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, December 17, 2018

Year-End Financial Clean-up

This is my last post for 2018 and I wish you and your family a Merry Christmas and/or Happy Holidays and a Happy New Year.

In prior years, my last post of the year would often be on undertaking a "financial clean-up" over the holiday season. I thought I would revisit this topic again this year, with some comparative assistance to review your portfolio's 2018 performance.

So, what is a financial cleanup? In the Blunt Bean Counter’s household, it entails the following in between eating and the 2019 IHF World Junior Championship.

Yearly Spending Summary


I use Quicken to reconcile my bank and track my spending during the year. If I am not too hazy on New Year’s Day, I print out a summary of my spending by category for the year. This exercise usually provides some eye opening and sometimes depressing data, and often is the catalyst for me to dip back into the spiked eggnog :)

But seriously, the information is invaluable. It provides the basis for yearly budgeting, income tax information (see below), and amongst other uses, provides a starting point for determining your cash requirements in retirement.

Portfolio Review


The holidays or early in the New Year is a great time to review your investment portfolio, annual rates of return (also 3,5 and 10 year returns if you have the information) asset allocation, and to re-balance to your desired allocation and risk tolerance. The $64,000 question is how your portfolio or advisor/investment manager did in comparison to appropriate benchmarks such as the S&P 500, TSX Composite, an International index and a Bond Index. This exercise is not necessarily easy (although some advisors and most investment managers provide benchmarks, they measure their returns against). I hope to write something in more detail on this topic next year.

PWL Capital on their resource page has market statistics and model portfolio's that you can use as guidelines or to create your own benchmarks which I find useful.

Rob Carrick of The Globe and Mail in an article (it is behind a firewall) last year, pointed me to this Suggestus site which offers a no cost comparison against thousands of portfolios'. This is a good test check, but since no two portfolios are exactly alike, you need to understand the limitations of this site as an exact bench-marker.

Tax Items


As noted above, I use my yearly Quicken report for tax purposes. I print out the details of donations and medical receipts (acts as checklist of the receipts I should have or will receive) and summaries of expenses that may be deductible for tax purposes such as auto expenses. If you use your home office for business or employment purposes (remember you need a T2200 from your employer), you should print out a summary of your home related expenses.

Where you claim auto expenses, you should get in the habit of checking your odometer reading on the first day of January each year. This allows you to quantify how many kilometres you drive in any given year, which is often helpful in determining the percentage of employment or business use of your car (since, if you are like most people, you probably do not keep the detailed daily mileage log the CRA requires).

Medical/Dental Insurance Claims


As I have a health insurance plan at work, I also start to assemble the receipts for my final insurance claim for the calendar year. I find if I don’t deal with this early in the year, I tend to get busy and forget about it.

To facilitate the claim, I ask certain health providers to issue yearly payment summaries. This ensures I have not missed any receipts and assists in claiming my medical expenses on my income tax return. You can do this for physiotherapy, massage, chiropractors, orthodontists, and even some drug stores provide yearly prescription summaries.

Year-end financial clean-ups are not much fun and somewhat time consuming. But they ensure you get all the money owing back to you from your insurer and ensure you pay the least amount of taxes to the CRA. In addition, a critical review of your portfolio and/or investment advisor could be the most important thing you do financially in 2019.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.

Monday, December 10, 2018

Tax on Split Income (“TOSI”) Update

I have written several times on the Tax on Split Income ("TOSI") legislation and the impact these rules will have on small business owners and their families. However, the last time I wrote on this topic was in early January of this year when I discussed the December 13, 2017 update of the rules.

While the December 2017 update provided much clarity, the actual application of the rules is far from simple and further clarity is still required from the CRA on several fronts. I had hoped to have an update post on these rules several weeks ago, but for various reasons I could not provide the blog post until today.

As I have transitioned from tax to Wealth Advisory over the last couple years, I felt I should have a tax expert write this post. Thankfully, Howard Kazdan, a Senior Tax Manager with BDO Canada LLP, agreed to write an update on the TOSI rules; although, with this legislation, the devil is in the details, so you must review with your professional advisor.

