Hot Diggity Dog

Reggie and Whitney
Pic by Trudy Rudolph

Did you ever wish after a hard day’s work that you were a dog? What a life. Wake up and go to the bathroom, get fed, play and/or walk, get a snack when your guilty master goes to work, try to have sex with the next door neighbour’s dog, take a nap (a long one if you were successful with the dog next door), go for another walk, greet your master(s) at the door, lick them and get a cookie, get fed, watch some TV, go for yet another walk and then back to sleep. All this must be done while being massaged, patted and kissed by family members. Then if you are real lucky you get a $12,000,000 inheritance or an $8,000,000 mansion and $3 million trust fund.

Since this is a financial blog, the thin thread of finance in my post today will be the cost of owning a dog (Actually, after last week's brain numbing three part series on small business owners remuneration, I needed a less taxing topic). I have two dogs, Reggie and Whitney, both schnauzers (see picture). Reggie the male and larger dog is a half-brother to Whitney (see the first paragraph about trying to have sex with the dog next door. In this case, Reggie and Whitney’s mother was successful, or at least the neighbour's dog was successful).

I have had several dogs during my lifetime and I have typically passed on dog insurance. Boomer of Boomer and Echo (Robb Echo) wrote an excellent article on how much we spend on our pets. In the article Boomer noted that the average dog owner spends $1,800 a year. I got the feeling Boomer found this to be on the high end. So being the anal accountant I am, I went back to look at my Quicken data for the last three years and found my annual cost per dog was closer to $2,800 a year. Ouch. Last week in Carrick on Money, Rob Carrick posted this article on the lifetime costs of owning a dog, which I consider on the low end.

The major reason my costs are higher than the “supposed average” is that when my kids went off to University a couple years ago, we decided to hire a dog walker a couple days a week. Our dog walker is also our dog's trainer. She is publicity shy, so I will not mention her name, but she is a great trainer and walker and loves the dogs. That being said, two things became glaringly evident: dog walking is a nice gig if you can get 4-6 dogs for each walk, and we could easily reduce our costs if we cut out our dog walker.

The other Costs

Food – $65 for each bag of food (special food required due to Whitney having crystals in her urine), so around $800-$900 a year in total.
Grooming – $110 ($55 each dog) for grooming, so around $500 a year.
Vet costs – vaccinations, heart worm medication, check-ups, (each dog has required an operation and had some skin infection); so from $1,000 to $2,000 a year.
Kennel costs – when on vacation if a family member cannot take the dog (we are lucky, often our breeder takes in our dogs at a reasonable cost), the costs of boarding can be as high as $400-700 per week for both dogs.  
Dog singing lessons- just joking, but check out Reggie and Whitney singing. Whitney actually sings on demand. She is often the star attraction at family gatherings and some relatives start singing on purpose to get her crooning.

I am sure many readers are thinking I am nuts for spending that much on our dogs, but if you are a dog lover, you understand this. If not, you never will.

Rant

The great “dog’s life” I discuss in the first paragraph, is unfortunately dependent upon the dog being purchased or adopted by a great family. Many a dog has been mistreated, abused or worse by miscreants who had no right owning a dog. If I ran the court system, any kind of criminal infraction against dogs, or any animal for that matter, would be treated the same ways humans are and would be interchangeable in court sentencing (although we don't exactly levy heavy sentences for many human infractions). Anyways, I am off on a tangent, but now I feel better.

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.

Tax Tips Tweet Summary & Child Disability Claims

This week I started tweeting daily income tax tips under the hashtag #blunttaxtip. The tweets were organizational in nature, to get you prepared to file your tax return. I have had an avalanche of requests to post these tips on my blog. Okay, two, but who is counting. 

In response to these requests, I will post a summary of my weekly tax tips each Friday until my tips have been exhausted or I become exhausted, whichever comes first. I am not sure how well tax tweets with a 140 character limitation translate, but I assume you will get the gist of the tips.

Tips for Week of January 22-25

Make a checklist of all the tax slips you expect to receive this year. Will help you avoid this penalty: http://bit.ly/W7PuCl #blunttaxtip

Medical expenses must evidence payment. Tip- Have pharmacy, dentist, orthodontist, chiropractor, etc. provide a yearly summary receipt. #blunttaxtip

Ensure for each donation made online, you receive or request an official tax receipt. The online receipts are not official receipts. #blunttaxtip [Note: To clarify, when you donate online, you receive a payment confirmation receipt (this confirmation receipt is not an official receipt) and often, a notice that the official receipt will be sent separately or must be downloaded. Many clients provide me the payment confirmation receipts and do not download the official receipt or request such].

