My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. My posts are blunt, opinionated and even have a twist of humour/sarcasm. You've been warned. Please note the blog posts are time sensitive and subject to changes in legislation or law.

Monday, September 30, 2013

Charitable Giving - The First-Time Donor’s Super Credit - Why is it Necessary?

In August, Preet Banerjee of the Globe and Mail wrote an article titled “A super (secret) way to quadruple your charitable giving”. The article discussed the income tax benefits of the new First-Time Donor’s Super Credit (“FDSC”). While I applaud any charitable giving, I find it very sad that because of a shrinking donor pool; the government had to create such a program to entice Canadians to make their first charitable donation since 2007, or in some cases their first donation ever!

According to this CBC article, Canadians are one of the most generous nations in the world, yet “from a high of almost 30 per cent in the early 1990s, the proportion of taxpayers claiming charitable
donations on their tax returns had fallen to 23 per cent by the 2011 tax year.”

As Preet describes in his article, the FDSC was announced in the 2013 Federal Budget and is effective from March 21, 2013 to December 31, 2017. Essentially, this new credit is available as long as neither you nor your spouse or common-law partner has claimed a charitable credit since 2007 (Note: if you made a donation but did not claim it, you are still eligible).

For income tax purposes, the first $200 of charitable donations qualify for a 15% credit and any donations in excess of $200 qualify for a 29% federal credit. The FDSC increases those federal credits by an additional 25% on all donations claimed to a maximum of $1,000.The provinces also provide charitable tax credits, however, they vary by province.

The CRA provides the following example of the FDSC from a federal perspective where you make a $500 donation:

First $200 of charitable donations claimed:$200 x 15% =$30
Charitable donations claimed in excess of $200:$300 x 29% =$87
First-Time Donor’s Super Credit:$500 x 25% =$125
Total FDSC and CDTC: $242

This program would appear to make some sense in the context of students entering the workforce or those who have endured hard economic times and have not had much if any discretionary income to make charitable donations. However, a lower income is not necessarily a deterrent to making charitable donations. Over the years I have often been asked to prepare a caregivers tax return by their employer; often the caregiver has made substantial donations and sometimes donated a significantly greater proportion of their income than their employer. 

Based on the number of charitable requests I receive from friends, family and associates for every biking and running charity event, I find it almost inconceivable that most people have not been "guilted" into at least one donation since 2007. You would think most Canadians would almost have no choice but to make a donation or two a year just from family and religious expectations.

Over my 25 years as an accountant, spanning various firms, I have worked with clients making hundreds of thousands of dollars if not millions of dollars. These clients often make so many donations and have so many donation receipts, that we cannot staple their tax returns. Yet, one particular firm I used to work for, for some reason had several clients whose charitable donations consisted solely of a single donation of say $100 or a few small donations which I found shocking given their financial resources. I have a hard time accepting there could be people in the top 1% of earners in Canada potentially claiming the FDTC.

Believe it or not, I have had the occasional client complain to me about how much tax they have to pay. Where they make minimal charitable contributions, I may inform them in as nice a way as a Blunt Bean Counter can, that they are missing the best tax planning vehicle around, the donation tax credit you receive when making a charitable donation. Sometimes this awakens their charitable giving and sometimes not.

I had not given much thought to the FDSC until Preet’s article. But when I read the article, I couldn’t help thinking that it is absurd for a country as prosperous as Canada to require such a program, when we already have such a generous donation tax credit scheme. However, if the program changes even a few people’s charitable behaviour, than I guess it has to be considered a success. Wednesday I will discuss some alternative ways to make charitable donations and the associated tax advantages.

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

Monday, September 23, 2013

TFSA Confusion – Contribution Limits, Withdrawals and Re-Contributions

John Heinzl of the Globe and Mail has an annual Investor Clinic Quiz. He stated that the quiz question he received the most emails and inquires about was a question he had on TFSA contribution limits. His readers’ confusion with this question reflects the continuing misunderstanding that exists in relation to TFSA contribution limits, withdrawals and re-contributions.

Thus, today I will revisit his question and add a variation on the question to try and further promote TFSA literacy. Finally, I have a quick comment on how many people still pay no attention to their investment strategy in their TFSA.

Question #1 – TFSA Contribution Limits

John’s question was as follows:

Dorothy is 25 years old and has contributed $3,000 to her tax-free savings account. Her TFSA is now worth $3,800. As of January 1, 2014, the maximum she could contribute would be:


Please note your answer now, before you continue reading. John states that only 40% of the respondents chose the correct answer.

Question #2 – TFSA Withdrawal and Re-contribution Limits

I am going to ask a second question, before I reveal the answer to the first question.