Many of you will be familiar with Howard's writing as he has provided guest posts in the last couple years on such topics as What Small Business Owners Need to Know - Management Fees - The Importance of Having Proper Support and how 2016 tax changes Made Reviewing Your Will a Must.

I thank Howard for his excellent TOSI update posted below.

Tax on Split Income (“TOSI”) Update

By Howard Kazdan

If you own a Canadian private corporation, and wish to split income with your family members, you now have to deal the Tax on Split Income (“TOSI”) rules, which are complicated and full of uncertainty.

These rules were effective January 1, 2018, but since this is the transition year, taxpayers have the opportunity to rearrange their affairs by December 31, 2018, to avoid the application of these rules in 2018.

Prior to the introduction of the TOSI rules, there were restrictions in place to prevent income splitting on certain types of income with family members under the age of 18. The TOSI rules extend and expand those restrictions to adult family members who are not actively involved in the business. Generally, where family members can demonstrate that they have made legitimate and meaningful contributions to the business, the TOSI rules should not apply.

Any income caught under the TOSI rules will be subject to tax at the highest personal marginal tax rates, eliminating any advantage of income splitting.

In some cases, structuring put in place many years ago may no longer meet all of the original objectives, unless a further reorganization is undertaken.

What type of income is subject to TOSI?


The TOSI rules will apply to many types of income earned from a private corporation, including:

  •  Dividends and shareholder benefits;
  • Income received from a partnership or trust where the income was derived from a related business, or the rental of property in certain cases;
  • Income on certain debt obligations (e.g., interest); and
  • Income or gains from the disposition of certain property disposed of after 2017. However, if the shares of a corporation qualify for the capital gains exemption ("they are qualified small business corporation shares”), then taxable capital gains on the disposition of those shares will not be included in TOSI.

TOSI does not apply to:

  • wages paid for work performed which are subject to a separate reasonableness test.
  • capital dividends
  • second generation income earned on a distribution previously subject to TOSI.

Is there any way out of TOSI?


If certain exceptions are met, TOSI may not apply to distributions from a private corporation:

Excluded shares


The “excluded shares” exception can apply where corporate distributions are paid to individuals who are 25 years of age or older. This will exempt distributions from TOSI where the individual owns shares with at least 10% of the votes and value of the company; where less than 90% of business income of the company is from services, and where less than 10% of the company’s gross income is earned from a related business.

Since there is a requirement for the individuals to hold shares directly under this exception, if an individual owns shares through a beneficial interest in a family trust, they will not be able to rely on this test to escape TOSI. Professionals will also not be able to rely on this test to be exempt from TOSI.

There is lack of clarity on exactly what is considered to be a service – for example, if goods are sold, they could potentially be considered to be service income, if they are incidental to providing a service. 

At a conference held in October 2018, the CRA shed some light on their views with respect to whether shares of a holding company may qualify under the excluded shares exception. In general, if its income is from carrying on a business, the purpose of which is to earn investment income, then it may qualify if the ownership and related business tests are met. This may be the case even if the capital used to buy portfolio dividends was originally derived from dividends previously received from a related operating company. Note that the distribution of the original capital may be subject to TOSI, therefore, only the income earned from the original capital would escape TOSI.

Due to all of the conditions that need to be met and many other technical requirements not discussed in this blog, this is considered one of the hardest tests to meet and you need to discuss and review this with your accountant.

Excluded Business


The “excluded business” exception can apply to any family member who is 18 years of age or older. To qualify for this exclusion, the family member must be engaged on a “regular, continuous and substantial basis” in the business in the year or for any five previous years. A bright line test has been established by the CRA so that an individual is considered to be actively engaged in the business if the person works at least an average of 20 hours per week in the business during the portion of the year in which the business operates in the taxation year or for any five previous years. However, there
is still some subjectivity to this test.

Also, in some cases, record keeping of time spent in the business by owners may not have been perfect, so there could be an issue of proving that the test has been met. It will be key to maintain proper file documentation to support any filing position taken in filing tax returns.

Reasonable Return


The reasonable return exception can apply for adult family members who are 25 years of age or older. In this case, a reasonable amount of dividends can be paid to these individuals and not be subject to TOSI if the amount paid represents a reasonable return on their contribution to the business (e.g. work performed, property contributed, risks assumed). This is an extremely subjective test, so your files will need to be adequately documented in order to support your position in case the CRA comes knocking.

