of Fasken Martineau DuMoulin LLP wrote a great paper on this topic in 2001.

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.