If Dorothy withdrew her initial $3,000 contribution in 2013: (1) what would be the maximum she could contribute in the remainder of 2013 if she suddenly came into an inheritance and (2) what would her maximum contribution room be on January 1, 2014 if she decided against using her inheritance to contribute to her TFSA in 2013?

You can try and answer this question now if you are confident you got the first question correct, or wait until I reveal the correct answer to question #1 before attempting this question.

Answer to Question #1

As John notes in his discussion of this question, the $3,800 value of the TFSA is a red herring for purposes of this question. The contribution limit when TFSAs were launched in 2009 was $5,000 a year. The limit was increased to $5,500 effective January 1, 2013. It is very important to note that TFSA contribution limits are cumulative.

Therefore, Dorothy could have made full TFSA contributions of $20,000 ($5,000 a year for 4 years)+ $11,000 ($5,500 for each of 2013 & 2014)=$31,000. As she has made $3,000 in actual contributions, her maximum contribution room is $28,000 as of January 1, 2014.

Answer to Question #2

Question #2 reflects the most common error made by Canadians each year with respect to TFSA’s – the withdrawal and re-contribution rules. According to this article in Maclean’s, last year 76,000 Canadians were issued TFSA letters by the CRA for over-
contribution penalties. I would suggest most of the letters relate to TFSA re-contributions.

As described in this CRA document, TFSA withdrawals can only be returned to your TFSA at earliest, on the first day of the next year after you  made a TFSA withdrawal. This is because the contribution room formula increases your TFSA room for any withdrawals made only in the previous year, not the current year.

For example. If you take out $5,000 from your TFSA in 2013, the $5,000 is not added to your contribution room until January 1, 2014. You cannot re-contribute the $5,000 in 2013 unless you have not made full TFSA contributions in prior years and have additional contribution room totally unrelated to the withdrawal.

Okay, back to the answer. If Dorothy received a large inheritance and decided to put the maximum amount into her TFSA in 2013, her contribution room would be $22,500 calculated as follows:

Dorothy could have made full TFSA contributions of $20,000 ($5,000 a year for 4 years)+ $5,500 (2013) less her $3,000 actual contribution (the $3,000 she took out in 2013, is not added back to her contribution room until January 1, 2014).

If Dorothy decided to wait until 2014 to use her inheritance to make her TFSA catch-up contribution, her maximum contribution limit on January 1, 2014 would be $31,000. This is the total of $28,000 as per question #1, plus the $3,000 she withdrew in 2013 that is added back to her contribution limit on January 1, 2014.

It should be noted that if Dorothy had withdrawn the entire $3,800 in her TFSA in 2013, her January 1, 2014 contribution limit would be $31,800.

Pretty easy to see why 76,000 people received TFSA over-contribution letters.

Savings Account vs Alternative Retirement Fund

TFSAs have different uses for different people. For some people it is used a rainy day fund, for others it is just a fancy savings account and for others, it is an alternative retirement fund they don’t plan to access until retirement.

The problem I see on a daily basis is that even though people as of 2013 could have contributed as much as $25,500, they still in general treat their TFSA as a daily savings account; at best they put their money in a GIC and at worst, just leave it in the account. If you look at your TFSA as a retirement account, you need to consider investing as if it were your RRSP and fully diversify your investments and maximize the tax-free aspect of the account.

As an accountant I cannot provide specific investment advice, but you need to consider whether you diversify your TFSA of its own accord, or look at the account as part of your overall diversified portfolio. For example, say you have a total portfolio of $300,000, made up of a $30,000 TFSA, $70,000 in investments and a $200,000 RRSP and your investment mandate is 10% foreign, 10% real estate, 40% equity and 40% bonds. Do you allocate your $30,000 TFSA in the 10/10/40/40 ratio, which may be impractical, or do you just have the real estate holdings in your TFSA ($300,000 x10%=$30,000).

Either way, don’t let the funds sit there and gather dust.

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

Monday, September 16, 2013

Oh Those Sleepless Nights - What is Keeping You up at Night?

What is keeping you up at night? That is one loaded question. It may be a financial issue, a family issue, a business issue or in my case, the sub sandwich with hot peppers I ate at 10:00 pm last night. All joking aside, this is a serious question and everyone from psychiatrists to financial consultants asks this question or a variation of it when meeting a new patient or client.

If you had asked me twenty-seven or so years ago whether this question would have any relevance to me professionally, other than from a financial perspective, I would have looked at you like you were crazy. However, as I look back over my career, I am amazed at how often I have been a psychologist/psychiatrist to my clients and how often money issues are intertwined or even secondary to family and personal issues. Analyzing sleep loss is a skill set I was not taught in university or in any of my Chartered Professional Accountant courses.