There is also a reasonable return exception for family members between 18 to 24 years of age, however, the amount representing a reasonable return is limited to the prescribed rate of interest (currently 2%) on any investment made by that individual, into the business.

Other Exceptions


  • There are certain exclusions from TOSI where the spouse who contributed to the business is aged 65 or over.
  • Special rules will apply to ensure that individuals who inherit property will benefit from the same tax treatment realized by the deceased individual, had the deceased continued to own the property:
  • An amount will be deemed to be excluded from TOSI for a surviving spouse if that income would have been excluded from TOSI if it was earned by the deceased in their last taxation year.
  • Similarly, if income would have not been considered to be TOSI if it was earned by the deceased individual from whom the property was inherited, then such income will generally be excluded from TOSI for other individuals over 17 years of age.
  •  TOSI should not apply in the case of marriage breakdown or on deemed capital gains on death.

Next Steps:


If these rules sound complicated, that’s because they are! Each corporate situation is unique with respect to every shareholder.

Before making any further distributions, or undertaking any reorganizations, it is suggested that you consult with your tax advisor on how the TOSI rules may impact you and your family for 2018 and onwards.

Note from Mark: 

1. As noted above, the rules are complex and unique to each situation. Thus, I nor Howard will answer any questions on this blog post.

2. If you have not already met with your professional advisor, you only have a couple weeks to rearrange your affairs for 2018. Thus, time is now of the essence and you may need to act immediately. 

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.

Monday, December 3, 2018

Renting Your Property as an Airbnb - Beware of the Income Tax Issues

In the last few years, more and more people have begun to rent out all or part of their residence through
online services such as Airbnb or other rental vacation sites such as Tripping.com or FlipKey. Some will say it is for the unique opportunity to host people from a variety of backgrounds, others that it helps to cover the cost of the skyrocketing real estate/rental market.

Regardless of the reason, there are potentially detrimental tax consequences that can impact you in both the short- and long-term that I would suggest are unexpected to those renting.

Today, I discuss some of these tax consequences. Before I start, I would like to acknowledge the substantial assistance of Christopher Bell CPA, a senior tax accountant with BDO Canada LLP, in writing this post.

Sales Tax


The first thing that you will want to consider (which most laypeople would not) is whether your rental income is subject to GST/HST. You are required to register your business for GST/HST when your gross revenues from all of your commercial activities surpass $30,000 in revenue in a 12-month period. As a result, even if you only make $5,000 from renting your residence, if other commercial activities total $25,000 or more, you will be required to register to collect and remit sales tax. There is an important distinction to keep in mind when considering rentals. Long-term rentals (think of the rent you pay to your landlord) are exempt from GST/HST, while short-term housing rentals for periods of less than 30 continuous days are taxable for GST/HST purposes. There is a clear distinction here and Airbnb rentals, like hotels, are generally considered taxable for GST/HST purposes once you surpass $30,000 in a year.

You can claim back portions of the GST/HST you pay on expenses that are incurred related to the rental of the space in your home. Some items you might be able to recover GST/HST on are:
  •  Housekeeping expenses
  •  Professional/accounting fees
  •  Advertising expenses
Note that there are some potentially significant impacts of improper planning when it comes to GST/HST. If you rent out your property for 90% of the time for rental periods of under 60 days, the property could lose its “residential complex” status, which would result in any future sale of the property to becoming subject to GST/HST. Good luck trying to explain that to any potential buyers!

If you decide to reduce or eliminate the rental of the property in the future, it may change status again, to either an exempt long-term rental or back to a personal residence. When this change occurs, you would need to pay GST/HST on the fair market value of the house at the time of this change. In some cases, you may be eligible to apply for a rebate on these taxes.

As you can see, the GST/HST issues of renting as an Airbnb are very complex. I strongly urge you to seek professional advice before you start renting. Note: I will not answer any questions on GST/HST as I am not an expert in this area. I am just making you aware of the issues you must consider.