If you incur expenses to earn employment income, request a signed Form T2200 from your employer. #blunttaxtip

Disability Tax Credit & Child Disability Benefit Claims

Over the past two weeks, the Big Cajun Man has been posting on his Canadian Personal Finance Blog about how to claim the disability tax credit and complete the disability tax credit certificate for a child and how to claim the child disability benefit. He also discussed how he received a refund for prior years by "back" claiming his son’s tuition expenses as a medical tax credit. If you have a disabled child or know someone who does, please direct them to his blog. 

For those who want a concise, but slightly dated overview of some of the expenses related to learning disabilities which are eligible for the medical expense tax credit, please see this article.

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.

Part 3 - Salary or Dividend? Issues to Consider

In my blog post yesterday, the numbers reflected that corporate small business owners, who employ a dividend only strategy and retain the deferred income tax savings in their corporations, will end up with more after-tax funds than if they were remunerated by salary.

The above statement begs the question: why would any small business owner pay themselves by salary, in any case other than where they need to show T4 income on their personal income tax return for a specific purpose?  I examine some of the possible reasons below.

Loss of RRSP

 

One of the most significant issues that arise when a corporate small business owner remunerates themselves solely by dividends is that they can no longer contribute to an RRSP. The reason for this is that your RRSP deduction limit is dependent upon having “earned income”, which includes employment income, but does not include dividends.

Jamie Golombek suggests in his 2011 paper "Bye-bye Bonus! Why small business owners may prefer dividends over a bonus" that “a business owner with no other source of earned income needs to consider whether he or she would be better off with a dividends-only strategy, rather than paying out enough salary/bonus to maximize his or her RRSP contributions”. He goes on to reference his 2010 paper “Rethinking RRSPs for Business Owners: Why Taking a Salary May Not Make Sense ” which concludes that small business owners whose corporations do not make more than $500,000 of taxable income are typically better off not contributing to an RRSP, but in essence using their corporations to create their own “corporate RRSP” (my term, not Jamie's).

Jamie supported his assertion by comparing two scenarios’: the first where a salary is paid and the maximum RRSP contribution is made and the second where dividends are paid and surplus funds are invested in the corporation. He then utilized 3 different portfolios to test his hypothesis. His model showed that the dividend only remuneration strategy outperformed the salary strategy over all three portfolios.

Jamie noted three reasons for this result (the first two were discussed in yesterday's blog post): (1) There is an absolute tax saving advantage by paying dividends over salary (2) The income tax deferral advantage provides more investable funds and (3) Within a RRSP, capital gains lose their tax preferred status of only being 50% taxable, since they are 100% taxable as income when withdrawn from a RRSP.

It is slightly ironic that Jamie’s numbers support building your own “corporate RRSP", since he has noted in the past that the rate of RRSP withdrawals suggest that Canadians do not consider their RRSPs as the Holy Grail of retirement savings. Thus, by  extension, if Canadians are not repelled by the "invisible fence" surrounding their RRSPs, I wonder if Jamie is concerned small business owners will not be disciplined enough to keep their hand out of their new "corporate RRSP", held by an unfenced holding company?

In the David Milstead article I discussed yesterday, Clay Gillespie of Rogers Group Financial in Vancouver says that although he likes the dividend strategy, he notes it could be derailed by human nature. “People tend to spend money they can get their hands on, he said, as opposed to dollars socked away in tax-advantaged retirement plans. It's whether people will be disciplined enough to take the money and invest in a way to take advantage of the strategy. It's important to make sure retirement savings are sacrosanct, given that future CPP benefits (but not benefits accrued previously) will be lost under this strategy.”

Before I leave this topic, I want to clarify one thing about the deferred corporate funds that accumulate if you utilize a dividend only strategy. There are two components to these deferred funds: 1. Funds that would have been contributed to your RRSP if you had used a salary strategy and 2. Excess funds that were not required for your day to day living expenses and were left in the corporation to take advantage of the corporate income tax deferral. If you were to only remove the “excess funds” component from your corporation, you at worst would still have achieved an absolute income tax savings. The insidious aspect of these deferred funds is where a small business owner withdraws money that would have been “protected” RRSP money under a salary strategy.

