How Much Money do I Need to Retire? Heck if I Know or Anyone Else Does!

I will not be posting a blog this week. I am spending my time editing a six-part series which I will post during the month of February. This is a bit of an experiment – an entire month examining one topic.

The six-part series deals with retirement rules of thumb, studies and papers on the topic by various retirement experts, issues to consider and finally, some calculations to come to a "number". I am not sure if this is going to be one of my best blog series or my worst. I will leave that determination to you. The initial feedback on my drafts has been very positive; if not that the series is overly ambitious.

The premise of this series came about as I started trying to determine how much money I needed to retire and I was having trouble coming up with a number. Fortunately for you… or unfortunately, during the Christmas time ice storm in Toronto, the power was out at the office and I was stranded at home. With my two now very independent children home for the holidays, and my in-laws moving in (they had no power), I retreated to my computer and decided to detail my thought process on the various papers and studies I have reviewed on this subject. 

I determined most experts in retirement planning are very good at telling you about all the flaws and variables not considered by the current retirement withdrawal rule of thumb, but they provide limited assistance in trying to come up with a number that at least forms the basis of your future planning. Even though we know that number will not be definitive, we are programmed to need a number. 

In the end, I created my own crude and admittedly tax centric model that I compare to other models and methods to determine that ever elusive "magic number". You will have to wait until Part 6 of the series for that revelation. Hopefully you are still reading at that point. See you next week for Part 1.

New Will Provisions for the 21st Century – Reproductive Assets

In my wildest dreams, I would never have imagined ten years ago I would be posting a blog on how you address reproductive assets in your will. Yet today, I have a guest post by Katy Basi on this topic. This is Katy’s third post in this series on New Will Provisions for the 21st Century.

Her first post in the series dealt with how you handle RESPs in your will and her second post discussed will provisions related to Digital Assets.

I thank Katy for this very informative and enlightening series. I have received excellent feedback on all of Katy’s posts.

Does your Will address your Reproductive Assets?

By Katy Basi

“My what?” you may ask. Do you have sperm/ova/embryos in a clinic somewhere? Have you banked cord blood for your child? (Okay, cord blood isn’t really a “reproductive asset” but I’m throwing it in as a two for one promotion). If so, what are your intentions with respect to these “assets” in the event of your death, and does your will tell your executor what these intentions are? If reproductive technologies were involved in creating your children or grandchildren, does your will adequately define “child” and “issue”?

Medical technology is able to leap tall buildings in a single bound these days, and estates law is hard pressed to keep up. For example, the drafting of most wills implicitly assumes that your ability to have children dies when you do, but medical reality tells a different story. If your DNA is banked in any form, your ability to reproduce may long outlive you, potentially creating “after-born children”. (In one of the few instances of the Canadian legal system addressing these issues, your written consent is required in certain cases for the use of your reproductive assets (see the Assisted Human Reproduction Act)). 

You may be able to have your estates lawyer deal with the possibility of after-born children in drafting your will, or you may have no reproductive assets banked and therefore not be very worried about this issue. If you fall in the latter camp, consider whether part or all of your estate may be inherited by your grandchildren. For example, if your son Clark predeceases you having his own children, should a grandchild conceived by your daughter-in-law after your death, using Clark’s banked sperm, be included or excluded from your estate?

Regardless of the after-born children consideration, what should happen to any sperm/ova/embryos banked in a clinic upon the death of the donor? The contract signed with the clinic in question may provide an answer, e.g. the donor may have given the clinic permission to donate or destruct these materials upon his or her death. Otherwise, does the residuary beneficiary inherit these materials? Is an embryo even capable of being inherited, i.e. is it property? Ideally these issues should be dealt with before the death of the donor, while his or her intentions can still be ascertained.

Clearly we are just starting to address this somewhat murky area of estates law. In my practice, reproductive assets currently come into play in three additional areas:

1) Parents have banked cord blood for their child. I often include a provision in the parents’ wills (i) directing the trustee of their child’s trust to continue paying storage fees for the cord blood until the child reaches a certain age, and (ii) instructing the trustee to transfer ownership of the cord blood to the child once he or she attains that age. We do not yet know the limitations of cord blood, and it may end up being the most valuable asset in your estate if a member of your family has certain medical issues (yes, potentially more powerful than a locomotive….)

2) A couple with fertility issues has found a surrogate or gestational carrier. There is usually a surrogacy contract in this scenario, and the contract often requires the couple to have properly executed wills providing for the child that may result from the surrogacy. This requirement can lead to last minute, faster than a speeding bullet wills, which may not be as carefully drafted as they need to be under these circumstances (see #3 below). Expert advice is strongly recommended!