Despite my sometime amateur psychologist/psychiatrist status, it would be presumptuous of me to even consider providing advice of a psychological nature
on non-financial matters. Thus, today I will focus on the observations I have made over the course of my career in relation to financial matters that have kept my clients up at night.

As I reflect on this issue, I have come up with four primary observations:

Get Objective Advice

It is extremely difficult to solve complex problems by yourself. It is vitally important when you have significant financial issues keeping you up at night that you speak to someone who can provide objective financial advice (your accountant, financial planner, investment advisor or a close friend). When one experiences a significant financial issue, it has been my experience that he/she loses perspective and fails to see the forest for the trees. Speaking to someone you trust implicitly who knows both your financial situation and your personality provides you with a detached, non-emotional perspective on your financial issues.

It Takes Time

Most financial problems are not immediately solvable. From excessive debt, to funding your child's education, to fluctuations in foreign currency causing the cost of goods in your business to rise dramatically, the sad truth is that time is often the only answer and the sooner that fact is accepted, the better. Whether it is the slow process of putting an actionable debt reduction budget in place, the many years it takes to fund a RESP, or cutting back on costs to offset foreign currency fluctuations and/or wait out a reversal in those rates, in each case, time is the only answer.

Some Financial Problems Don’t Have A Solution

Thankfully these instances have been few and far between, but the saddest moments in my career have been those where a financial problem was not solvable. The typical situation where this occurs is when a once successful business is careening towards bankruptcy because of technological changes, competitors outsourcing to a low cost country or just plain business mismanagement. These situations are very complex. Often the person is a long-time client whom I have gotten to know on a personal basis and I have to tell them they need to close their business (this would be last resort advice after all other alternatives have been exhausted).

This advice often leads to confrontation because (a) the client’s self-worth and net-worth often revolve around their business and (b) the client’s own solution is typically to throw more money at the problem; while I am trying to prevent throwing good money after bad to ensure they still have resources once the business is closed.

In the end, all a financial advisor can hope for is that the client eventually realizes their situation is not fixable and begrudgingly, takes your advice and conserves their remaining resources.

The Moment of Absolute Certainty Never Arises

One of my favourite quotes is from a poem by S.H. Payer’s “Live Each Day to the Fullest”. It goes as follows:

When you are faced with decision,
make that decision as wisely as possible -then forget it.

The moment of absolute certainty never arrives.

Think about that last line, “The moment of absolute certainty never arrives”. Whether a decision is financial or personal, it has been my experience that often, people are frozen in their tracks with indecision and cannot take action on their issue until they feel they have found that moment of certainty. However, we all know that moment very rarely identifies itself or if it does, often it is not in a timely manner. That is why I love this quote. Time constraints often force us to deal with an issue before there is certainty and those people who make the best decision under the circumstances and move forward without regret or second guessing themselves are best equipped to solve and deal with their issues, even if the decision does not turn out to be correct.

Today’s blog is not technically related to tax, business or investment advice but sometimes general life advice is worth far more than income tax or financial advice and is definitely cheaper :).

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

Wednesday, September 11, 2013

The 20% CRA Penalty for Missing T-Slip Information - Two Solutions to Minimize the Issue

On Monday, I discussed the 20% penalty that thousands of Canadians are assessed each year for not reporting income that the CRA already has on hand from the country’s employers and financial institutions. I think I made it clear, I'm of the view the penalty is excessive in most cases.

The CRA’s matching program is designed to ensure taxpayers have reported all the income reflected on their T-slips. I have no issue with this objective. However, I do have an issue with taxpayers being penalized for failing to report this income. More specifically, I am perplexed as to how you can be deemed to not have reported income if it is already sitting in the CRA's database courtesy of your employer or financial institution? Should taxpayers be subject to 20% penalties for  failing to confirm income already reported?

Today, rather than continuing to rant about this issue, I offer two solutions.

1. The CRA should populate (with T-slip tax data) a draft online tax return for each and every Canadian. Taxpayers would access this draft return through their CRA “ My Account”. This tax return would reflect all T-slip information provided to the CRA for each individual by their employer and financial institutions. Initially, this return could be informational only. By this I mean, the return would only reflect your income information and would not calculate your income tax liability.

2. A more practical solution would be to provide full real-time access to all T-slips issued to each taxpayer. Currently your "My Account" only allows you to view T4 related slips such as T4's, T4A's, T4A(P), T4A(OAS) etc. However, it does not contain any other T3, T5 or T5013 information.