Despite my reservations about human nature, I must concede, if you are financially disciplined, a dividend only strategy “sans RRSP” may make sense subject to the comments below.

No CPP

If a salary is not paid, your CPP entitlement at retirement will be significantly reduced, as you cannot contribute to CPP unless you are paid a salary or earn self-employment income. For 2013, the maximum CPP entitlement is approximately $12,200 (not to mention the disability and death benefit CPP provides). It must be noted that the combined cost of the employee and employer CPP premiums’ for 2013 is almost $4,800.

OAS Clawback

For income tax purposes, the actual dividend you receive from a private corporation will typically be grossed-up by 25%. For example, if you were paid a dividend of $50,000, you would report $62,500 on your income tax return. This "artificial increase" in income can result in a partial clawback of your old age security, subject to your actual net income.

Child Care

For those with young families, if you are the lower income spouse and paid solely by dividend, you will not have any earned income and will not be entitled to claim your child care costs. If you and your spouse are both shareholders and take only dividends, you may need to take some salary to maximize your child care claim.

$750,000 Capital Gains Exemption

To be eligible to access the $750,000 capital gains exemption upon the sale of your corporation’s shares, certain criteria must be met. If you utilize the dividend strategy, your corporation or your holding company will accumulate a substantial cash position that may put the corporation offside in terms of the rules. If an offer to purchase your company comes out of left field, your shares may not qualify for the $750,000 capital gains exemption.

In order to alleviate the above concerns, you may be able to “purify” your corporation of excess cash. If you intend to use a dividend only remuneration strategy, you may want to consider implementing a family trust which would potentially have your spouse, children and a holding company as beneficiaries. The holding company would provide an outlet to remove excess cash so that you could still claim the capital gains exemption, while providing creditor protection (see below). If a family trust is not practical, there are alternative ways to purify your corporation, but some of these can be problematic or expensive to undertake.

Creditor Protection

If you utilize a dividend only strategy, the cash you are accumulating becomes exposed to creditors, should your business fail or you are sued by a customer, employee etc. Thus, at a minimum, you would want a holding company as the owner of the corporation (excess cash is paid as a tax-free dividend to the holding company) or have a holding company as a beneficiary of the family trust as noted above.

Although a holding company may provide creditor protection if you are sued by the creditors of your operating company, these assets would be at risk if you had to declare personal bankruptcy for any reason. RRSPs on the other hand are protected from creditors upon bankruptcy, except for any contributions made within the last 12 months.

Research and Development (“R&D”) Companies

For corporate small businesses engaged in R&D, a dividend only strategy may not be the correct strategy. This is because the expenditure limit for purposes of claiming Investment Tax Credits (“ITC”) is reduced where taxable income exceeds certain thresholds. Consequently, the payment of a salary will reduce taxable income and potentially allow for a larger ITC claim. In addition, the owner’s salary (specified employees) may be an eligible R&D expense, whereas dividends provide no R&D tax benefit.

Summary

My practical experience is mixed. Some people are not willing to give up taking a salary and they definitely do not want to stop contributing to their RRSP. Some also do not like the idea of not contributing to CPP and others have concerns regarding their capital gains exemption eligibility. However, the numbers, which need to be run individually for each person’s specific circumstances, do reflect that a dividend only strategy is advantageous in many circumstances and some clients have taken this route. First and foremost, you must be honest with yourself and determine whether you will be disciplined enough to not dip into your easily accessible corporate retirement fund and whether you can mitigate some of the negative consequences associated with a dividend only remuneration strategy.

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.

Part 2 - Salary or Dividend? Numbers, Numbers and More Numbers

In yesterday’s blog post, I discussed the so called “conventional wisdom” in regard to corporate small business owner remuneration. Today, I play accountant and overwhelm you with numbers. Sarcasm aside, this conversation cannot happen without numbers. If this topic is of interest to you, you will probably want to print this blog post and the related links and review this discussion when you have some spare time. You may also want a bottle of scotch and glass beside you.

There are two concepts that need to be understood in relation to this discussion:

1. Absolute income tax savings

2. The power of the deferral of income tax and the time value of money 

I illustrate these two concepts below. Please note that for the purpose of the illustrations, I have used Ontario income tax rates, however, these two concepts hold true for every province.

Absolute Income Tax Savings

The following reflects the absolute income tax savings a business owner would have by utilizing a dividend only strategy over a salary strategy. This example assumes the individual’s income is less than $500,000 (below the Ontario super tax rate) and all personal income is taxed at the marginal income tax rate of 46.41% (the highest non-super tax rate).