3) A client has a child (or is planning to) where the child is not biologically related to the client, and the child has not yet been adopted by the client. Careful drafting of the client’s will is required to ensure that the child will inherit regardless of the status of any planned adoption. Often a will refers to “my child” generically, without naming the child, either because the child is not yet born, or the client intends to have additional children and does not want to revise his/her will immediately upon the birth of the next child. If not specifically defined in the will, “my child” refers to a person’s child by blood or adoption. If a client has not yet adopted a child, and is not related by blood to the child (e.g. a donor was used), a broader definition of “child” needs to be included in the client’s will. Conversely, if a client has donated reproductive material (e.g. sperm or eggs), his or her will should be carefully drafted to exclude any children related to the client only by virtue of this donation. (While other provinces have legislation clarifying that sperm and egg donors are not parents, Ontario currently does not.)

Clients who have been involved with reproductive technologies have often been through significant stress and, in some cases, heartbreak. Reproductive technologies are incredibly costly, so credit cards are maxed out and wills and estate planning are very low down the priority list. Once the time comes to address your estate plan, alert your lawyer to these issues if they pertain to you – protect that child you worked so hard for!

Katy Basi is a barrister and solicitor with her own practice, focusing on wills, trusts, estate planning, estate administration and income tax law. Katy practiced income tax law for many years with a large Toronto law firm, and therefore considers the income tax and probate tax implications of her clients' decisions. Please feel free to contact her directly at (905) 237-9299, or by email at katy@katybasi.com. More articles by Katy can be found at her website, katybasi.com.

The above blog post is for general information purposes only and does not constitute legal or other professional advice or an opinion of any kind. Readers are advised to seek specific legal advice regarding any specific legal issues.

Golf – The Business, Social and Income Tax Aspects

I have had enough with winter! So I thought a great way to take our minds off ice storms and cold weather would be to talk golf. Readers of my blog know that I am a golfer. Of all the sports I have played, golf has been far and away the most difficult to master. However, the beauty of golf is that you do not have to be a scratch golfer to enjoy the game and the social aspect is by far the most enjoyable of any sport (especially for trash talkers like me). When you have some semblance of a golf game and some degree of social skills, various studies

Pebble Beach

suggest golf is an excellent business tool.

Today, I will look at the various studies and articles out there examining whether or not playing golf can increase one’s wealth (because of the business conducted on the course and the business connections made) and since this is a tax blog, review the income tax implications of the costs associated with playing the game.

The Perception vs. the Reality

Many people perceive golf as a rich man’s sport or a game for the elite, yet the lineups at public courses suggest otherwise. According to the National Golf Foundation, only 10% of the 26 million golfers in the USA belong to private clubs. Thus, golf may be a way to climb the social and monetary ladder even if you do not belong to a private club. Melissa Leong of the National Post suggests golf may help if you plan on raising you child to be a CEO.

Golf and Remuneration

There has only been one definitive study of the correlation between golf and increased wealth. This study called “Illusory correlation in the remuneration of chief executive officers: It pays to play golf, and well” was authored by Gueorgui Kolev and Robin Hogarth of the University of Pompeu Fabra in Spain. Although the study relates to CEO's, I assume it would translate down the corporate ladder.

In the abstract to the paper, the authors state; “although we find no relation between handicap and corporate performance, we do find a relation between handicap and CEO compensation. In short golfers earn more than non-golfers and pay increases with golfing ability”. The paper quantifies the “golfer’s advantage” by stating “CEO’s who are not regular golf players receive about 17% less in total ex-ante compensation.”

Predator Ridge

The authors argue that golfing ability confers an intangible “halo” effect on the CEO. They state “the presence of the illusory belief that golf playing abilities correlate with shareholder value maximization abilities prompts the relevant decision makers to confer higher pay on CEO’s who are good golfers”. Mr. Hogarth and Mr. Kolev say remuneration decisions “involve a host of tangible and intangible measures ranging from concrete indicators of past performance to the observation of ‘soft’ social skills and even physical appearance. (Blogger note: There have been studies that taller CEO’s also make more money.) Moreover, in the USA golf clubs provide locations in which the relevant actors socialize and can judge each other on a variety of dimensions. In this milieu, then, we suspect that being a good golfer is a positive attribute, generating its own ‘halo’ effect.”