These solutions would ensure Canadians are aware of any and all income they earned in any given year that was reportable to the CRA (obviously this would exclude capital gains, rental income, self-employment income etc. that relies on taxpayer self-reporting). This solution would avoid any issues with lost mail or slips addressed to old addresses.

As I am not a software developer, I have no idea how difficult it would be to develop a simple return for each individual that is updated for any T-slip data on a real-time basis? However, it would not seem to require a large technological advancement.

If I ignore the potential lost revenue I would have as a personal tax preparer (which I could easily live without since each tax season takes a month or two off my life) and think long-term; if the CRA created an online informational only tax return, this return could eventually be enhanced such that it could become each Canadian’s actual online personal tax return.

Maybe I am missing the complexities of creating an online tax return? On the other hand, maybe this is not such a far-fetched solution.

P.S. Yesterday a reader sent me a copy of an email they sent to their MP about the "unfairness" of the 20% penalty. Good for them. Who would have thought the BBC would be the catalyst for tax policy changes :)

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.

Monday, September 9, 2013

The CRA's Matching Program - Mismatch and You May be Assessed a 20% Penalty

How can you be issued a 20% penalty for missing information the CRA has on hand? Read on and you will find out!

In the next month or two, the CRA’s matching program will begin kicking out notices of reassessment to Canadians whose reported income on their 2012 income tax returns does not match the CRA's records. Some of these income tax filers will be assessed penalties of 20% on income not reported. Yes, that is income not reported, not tax underpaid! This penalty applies to income tax information your employer or financial institution provided to the CRA which was not reported on your return. In most cases, the omission of income was purely unintentional.

What is wrong with this picture? How can one be considered to not have reported income that the CRA has in its database? Is this not a penalty for failing to confirm income, as oppossed to not reporting income?

In this two part blog, I am going to look at the penalty itself and why I think it is egregious, as well as how the CRA could easily remedy the situation. Long-time followers of this blog will be aware I have written about this penalty a couple of times. However, this week’s blogs look at the penalty from two new perspectives:

1. The matching aspect
2. How I think the CRA could easily address this issue.

So let’s start from the beginning.

The Matching Program


The CRA’s matching program catches the non-reporting of income every fall. Each year the CRA checks the T-slip information in its database against Canadian taxpayer’s income tax returns to ensure the T-slip income reported matches. Where the income filed by a taxpayer does not match the CRA's database records, an income tax reassessment is mailed to the taxpayer asking for the income tax due. If the taxpayer is a first time offender, they are just assessed the actual income tax owing and possibly some interest. If this is the second occurrence in the last four years, a 20% penalty of the unreported income is assessed.

The Penalty Provision

Under Subsection 163(1) of the Income Tax Act, where a taxpayer has failed to report income twice within a four-year period, he/she will be subject to a penalty. The penalty is calculated as 10% of the
amount you failed to report the second time. A corresponding provincial penalty is also applied, so the total penalty is 20% of the unreported income. 


Ouch! Is this Fair?

I find this penalty unfair for the following reasons:

1. It is excessive. I can accept a penalty of 5%, maybe 10%, but 20%?

2. The penalty can be levied even if you owe no income tax. I.e.: If someone in Ontario fails to report a T4 slip with $5,000 of employment income and the slip also reported $2,325 of income tax deducted, they would owe no income tax, as the maximum marginal income tax rate of 46.41% was applied (ignoring Ontario supertax). However, if you had failed to report income in any of the three prior years, the penalty under subsection 163(1) would be $1,000 (20% x $5,000), even though you owed no income tax and the CRA was provided this information by your employer. 

3. The penalty can vary wildly on the exact same total of non-reported income. If you fail to report $2,000 two years ago and fail to report $100 this year, your penalty is $20. However, if you failed to report $100 two years ago and failed to report $2,000 this year, the penalty is $400! That is a huge difference in penalties for the exact same total of unreported income.

4. Most penalties relate to T-slips taxpayers did not knowingly ignore or evade. In most cases, the missing income relates to T-slips lost in the mail or sent to the wrong address. Also, as a reader notes below in the comment section, many T-slips are now issued online and easy to miss.

According to an article by Tom McFeat of CBC News, the number of Canadians penalized for this repeated failure to report income totaled over 81,000 in 2011 with an income tax cost of slightly over $78,000,000.

To be clear, my issue with this penalty is that taxpayers in most cases are being penalized where there is no intent to hide income and the CRA receives that information. However, I am not as forgiving with the non-reporting of rental income, capital gains or self-employment which relies on taxpayer honesty.

Tax Tip for T-slips Received after You Filed Your Return?