Corporate taxable income	$100,000
Corporate income tax	($15,500)	[A]
Corporate funds available for dividends	$ 84,500
Dividend	$ 84,500
Personal income tax on dividend	$ 27,522	[B]
Total corporate and personal taxes	$ 43,022	[A+B]
Tax on salary of $100,000 (no EHT)	$ 46,410
Absolute income tax savings of paying
dividend instead of a salary	$   3,388	($46,410-$43,022)

Below, I again reflect the absolute income tax savings a business owner would have by utilizing a dividend only strategy over a salary strategy. However, this time I assume the $100,000 salary or $84,500 dividend is the business owner's only source of income and they benefit from the lower marginal income tax rates. The numbers below are for 2013, calculated without the use of computer software, so they may be slightly off.

Corporate taxable income	$100,000
Corporate income tax	($15,500)	[A]
Corporate funds available for dividends	$ 84,500
Dividend	$ 84,500
Personal income tax on dividend	$  9,265	[B]
Total corporate and personal taxes	$ 24,765	[A+B]
Tax on salary of $100,000 (no EHT)	$ 26,697
Absolute income tax savings of paying
dividend instead of a salary	$   1,932	($26,697-$24,765)

As reflected in both examples above, there is an absolute income tax saving of approximately 1.9% to 3.4% by utilizing a dividend only strategy and this does not even account for the additional provincial payroll levies that may be applicable.

The Deferral on Corporate Income Eligible for the SBD Limit

The chart below reflects the amount of income that is deferred when a business owner leaves excess funds in their corporation.

 

Salary at highest marginal rate (non super tax rate)	46.41%
Corporate income tax rate on income under $500,000	15.50%
Income tax deferred by retaining surplus cash in your corporation	30.91%

Note: this is not an absolute income tax saving, just a deferral of income tax until you require the money.

The value of the deferral is directly correlated to the number of years you leave the funds in the corporation and the return earned on those funds. An additional benefit will be the possibility to “income smooth” those funds when distributed from your corporation as dividends. It may be possible to pay dividends out over time such that you end up paying substantially less than 46.41% in total tax (or 43.02% in total using the dividend strategy example).

Jamie Golombek quantifies the deferral benefit in his 2011 report I mentioned yesterday. Using $100,000 of after-tax small business income, over a 40 year period, with a 5% return, he says that one would have more money at the end of the 40 year period, by paying a dividend out of small business income as opposed to paying a salary. The savings range from $33,000 in P.E.I. to $66,000 in Ontario.

Dividend Tax Advantage

The numerical analyses above reflect the following:

1. There is a clear absolute income tax advantage (1.9% to 3.4% in Ontario) for corporations that pay dividends rather than salary; and

 2. Where corporate funds are not required for personal use immediately, it is best to pay the higher corporate rate and to retain the funds to be paid out later as dividends.

Bloggers Note: If you are suffering from "numbers fatigue" at this juncture, you can skip directly to the second to last paragraph. The next few paragraphs will most likely be of interest to only those born with a latent accountant gene as I get a little picky with some of John Nicola's numbers.



If you did not open the link yesterday to the article by David Milstead, which discusses John Nicola’s dividend only views, please do so now, as it provides required context for the discussion to follow.

In Milstead’s article, John Nicola provides numerical support for his suggestion that a dividend only strategy may be the way to go for incorporated professionals, if not all small business owners (he contends that the dividend strategy may not necessarily be the right approach for businesses such as manufacturing companies that are asset heavy and may be sold in the future).

I really liked the clean and simple manner in which John presented his numbers. However, I would have liked to have seen the following in John’s charts.

1. In his first scenario, Mary Wilson receives what I assume is a reasonable salary of $40,000 because she is either an employee or not an active shareholder. However, in scenario two she receives $120,000 in dividends in her capacity as a shareholder. I feel this is a bit of an “apples to oranges” comparison.

In reality, some business owners may not have a spouse, or they do not wish to have their spouse as a shareholder. In the case of certain professionals like CA’s and lawyers in Ontario, their professional statues may not allow spouses or children to become shareholders. Thus, I would have preferred to have seen an example where apples are compared to apples, for instance: 

• Scenario 1- Same as John’s scenario 1. Mary receives her $40,000 salary and John Wilson receives a salary.
• Scenario 2- Mary receives the same $40,000 salary and Mr. Wilson is remunerated by dividends.