Building Relationships and Making the Deal

Josh Sens in a Golf.com article entitled The 8 Rules of Business Golf says “Golf isn't merely a leisure sport. It's the martini lunch of the modern workforce, the buoyant venue where business gets done”. I think Josh may be a bit enthusiastic, but clearly his point is that the golf course is a great place to get business done. He does suggest you do not talk business before the 5th hole or after the 15th hole.

According to Golf Digest, Jim Crane the current owner of the Houston Astros baseball team had the lowest handicap of any CEO in 2005. In discussing the business opportunities the game provides, Crane said that “nowadays, most of his golf is business-related" and "if you can't close in four hours, you can't sell."

Comic by Andrew Grossman

For those interested in refining their skill at closing a deal on the golf course, this Forbes article provides 19 tips from business golf experts.

Golf May Be Good for Business, but the CRA Does Not Care

As I will detail below, notwithstanding the many deals that originate or are consummated on the golf course, the CRA is not very keen on providing income tax benefits. I wondered why the CRA held this point of view, until I found these comments by Jamie Golombek, Managing Director, Tax and Estate Planning of CIBC Private Wealth Management who wrote the following in the National Post in his May, 2011 article titled,  "Tax law takes 9 iron to golf deductions".                

Jamie notes that the Department of Finance in 1996 said the limitation on the deductibility of golf is “designed to ensure that businesses assume their fair share of the tax burden and to prevent ordinary taxpayers from subsidizing the deduction by businesses of entertainment expenses that are altogether discretionary.” The CRA is of the view that the direct business purposes of golf is "accessory or subordinate to the recreational or personal nature of the..golf activity".

If there is one expense my clients are incredulous about, it is golf related expenses. They cannot believe the restrictions the Income Tax Act places on various golf related expenditures. I detail these restrictions below:

Green Fees and Club Rentals

Expenses incurred for green fees and golf equipment rentals are not deductible under subparagraph

The BBC in his Rickie Fowler attire at Predator Ridge

18(1)(l)(i) of the Act.

Membership Fees and Dues

Subparagraph 18(1)(l)(ii) prohibits the deduction of all membership fees or dues (whether initiation fees or otherwise) in any club whose main purposes is to provide dining, recreational or sporting facilities for its members.

Meals

At one time, the CRA did not allow you to deduct meals at a golf club if they were part and parcel of your golf game, but allowed meals if you were not there to golf, but for a business purpose. That ridiculous rule was, for obvious reasons, later changed.

The current rule is; where there is a business purpose with respect to a meal, reasonable amounts expended for meals and beverages consumed at a golf club are deductible, subject to the 50% limitation in section 67.1 of the Act. As with all meal and entertainment expenses, you should note on the back of the receipt who you took for lunch, dinner or drinks.

As discussed above, there is no dispute that playing golf can lead to increased business sales and increased remuneration. However, the CRA clearly wants you to golf on your own dime – notwithstanding the fact that golf may actually be one of the greatest generators of business and business leads within certain industries.

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.

Salary or Dividend? A Taxing Dilemma for Small Business Owners -2014 Update

Effective January 1, 2014 the personal income tax rate on non-eligible dividends paid by private corporations will increase. As result of this uptick in rates, the absolute income savings that were available in most provinces in 2013, when small business owners paid themselves by dividends (as opposed to salary) have been virtually eliminated.  

With these changes, the government has achieved almost perfect integration, at least in my home province of Ontario. By integration, I mean a person will be indifferent as to whether they receive a dividend or salary from a private corporation, since the ultimate income tax cost (total of both corporate and personal taxes) is exactly the same.  

Although the government has effectively removed any absolute income tax savings, a significant income tax deferral is still available where corporations earn active business income. For example, if a corporation earns active income in Ontario, the corporate tax rate is only 15.5% as opposed to a personal tax rate of 46.41% (on taxable income over $136,270). This means to the extent that a small business owner does not need all their corporate earnings to live on and can leave funds in their corporation, they are deferring 30.91% in taxes (34.03% if they are a super-tax rate taxpayer paying 49.53%).  

Jamie Golombek, the Managing Director, Tax & Estate Planning of CIBC, recently released a report titled “The Compensation Conundrum: Will it be salary or dividends?”  This is Jamie’s third report in an excellent series on owner-manager remuneration, the first two being “Rethinking RRSPs for Business Owners: Why Taking a Salary May Not Make Sense” and “Bye-bye Bonus! Why small business owners may prefer dividends over a bonus”.