Income Tax


Any income you earn from renting your home needs to be reported on your tax return and can be classified in one of two ways: rental income or business income. It is very important to always consider the impact renting can have on your Principal Residence Exemption. This is discussed in greater detail below. The characterization of your rental income is largely determined by the number and kinds of services that you provide to your customers. If you rent your home to someone and they only receive the “bare-minimum,” such as light, heat, parking, laundry, etc., this income would typically be deemed as rental income. If, however, you are offering additional services, such as meals, cleaning, or entertainment, you are more likely to be deemed to be carrying on business activities. As Chris told me, "if you want to keep the green, keep it lean".

You can deduct related expenses from the income earned on your tax return. Some of those items include the following:

1. Utilities (light, heat, water, etc.)
2. Maintenance (painting, small repairs, cleaning*)
3. Property taxes and condo fees
4. Internet and cable
5. Home insurance
6. Mortgage interest

*Note: you cannot clean or do repairs yourself and pay yourself $50 an hour for your hard work. Cleaning and repairs are typically only deductible if done by external service providers.

These expenses will need to be prorated based on the number of days of the year in which you hosted guests in the year against the total amount of time you’ve owned the home. Similarly, if you only rent out a portion of your home, you would need to prorate the expenses further to account for the proportion of the home that is used for rental purposes. The space can be prorated based on either the square metres/feet of the home you are renting or based on the number of rooms you rent out. I suggest you base the pro-ration on the square area to avoid any conflict with CRA, so get the measuring tape out!

Impact of renting as Airbnb on your Principal Residence


There are sometimes more significant amounts that you want to claim, such as large repairs or maintenance costs. Given the capital nature of these expenses, you may want to claim Capital Cost Allowance ("CCA"- you may know CCA as depreciation) on these repairs, or maybe on the property itself. While it is tempting to reduce your annual income by making a CCA claim, there are some long-term implications of doing so.

First of all, renting out your property regularly may result in you being considered to have changed the use of the property, which could result in some significant tax consequences. There is a deemed disposition of the property upon the change in use at the fair market value, and the property is no longer considered a principle residence.

Furthermore, claiming CCA against your income will potentially limit or outright prevent you from claiming the principle residence exemption on your home when you decide to sell it. Something to note would be that if you make significant structural changes and there is a significant change in use, CRA will deem the property as income generating.

Final Comments


It is vital that you understand the various complex income tax implications discussed above. I strongly urge you to obtain professional advice before you start renting in order to avoid some costly pitfalls.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.

Monday, November 19, 2018

Tax-Loss Selling - 2018 Version

In keeping with my annual tradition, I am today posting a blog on tax-loss selling. I am doing it again because the topic is very timely and every year around this time, people get busy with holiday shopping and forget to sell the “dogs” in their portfolio and as a consequence, they pay unnecessary income tax on their capital gains in April.

Additionally, while most investment advisors are pretty good at contacting their clients to discuss possible tax-loss selling, I am still amazed each year at how many advisors do not discuss the issue with their clients. So, if you have an advisor, ensure you are in contact to discuss your realized capital gain/loss situation and other planning options.

For full disclosure, the following two comments are the only new items to consider that are different from last year's version.

1. The stock markets in 2018 have been much weaker than the last few years and you may unfortunately have "more opportunity" to sell stocks with unrealized losses to reduce your current year capital gains or carryback the losses to any of the last 3 years to recoup some of the tax you paid on gains you previously realized.

2. If you intend to tax-loss sell in your corporation, keep in mind the new passive income rules are applicable for taxation years beginning after 2018 and you should speak to your accountant to determine whether a realized loss would be more effective in a future year (to reduce the potential small business deduction clawback) than the current year.

Many people persist in waiting until the third week of December to trigger their capital losses to use against their current or prior years capital gains. To avoid this predicament, you may wish to set aside some time this weekend or next, to review your 2018 capital gain/loss situation in a calm methodical manner. You can then execute your trades on a timely basis knowing you have considered all the variables associated with your tax gain/loss selling.