I think most people will agree that this penalty is excessive. Wednesday I suggest a simple solution to the issue. However, here is a quick tip before you leave. If you received a T-slip after filing your tax return and ignored the slip since it was a small amount, dig it out tonight and file a T1 adjustment as soon as possible before the matching program gets you. Even a small $10 missed slip will start your clock ticking for a potentially larger penalty if you miss reporting income again in the subsequent three years.

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.

Monday, September 2, 2013

The Revised T1135 – This Could Get Ugly for Taxpayers, Investment Advisors & Accountants

I’m back from a summer of hiking and golfing. I had a great time going east to west across Canada. Specifically, I went with my wife to Gros Morne National Park in Newfoundland which was incredible (pictures and blog to follow in the next few weeks). This was followed by a boys’ golf trip to Predator Ridge in Vernon, BC, a short drive from Kelowna. I could not ask for much more; except for the course marshals at Predator to take some chill pills.

Western Brooke Pond
All this crisscrossing of Canada did not leave me much time to work on my book so I am still sitting on two chapters; I either get traction this fall or the book dies an early death. I also did not take any of the guitar lessons my wife bought for me, but I intend to book lessons in the fall, so watch out Jimmy Page.

The T1135

To provide some symmetry to my return to blogging, I start off where I left off. You may recall that my last blog discussed the revised T1135 Foreign Income Verification Form ("T1135"). In that post I discussed the new reporting requirements, which now includes the following:

  • The name of the specific foreign bank/financial institution holding funds outside Canada
  • For each foreign property identified on the T1135, the maximum funds/cost amount for the property during the year and cost amount at the end of the year (the old form only required the cost amount at the end of the year if at anytime in the year you exceeded the threshold)
  • For each foreign property identified on the T1135, the income and capital gain/loss generated (the old form asked for total income or gains from all foreign property in one lump sum)
  • Specific country where each foreign property is located (the old form had pre-defined groupings based on each continent for all the property on an aggregate basis) 

The T3/T5 Exclusion

I concluded my July 2nd post by saying that “There is one important saving grace to these rules. If the income for a foreign property is reported on a T3 or T5, the details do not have to be reported. This will exempt most U.S. or foreign stocks held with Canadian brokerages; but the details for property held outside Canadian institutions will be burdensome”.

While the above statement is essentially correct, the CRA’s administrative position in regard to this exemption may prove problematic. You see, the CRA is saying that even where you hold a foreign stock or bond in an account with a Canadian brokerage firm that issues a T3 or T5 for that account; if that security does not pay income in the form of a dividend or interest and thus is not reported on the T3 or T5, the specific stock or bond will not be excluded and will have to be reported in detail on the T1135. This position was recently confirmed by a CRA representative to one of my tax managers.

In addition, it must be noted you will still be required to file the T1135 if the total cost amount of your foreign holdings exceeds $100,000 at anytime during the year, even if dividends or interest is reported on a T3 or T5. See the example discussed in this article by Jamie Golembek, where the CRA representative states you would still need to file the form and check the reporting exclusion box for the stocks reported on a T-slip.

The Tax to English Version


So what does this all mean in English? Say you own 25 foreign stocks held at a Canadian brokerage that have a total cost of $150,000, but five of those stocks do not pay dividends or fail to pay a dividend in that year. As we now understand the CRA’s position, even though the 20 dividend paying stocks do not need to be individually listed, the 5 non-dividend paying stocks must be reported. Thus, you will need to tick the box on the T1135 Form to claim the exclusion for the 20 stocks, but you will also have to determine the highest cost amount of each of the five non-excluded stocks during the year (troublesome if you bought and sold) and the cost amount at the end of the year in addition to providing other information such as country location and capital gain or loss.

In the example above, if all 25 stocks pay dividends that will be reported on a T3 or T5, you will still have to file the T1135 and check the exclusion box; however, you do not need to report all the details of each individual stock. Clear as mud.

For people with only a few foreign holdings, this is not much of an issue. However, I have clients who are in private client programs with the large Canadian financial institutions that own 20-50 shares of multiple foreign stocks or have private managers running their money who have upwards of 50 U.S. and foreign stock/bond holdings. This means that the client, the advisor, or their accountant, or probably a combination of all three must review all these stocks to determine which ones are exempt from reporting because they paid a dividend or interest that was reported on a T3 or T5 from those that did not have any income reported on a T3 or T5.

My tax manager said the CRA representative he spoke with, gave him the impression that the CRA’s position has not gone over very well. Let’s hope the CRA simplifies life for many Canadians and just exempts any foreign security held at any Canadian Institution whether income is reported on a T-slip or not.

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