The chart below, taken from Jamie’s most recent report, reflects the impact of the dividend tax changes on small business owners, who distribute their income as non-eligible dividends instead of salary; where their corporations are eligible for the $500,000 small business deduction limit (“SBD”). The absolute tax rates which Jamie denotes as tax rate (dis)-advantage reflect significant decreases from 2013 to 2014, while the tax deferral advantage is either unaffected or has grown larger in almost all provinces. For example: In Ontario, in 2013, there was an absolute tax savings of 3.21% if a small business owner received non-eligible dividends instead of salary. However, in 2014, that benefit is now only .12%. The tax deferral remains the same at 34.03%.

Tax rate (dis)advantage and tax deferral advantage

on SBD Income in 2013 and 2014

                                             2013                                                     2014

                       Tax Rate                    Tax                    Tax Rate                    Tax

                          (Dis)-                  Deferral                  (Dis)-                  Deferral

Province   advantage          Advantage          advantage          Advantage

AB                    1.17%                   25.00%                 (0.69%)                 25.00%

BC                     1.04%                   30.20%                 (0.56%)                 32.30%

MB                   0.56%                   35.40%                 (0.89%)                 35.40%

NB                    1.65%                   29.57%                   0.91%                   31.34%

NL                     1.84%                   27.30%                   0.94%                   27.30%

NS                    4.54%                   35.50%                   2.40%                   36.00%

ON                   3.21%                   34.03%                   0.12%                   34.03%

PE                   (0.18%)                 32.73%                 (1.95%)                 31.87%

QU                  (0.25%)                 30.97%                 (1.26%)                 30.97%

SK                     2.00%                   31.00%                   0.27%                   31.00%

Chart reproduced with permission from Jamie Golombek, the Managing Director, Tax & Estate Planning of CIBC from his recently released report “The Compensation Conundrum: Will it be salary or dividends?” December 2013.

For active business income (“ABI”) in excess of the $500,000 small business deduction limit (i.e.: taxable income from $500,001 upwards) the dividends distributed are considered eligible dividends and thus the absolute tax savings and tax deferral advantage are largely unaffected as noted below.

Tax rate (dis)advantage and tax deferral advantage

on ABI Income in 2013 and 2014

                                             2013                                                     2014

                       Tax Rate                    Tax                    Tax Rate                    Tax

                          (Dis)-                  Deferral                  (Dis)-                  Deferral

Province   advantage          Advantage          advantage          Advantage

AB                   (0.47%)                 14.00%                 (0.47%)                 14.00%

BC                   (1.19%)                 17.95%                 (1.42%)                 19.80%

MB                 (4.15%)                 19.40%                 (4.15%)                 19.40%

NB                    0.63%                   19.06%                 (0.13%)                 19.84%

NL                   (2.65%)                 13.30%                 (2.65%)                 13.30%

NS                   (5.88%)                 19.00%                 (5.88%)                 19.00%

ON                  (1.85%)                 23.03%                 (1.83%)                 23.03%

PE                   (3.44%)                 16.37%                 (3.44%)                 16.37%

QU                  (2.68%)                 23.07%                 (2.68%)                 23.07%

SK                   (1.11%)                 17.00%                 (1.11%)                 17.00%

Chart reproduced with permission from Jamie Golombek, the Managing Director, Tax & Estate Planning of CIBC from his recently released report “The Compensation Conundrum: Will it be salary or dividends?” December 2013.

Last January I wrote extensively about the decision of whether to pay a salary or a dividend and the benefit of accumulating a “retirement fund” inside your corporation by taking advantage of the income tax deferral. Part 1 discussed conventional wisdom in respect of the salary versus dividend issues, Part 2 demonstrated the numerical benefits of deferring income and Part 3 discussed the various issues that can impact that decision. I do not have the time or the energy to redo these posts and much of what I said is still relevant or covered by Jamie's new report. However, I would suggest there are two key changes.

If your remuneration strategy was to pay yourself a salary to the RRSP limit and then pay yourself a dividend on any amounts over the RRSP limit, the increased tax rate on non-eligible dividends means that in many provinces, there will be little to no benefit to remunerate yourself in this manner in 2014 (EHT should be considered in this analysis).

If you leave after-tax corporate funds to grow in your company, you will now pay more income tax on the eventual withdrawal of those funds, to the extent the funds are withdrawn as non-eligible dividends.

With the change to the taxation of non-eligible dividends, small business owners need to consult their accountants early in 2014 to determine if they need to consider changing the manner in which they are remunerated.

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.