I would like to provide one caution in respect of tax-loss selling. You should be very careful if you plan to repurchase the stocks you sell (see superficial loss discussion below). The reason for this is that you are subject to market vagaries for 30 days. I have seen people sell stocks for tax-loss purposes, with the intention of re-purchasing those stocks and one or two of the stocks take off during the 30 day wait period and the cost to repurchase is far in excess of their tax savings. Thus, you should first and foremost consider selling your "dog stocks" that you and/or your advisor no longer wish to own. If you then need to crystallize additional losses on stocks you still wish to own, be wary if you are planning to sell and buy back the same stock. It should be noted your advisor may be able to "mimic" the stocks you sold with similar securities for the 30 day period or longer or utilize other strategies, but that should be part of your tax loss-selling conversation with your advisor.

This blog post will take you through each step of the tax-loss selling process.

Reporting Capital Gains and Capital Losses – The Basics


All capital gain and capital loss transactions for 2018 will have to be reported on Schedule 3 of your 2018 personal income tax return. You then subtract the total capital gains from the total capital losses and multiply the net capital gain/loss by ½. That amount becomes your taxable capital gain or net capital loss for the year. If you have a taxable capital gain, the amount is carried forward to the tax return jacket on Line 127. For example, if you have a capital gain of $120 and a capital loss of $30 in the year, ½ of the net amount of $90 would be taxable and $45 would be carried forward to Line 127. The taxable capital gains are then subject to income tax at your marginal income tax rate.

Capital Losses


If you have a net capital loss in the current year, the loss cannot be deducted against other sources of income (unless you are filing for a deceased person. In that case, get professional advice as the rules are different). However, the net capital loss may be carried back to offset any taxable capital gains incurred in any of the 3 preceding years, or, if you did not have any gains in the 3 prior years, the net capital loss becomes an amount that can be carried forward indefinitely to utilize against any future taxable capital gains.

Planning Preparation


I suggest you should start your preliminary planning immediately. These are the steps I recommend you undertake:

1. Retrieve your 2017 Notice of Assessment. In the verbiage discussing changes and other information, if you have a capital loss carryforward, the balance will reported. This information is also easily accessed online if you have registered with the CRA My Account Program.

2. If you do not have capital losses to carryforward, retrieve your 2015, 2016 and 2017 income tax returns to determine if you have taxable capital gains upon which you can carryback a current year capital loss. On an Excel spreadsheet or multi-column paper, note any taxable capital gains you reported in 2015, 2016 and 2017.

3. For each of 2015-2017, review your returns to determine if you applied a net capital loss from a prior year on line 253 of your tax return. If yes, reduce the taxable capital gain on your excel spreadsheet by the loss applied.

4. Finally, if you had net capital losses in 2016 or 2017, review whether you carried back those losses to 2015 or 2016 on form T1A of your tax return. If you carried back a loss to either 2015 or 2016, reduce the gain on your spreadsheet by the loss carried back.

5. If after adjusting your taxable gains by the net capital losses under steps #3 and #4 you still have a positive balance remaining for any of the years from 2015 to 2017, you can potentially generate an income tax refund by carrying back a net capital loss from 2018 to any or all of 2015, 2016 or 2017.

6. If you have an investment advisor, call your advisor and request a realized capital gain/loss summary from January 1st to date to determine if you are in a net gain or loss position. If you trade yourself, ensure you update your capital gain/loss schedule (or Excel spreadsheet, whatever you use) for the year.

Now that you have all the information you need, it is time to be strategic about how to use your losses.

Basic Use of Losses


For discussion purposes, let’s assume the following:

· 2018: total realized capital loss of $30,000

· 2017: taxable capital gain of $15,000

· 2016: taxable capital gain of $5,000

· 2015: taxable capital gain of $7,000

Based on the above, you will be able to carry back your $15,000 net capital loss ($30,000 x ½) from 2018 against the $7,000 and $5,000 taxable capital gains in 2015 and 2016, respectively, and apply the remaining $3,000 against your 2017 taxable capital gain. As you will not have absorbed $12,000 ($15,000 of original gain less the $3,000 net capital loss carry back) of your 2017 taxable capital gains, you may want to consider whether you want to sell any other stocks with unrealized losses in your portfolio so that you can carry back the additional 2018 net capital loss to offset the remaining $12,000 taxable capital gain realized in 2017. Alternatively, if you have capital gains in 2018, you may want to sell stocks with unrealized losses to fully or partially offset those capital gains.