If such a calculation is undertaken (with spendable income of $189,000 in each scenario) the following occurs:

In scenario 2, the Wilson’s end up with approximately $24,000 less in RRSP funds than in scenario 1, however, the corporate savings are larger by approximately $43,000.

John’s charts clearly depict that from an income splitting perspective, it is always better to have multiple shareholders remunerated by dividends (especially where a spouse such as Mary is not active in the business). However, in many businesses both spouses are active shareholders. Thus, again I would have preferred an “apples to apples” comparison:

• Scenario three-Mary is an active shareholder who takes the same salary as John to maximize her RRSP.
• Scenario four-both John and Mary are only compensated by dividends.

If such a calculation is undertaken with spendable income of $189,000 in each case, the following occurs:

In scenario 4, the Wilson’s end up with no RRSP instead of an RRSP of approximately $47,000 as in scenario 3, however, the corporate savings are larger in scenario 4 by approximately $67,000.

These "apples to apples" comparisons do not alter the dividend tax advantage, however, I feel they provide a fairer comparison for many real life situations.

2. This may be a bit of a red herring, but in John’s chart, there is no mention of the future income tax liability related to the $54,100 in deferred corporate savings maintained in the corporation ($192,500 in scenario #2 minus $138,400 in scenario #1). Granted, I think John assumes that the funds will be left in the corporation indefinitely. However, since the income tax on these deferred earnings could be as high as 36% (at the super rate), depending upon the marginal income tax level of Mr. Wilson & Mrs. Wilson at the time they remove these excess funds, I think readers need to be aware of this potential income tax liability.

I will not debate John’s and Jamie’s conclusions that utilizing a dividend only strategy and keeping the deferred tax savings in your company will result in an overall income tax saving. However, the quantum of savings is subject to each individual personal circumstance, the number of years the funds are left in the company, the rate of return and whether the shareholder(s) are disciplined enough to keep their hands out of the holding company cookie jar.

Tomorrow, I look at why you may not want to employ a dividend only strategy.

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.

Salary or Dividend? A Taxing Dilemma for Small Corporate Business Owners

Over the last couple years, tax professionals have questioned the traditional salary based remuneration strategy used to pay corporate small business owners. Numerically, there is hard evidence that a remuneration strategy of paying only dividends and not paying any salary results in an absolute income tax savings and potentially, greater long term retirement savings. However, foregoing a salary means you can no longer contribute to a Registered Retirement Savings Plan (“RRSP”), nor can you contribute to the Canada Pension Plan (“CPP”). In addition, although abstruse in the salary versus dividend analysis, one must somehow account for personal behavioural characteristics. A consequence of utilizing a dividend only strategy is that you “park” your retirement savings in an easily accessible and tempting location (an operating company or a holding company) and human nature being what it is, one may tend to stick a hand in the candy bowl (money bowl in this case) when there is candy (money) there for the taking.

One of the first professional advisors to advocate the use of a dividend only strategy was John Nicola of Nicola Wealth Management. John’s views were discussed in a provocative 2010 article on “Paying yourself in dividends” by David Milstead of the Globe and Mail. I say provocative (since as my friend Alison says, "I find money pretty darn sexy"), because I specifically remember several people calling me to ask my opinion on the article.

Jamie Golombek, the Managing Director, Tax & Estate Planning of CIBC was another early proponent of using a dividend only strategy, or at least considering using such a strategy. In 2010, Jamie wrote an excellent report “Rethinking RRSPs for Business Owners: Why Taking a Salary May Not Make Sense” in which he concluded it may be better to not contribute to an RRSP, but  to essentially create your own “corporate RRSP” by utilizing a dividend only strategy.

Jamie followed up a year later with another paper, this time titled “Bye-bye Bonus! Why small business owners may prefer dividends over a bonus”. In this report, Jamie concluded that a dividend remuneration strategy may be the preferred method of remuneration in many cases for small business owners.

As evidenced by the breadth and depth of Jamie’s reports, this topic is not conducive to a simple analysis. Thus, in order to make this topic more digestible, I have broken the topics on remuneration strategies for corporate small business owners into three separate blog posts:

1. Conventional Wisdom

2. Salary or Dividend - The Numbers

3. Salary or Dividend - Issues to Consider

Conventional Wisdom

So let’s review the so called “conventional wisdom” with respect to how most accountants advise or used to advise their clients to pay and/or distribute their remuneration.