Identical Shares


Many people buy the same company's shares (say Bell Canada) in different accounts or have employer stock purchase plans. I often see people claim a gain or loss on the sale of their Bell Canada shares from one of their accounts, but ignore the shares they own of Bell Canada in another account. However, be aware, you have to calculate your adjusted cost base on all the identical shares you own in say Bell Canada and average the total cost of all your Bell Canada shares over the shares in all your accounts. If the cost of your shares in Bell are higher in one of your accounts, you cannot pick and choose to realize a loss on that account; you must report the gain or loss based on the average adjusted cost base of all your Bell shares, not the higher cost base shares.

Creating Gains when you have Unutilized Losses


Where you have a large capital loss carryforward from prior years and it is unlikely that the losses will be utilized either due to the quantum of the loss or because you are out of the stock market and don’t anticipate any future capital gains of any kind (such as the sale of real estate), it may make sense for you to purchase a flow-through limited partnership (be aware; although there are income tax benefits to purchasing a flow-through limited partnership, there are also investment risks and you must discuss any purchase with your investment advisor). 

Purchasing a flow-through limited partnership will provide you with a write off against regular income pretty much equal to the cost of the unit; and any future capital gain can be reduced or eliminated by your capital loss carryforward. For example, if you have a net capital loss carry forward of $75,000 and you purchase a flow-through investment in 2018 for $20,000, you would get approximately $20,000 in cumulative tax deductions in 2018 and 2019, the majority typically coming in the year of purchase. Depending upon your marginal income tax rate, the deductions could save you upwards of $10,700 in taxes. When you sell the unit, a capital gain will arise. This is because the $20,000 income tax deduction reduces your adjusted cost base from $20,000 to nil (there may be other adjustments to the cost base). Assuming you sell the unit in 2020 for $18,000 you will have a capital gain of $18,000 (subject to any other adjustments) and the entire $18,000 gain will be eliminated by your capital loss carry forward. Thus, in this example, you would have total after-tax proceeds of $28,700 ($18,000 +$10,700 in tax savings) on a $20,000 investment.

Donation of Marketable Securities


If you wish to make a charitable donation, a great way to be altruistic and save tax is to donate a marketable security that has gone up in value. As discussed in this blog post from two weeks ago, when you donate qualifying securities, the capital gain is not taxable. Read the blog post for more details.

Donation of Flow-Through Shares


Prior to March 22, 2011, you could donate your publicly listed flow-through shares to charity and obtain a donation receipt for the fair market value ("FMV") of the shares. In addition, the capital gain you incurred [FMV less your ACB (ACB is typically nil or very low after claiming flow-through deductions)] would be exempted from income tax. However, for any flow-through agreement entered into after March 21, 2011, the tax benefit relating to the capital gain is eliminated or reduced. Simply put (the rules are more complicated, especially for limited partnership units converted to mutual funds and an advisor should be consulted), if you paid $25,000 for your flow-through shares, only the gain in excess of $25,000 will now be exempt and the first $25,000 will be taxable.

So if you are donating flow-through shares to charity this year, ensure you speak to your accountant as the rules can be complex and you may create an unwanted capital gain.

Superficial Losses


One must always be cognizant of the superficial loss rules. Essentially, if you or your spouse (either directly or through an RRSP) purchase an identical share 30 calendar days before or 30 days after a sale of shares, the capital loss is denied and added to the cost base of the new shares acquired.

Disappearing Dividend Income


Every year I ask at least one or two clients why their dividend income is lower on their personal tax return. Typically the answer is, "oops, it is lower because I sold a stock early in the year that I forgot to tell you about". Thus, if you manage you own investments; you may wish to review your dividend income being paid each month or quarter with that of last years to see if it is lower. If the dividend income is lower because you have sold a stock, confirm you have picked up that capital gain in your calculations.

Creating Capital Losses-Transferring Losses to a Spouse Who Has Gains


In certain cases you can use certain provisions of the Income Tax Act to transfer losses to your spouse. As these provisions are complicated and subject to missteps, you need to engage professional tax advice.

Settlement Date


It is my understanding that the settlement date for Canadian stock markets in 2018 will be December 27th, as the settlement date is now the trade date plus 2 days (U.S. exchanges may be different). Please confirm this date with your investment advisor, but assuming this date is correct, you must sell any stock you want to crystallize the gain or loss in 2018 by December 27, 2018.

Summary


As discussed above, there are a multitude of factors to consider when tax-loss selling. It would therefore be prudent to start planning now, so that you can consider all your options rather than frantically selling via your mobile device while waiting in line with your kids to see Santa the third week of December.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.

Monday, November 12, 2018

Advice for Entrepreneurs - A Case Study of a Failed Restaurant

Just over a year ago, my wife handed me our monthly copy of Toronto Life Magazine. She suggested I read a story “on a guy who started a restaurant”. The article's headline had the intriguing header of, “A Restaurant Ruined My Life”.

The story is a first-hand account by Robert Maxwell of the trials and tribulations of a would-be restaurateur. The piece goes through how he quit his job, bought a restaurant, struggled, had a little success, had personal issues and eventually lost the restaurant. The quick synopsis above does not do the story justice. The actual details make for a fascinating read on many levels. I suggest you consider reading this article. Here is the link.

What I want to do today is compare Robert’s experience to a blog post I wrote way back in 2011, titled, Advice for Entrepreneurs that had 12 pieces of advice. Not all are applicable, and a restaurant can be a whole other beast, but let’s see how my advice stands up; and consider if Robert had read my blog, would he have been better off? My original comments are in black and my comments related to the article are in red.

Personal Relationships


In the blog, I stated that “the most important issue facing any entrepreneur involved in a relationship or married, is their significant other. Starting a business requires a significant time commitment and comes with a large element of risk. If your significant other is not willing to support you both financially and spiritually, either your business or marriage/relationship is doomed”.

In the article Robert recounts that his wife Nancy eventually embraced his dream of opening his own restaurant. As a neutral observer I would suggest that Robert provided Nancy a romantic notion of what owning a restaurant would be like (they would have breakfast at the competition, work together at lunch and Robert would be home in time to tuck in the kids) and thus she embraced a somewhat fanciful notion.

Be Honest With Yourself


In the original blog post I stated that “you must ask yourself before you commence any business is; are you an entrepreneur by choice or circumstance?”

I would suggest that the restaurant was Robert’s dream and that the circumstance of a buy-out from his employer allowed him to start the restaurant, it was clearly a choice he wanted to make. So, he gets a check-mark here.


"Business Plans and Cash Flow Statements


In the blog I stated “my first suggestion is to walk before you run. Make sure you start slowly and have everything you require in place. To ensure you have everything in place, you need a business plan and cash flow statement”.
In my opinion, this is the genesis of Robert’s failure and largest error in starting his business. He did start walking by first operating a booth at food market that allowed him to test his food and ability. He also knew that 80% of restaurants failed.

However, Robert’s critical first error which he could never really recover from was he did not put together a business plan and most importantly a cash flow statement. For a restaurant, the cash flow statement is almost impossible from a revenue side, as you never know how quickly or if the restaurant will catch on; nevertheless, a cash flow statement allows you to understand what your initial cost will be and how long you can operate under various revenue scenarios.

In the article he states he had $60,000 and had already run out of money before the restaurant opened and needed an additional $20,000, he was lucky to get from a friend. But from that point he was always on a shoestring budget and tight. The lack of planning also contributed to him leasing a location that was in terrible condition and not necessarily the best location.


Partners and Employees – Know Your Abilities


Another point I made in the blog was that “most people are either sales oriented or business oriented. If you are strong in both aspects, you have the best of both worlds. Whether you start with a partner or hire an employee later, know your strength. If you are a sales person hire a good bookkeeper or accountant to help you. If you are the business person, hire a good marketing person or get advice on how to market your product or service”.

In reading this article, I felt Robert was in a sort of no-man’s land regarding to his abilities. He was an excellent chef, but still needed to hire one, was weak in financial planning (even though he had an analyst background) nor was he a marketer. There is nothing wrong with this no-man’s land, but Robert needed to account for his lack of expertise in his budgeting and cash flow.


Financing


In respect of financing, I said the following back in 2011, “where possible, you should try to start your business after you have worked a few years and built some capital. Many young entrepreneurs access family money, either as loans or as equity. However, since many start-up businesses fail, you should ensure that if you borrow or capitalize your business with money from your parents, you do not put their retirement plans in jeopardy. Where possible, have a line of credit or capital cushion arranged in advance”.