For individuals who operate an active business through a corporation and whose corporation has annual taxable income of less than $500,000, most accountants generally advise or used to advise, a remuneration strategy along these lines:

1. Pay yourself a salary to maximize your RRSP contribution room for the following year (A 2013 salary of $134,833 is required to ensure you will have the ability to contribute the maximum 2014 RRSP deduction of $24,270).
2. Pay reasonable salaries to your spouse and children if they work in the business.
3. Pay dividends to the owner-manager and/or their spouse and children (if shareholders or beneficiaries of a family trust) to fund any additional living expenses not covered by salary.
4. Leave any remaining funds in your business to defer income tax on those funds. This strategy will be discussed in greater detail tomorrow.

Where a corporation has taxable income in excess of the $500,000 small business deduction (“SBD”) limit, the “conventional wisdom” used to be to pay a salary to maximize the business owners RRSP and then pay an additional bonus equal to the corporation’s taxable income in excess of the $500,000 limit (i.e. Pay a bonus to reduce the corporations taxable income to the $500,000 threshold limit at which the corporations income is taxed at a favourable low rate [15.5% in Ontario]).

However, as corporate income tax rates have declined over the last few years, “conventional wisdom” has changed with respect to paying a bonus when the corporate taxable income exceeds the $500k SBD limit. Most accountants continue to advise their clients pay a salary to maximize their RRSPs, but many now suggest their clients pay the higher general rate of corporate income tax (26.5% in Ontario) when taxable income is greater than $500,000 rather than pay the additional bonus, if the money is not needed immediately. The reason for this is to take advantage of the 19.91% income tax deferral (46.41% highest non "super tax" personal tax rate - 26.5% corporate rate in Ontario) or 23.03% deferral at the "super tax" rate. Our firm calculates that if your anticipated after-tax investment return is 3%, this strategy makes sense even if you can only leave the money in the corporation for 2 to 3 years.

For the purposes of this blog post and my two upcoming posts, I will not comment any further in regard to private corporations with taxable income greater than $500,000 as many accountants tend to agree on the above remuneration strategy.

Tomorrow, I put on my bean counter hat and throw some numbers around.

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.

Podcast, Tax Tweets and Contest

I have a few things to briefly discuss today. Last week was a very productive week media and content wise. I was quoted extensively in this CBC article about the 6 top reasons people raid their RRSPs and interviewed for a podcast. I created some material for a tweeting initiative and finally wrapped up a 3 part blog, which I will be posting next week on owner-manager remuneration that took forever to complete.

Mostly Money, Mostly Canadian - Podcast

Last week I was interviewed by Preet Banerjee for his Mostly Money, Mostly Canadian podcast. I discuss income tax issues and "Income Tax Horror Stories". The link for the podcast is here. Preet also interviews Mike Holman of the Money Smarts blog about what to look for in a real estate agent. I start around the 22 minute and 30 second mark. The reviews from family and friends were very positive. They thought I was informative and even funny, which beats the reviews from my Rob Carrick videos , were they coldly told me I needed media training. I guess I should stick to radio or podcasts.

I would like to thank Preet for interviewing me. I had a lot of fun and for a TV show host; Preet is pretty down to earth. Although as I told him on Twitter, he is only the second best looking host of his TV show, The Million Dollar Neighbourhood :).

Tax Tweet of the Day

My firm’s marketing manager, Jamie, is very keen on social media. She constantly chides me for my half-hearted embrace of Twitter, as I am still not convinced that Twitter is an effective medium for accountants. Although, I must say I really enjoy that Twitter allows me to chirp the Big Cajun Man about the Ottawa Senators and mock others such as Preet.

If Jamie is one thing, she is certainly persistent and for the last month or so I have been a good little Blunt Bean Counter and tweeted as much as possible. I have thus decided to placate Jamie some more and came up with this brilliant idea of tweeting a tax tip of the day during tax season beginning next week.

For the first 10 days I will tweet organizational tips to get ready for filing your tax return. Then for the next 25 days or so, I will tweet tax filing and planning tips. Feel free to let me know if these tips are of any use or whether my brilliance is too constrained by the 140 character limit. Look for the hashtag #blunttaxtip.

Rob Carrick Book Giveaway Part-2

Perry K, the young adult book giveaway winner of Rob Carrick’s book “How Not To Move Back In With Your Parents” has not claimed his book. Anyone, young adult or adult, who made a comment on the original blog and still wants a copy of the book, can go back into a draw being undertaken this Friday, by sending their name and address to Lynda@cunninghamca.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.

Make Things Easier for Your Family and Executor(s) – Designate Personal Effects in Your Will

In March of 2011, I wrote a blog post titled Personal Use Property – Taxable even if the Picasso Walks out the Door. The blog discussed the taxation of personal use property and noted how many parents often neglect to deal with their art, jewelry, collectibles and sentimental personal effects in their wills. These omissions may be either inadvertent, or on purpose, to avoid paying income tax and/or probate tax on the personal use property. The ramifications of this neglect are potentially twofold:

1. Parents, who take a leap of faith believing that their children will sort out the ownership of these assets in a detached and non-emotional manner, may be creating unnecessary dissension amongst their children.
2. Parents put their executor(s), who are often one or more of their children, in a precarious position, with respect to their liability for probate and income tax of the estate.

Ensuring an Orderly Distribution of Personal Property

Lynne Butler, an Estate Lawyer and Senior Will Planner for Scotia Private Client Group, and the writer behind the excellent blog Estate Law Canada, had this to say about personal effects: “My experience over the years has been that more estate fights happen over personal items of the deceased than happen over money. Sure we all like money but it's the personal items that have the sentimental value".

So how can parents mitigate the potential for a family fight? In three words: inventory and document. Parents need to undertake a detailed review of all personal items from art and antiques to jewelry to great grandma's tea set and ensure these items are reflected in their wills. Where there are significant variations in value for items such as art, antiques and jewelry, parents can choose to ignore the valuation issue and just leave those personal items to the child they wish. The other option they have is to equalize these disparities in value in their will through cash or other means. For less valuable items with sentimental value, the will should be as detailed as possible. The key is to ensure you minimize the amount of unallocated personal effects not included in your will.

Don't Leave Your Executor(s) in a Precarious Position

In November, 2011, I wrote a blog post titled “Ontario Probate – You may want to plan to Die in 2012 in which I detailed how changes to the probate rules, known in Ontario as the Estate Administration Tax (“EAT”) will now allow Ontario estate auditors four years from the date the EAT is payable to assess or reassess the tax. The consequence of this change is that executors will now have to be extremely careful in distributing estate assets.

I have been informed that where executors are diligent in their duty, they will only be responsible for any EAT assessment or reassessment in their representative capacity. However, most lawyers are still confounded as to whom Ontario will go after if the assets have already been distributed. The general consensus appears to be the beneficiaries will be held liable, but some commentators have suggested that because the issue is far from clear, executors may want to hold back the final distribution for four years, a very impractical solution.

Where assets are undervalued for EAT purposes, or where a Picasso grows legs that allow it to mysteriously walk out the door, executors will potentially have liability and penalty concerns. Parents in all provinces should understand that by not fully documenting their personal effects in their wills, they may be putting their executor or co-executors in an untenable position.

Personal Effects not Listed in the Will

So what does an executor or co-executors do when the last surviving parent passes away and they have not addressed the distribution of all their personal effects in their will? How do executors ensure siblings or relatives of the deceased don't help themselves to these personal assets as has been known to occur on more than one occasion and how do they distribute these assets without creating a family war?

Here are some suggestions:

1. As soon as possible, change the locks on the deceased’s home and ensure all assets are secured in the home. Valuable assets should be put into the deceased’s safety deposit box, if the bank allows such, or put into a new estate safety deposit box
2. Call a meeting of the beneficiaries and make it clear to them that they are not to remove any assets from the home and set out your intended plan of distribution of the personal effects.
3. Inventory and catalog all assets.
4. Get rid of the “junk”. We all accumulate old clothes, furniture etc. Weed out the crap and inform the beneficiaries they should see if there is anything they want or these effects will be donated, or removed by a Junk Removal service.
5. After you have had time to ensure everything has been accounted for and the estate is starting to move forward, distribute the assets that were noted in the will in accordance with the deceased’s instructions.
6. Lastly, comes the hardest part. How do you distribute the deceased’s personal effects that have not been itemized in their will? I have read, heard or seen the following possibilities: 
   
   a) For large valuable assets, attach values and attempt to distribute proportionately, if the assets allow for proportional distribution. First pick could be determined by draw and the person choosing last would then pick first the second time around. If the assets are disproportional, you can auction off the assets for a proposed value. If the value received by one beneficiary exceeds that of another beneficiary, the excess value received can be equalized with cash they have received from the estate or their own funds.
   
   b) For less valuable assets and sentimental assets, see if you can work something out with the family and/or beneficiaries. The beneficiaries can rank the assets one to ten and the assets are then allocated to the beneficiary with the highest ranking of each asset. Alternatively, a lottery can be used or any other method the beneficiaries can agree upon. You just want to distribute assets as fairly as possible while trying to minimize any issues between the beneficiaries.
   
   Parents need to be cognizant of the precarious position they may leave their executor(s) in where they do not itemize and allocate as many of their personal effects as possible in their will. For personal items not listed in the will, executor(s) need to secure, inventory and organize these personal effects and create a plan for distribution of such assets.

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.

Credit Cards - Tax, Budget and Repayment Issues

Today I want to talk about credit cards. In particular, I intend to discuss three issues.

1. The first issue being why you should consider having more than one credit card, despite the added annual card fees.

2. The second being how despite the credit card companies best intentions, they often come up short when trying to help their cardholders track their spending habits.

3. Finally, the ludicrous minimum balance repayment reminder.

I currently have three credit cards in my wallet. I use a CIBC Aerogold for my personal expenses and to accumulate Aeroplan points. I also have an American Express card I use for any expenses I consider business in nature that my firm does not reimburse me for (such as auto). Lastly, I have a BMO MasterCard that I use strictly for my firm Cunningham LLP’s business related expenses. 

Income Tax Simplification

The main rationale for having three credit cards is that they stream my expenses neatly into personal expenses that are not deductible for income tax, personal expenses that are deductible for income tax and business expenses that are deductible for income tax. Should I be audited, I will simplify the auditor’s life and hopefully give them no reason to re-assess me. If you do not have your own business, you may still want to consider a second card if you have significant employment or commission expenses you wish to segregate.

Many of my clients are mesmerized by their Aeroplan or similar travel plan points and use one card for their personal, employment and/or business expenses. This is an audit nightmare waiting to happen and will cause most auditors to automatically get their backs up that you are trying to expense personal expenses, even if that is not the case. Thus, I always suggest that my clients stream their expenses through multiple credit cards or at minimum two cards. The obvious downside to this attempt to keep the taxman happy is that it is detrimental to your point accumulation; although as per this blog on taxable benefits, you must be careful to adhere to the CRA rules.

The same concept holds for Lines of Credit (“LOC”). Where possible, always obtain two LOC’s, one for personal use like home renovations, trips and cars and one for investment or similar loans. The clear streaming minimizes audit time and potential reassessments. If you cannot obtain two LOC’s, ensure you clearly track and breakdown all advances between personal and investment uses and allocate the interest based on what proportion of the total LOC owing is investment use.

Tracking Credit Card Spending

On my Aeroplan card, Visa has attempted to help me, by categorizing my expenses for the month on the last page of my statement. I think this could be a very useful and practical idea, but only if Visa took the categorization a step further and provided a few more categories. For example, my wife and I always want to know how much we spent on groceries in any given month, but the grocery costs are lumped together with retail purchases and not easily determinable. Anything in $US is considered foreign currency; however, within the foreign currency category, I really want to know how much is travel or vacation spending versus retail purchases. Hotel, entertainment and recreation are also lumped together. Stuff like this drives me crazy. It is so close to being useful, but just far enough away to be useless. I would like to know if Visa asked its users for input on devising the categories, as just four or five more would have made this a useful report – at least for me.

Minimum Payment Information

Lastly, has anyone looked at the reminder on the last page of their Visa statement? On a recent Visa bill which included the costs of my 25th anniversary vacation, I noted a reminder on the last page that said “If you only make the minimum payment every month, it will take approximately 95 years and 9 months to pay the entire balance shown on this statement.” Talk about long-term debt! (Blogger's Note: In the comment area below, Sacha Peter, who is the blogger behind the Divestor blog, notes that the minimum payment information became a statutory requirement for credit card companies in 2010).

For some people, ensuring they maximize their travel points is an obsession. However, I suggest you consider the benefits of free travel rewards against a potential tax reassessment and the time and aggravation of an audit the next time you use your only credit card. As for the budgeting aspect, the credit card companies need to go back to the drawing board; in my case I can wait 95 years until they get it right.

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.