As noted in the article, financing is almost non-existent for a new restaurant. Thus, Robert needed to build greater capital before starting the restaurant. His financing was weak.


Marketing


Marketing is vital for many businesses. The marketing for a restaurant is a little different than the average business, thus my comments were not entirely applicable in the November 2011, post.

That being said, the restaurant had a soft launch and was advertised and eventually got a couple reviews from newspapers that spurred business. It is not clear if Robert pursued these restaurant reviews and if he used social media to publicize the restaurant.


Don’t Discount Your Services or Product


In the original blog I stated,“one of the biggest mistakes I have seen entrepreneurs make is discounting their services or products to get business”.

In the article Robert says “What I didn’t realize was that I was charging too little - we were producing exquisite, labour-intensive meals and selling them at Swiss Chalet prices. I clearly didn’t have a head for business.” Not much more to be said.


Keep Your Books Yourself


In the original post I said “This is a bit of an unusual suggestion, but if possible, you should initially keep your own books and learn about accounting. You may require a bookkeeper to assist you, but you will always be a better decision maker if you understand your own books. You do not want to be dependent on your bookkeeper”.

There is not enough information to comment on this. But Robert did not spend enough time to learn about the basics of owning a business such as he would need to incorporate for creditor protection and that he was liable for HST and payroll taxes as the owner.

Give it Time to Grow


In my post I said “Most businesses require three to five years to begin to mature and solidify. Thus, you will need patience and an understanding that you will not be “raking in the cash” for several years.”

For a restaurant this is not relevant, since so many close within a year or two. They are typically hit or miss, most often a miss.


Your Psyche


Finally, my last comment on the blog post in 2011 was “Many entrepreneurs at some point in their business lives have been perilously close to bankruptcy or have actually had a business go bankrupt. While not always the case, entrepreneurs seem to have nerves or steel or at least give that impression. You may be able to be successful without those steely nerves, but they would be an attribute if you start a business, so you can face down the many challenges that will confront your business.”


I don’t know if Robert has nerves of steel or not, he certainly went through a lot. However, as he notes, his nerves were artificially re-enforced with sleeping pills and alcohol, not the ideal way to combat the stress.


Summary


In my post I concluded with the following “It has been my experience that when entrepreneurs reflect upon their businesses, they almost all say that if they knew about the physical toll, long hours and financial stress they would endure, they would not have started their business.”

Robert notes at the end of his article that he is sharing his story as a cautionary tale to other amateurs who have big ideas and dreams and his advice is don’t even think about it. While I am fully in on the caution, especially for the restaurant and bar business, if you are considering starting a business and go through the list of considerations above, I think you may qualify or disqualify yourself if you are honest with yourself.


This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.

Monday, November 5, 2018

Donating Marketable Securities – Altruism and Tax Savings Rolled into One!

As the year winds down, many people consider making charitable donations for income tax purposes or because the holiday season is approaching and they feel altruistic. Whatever the reason, I applaud them; although based on this Globe & Mail article, Canadians as whole are not donating as generously as our American friends.


With the strong markets of the last few years, many people have large unrealized capital gains in their portfolios and may be considering locking in some of those gains given the recent turbulent markets.

A great way to benefit both a charity and your own tax situation is to make a donation of qualifying marketable securities that have increased in value. By doing such, you enrich a charity, obtain a personal charitable donation credit and you do not have to pay any capital gains tax on the donation of the marketable security.

The above is best reflected by an example:

Assume that you purchased 100 shares of ABC Corp. for $10 and the stock price is now $20. The shares are qualifying public marketable securities.

Assume you wish to make a $2,000 donation this year to your favourite charity.

Assume you are a high-rate taxpayer.

Please note the initial posting contained a calculation error that has been corrected.

Donation with Personal Cash


If you make your donation with $2,000 of personal funds you have in your bank account, the charity will receive $2,000 and you will receive a charitable credit. That credit is worth approximately $1,000 on your 2018 tax return. Thus, you are out of pocket approximately $1,000.

Donation with Sale of Stock


If you sell your shares of ABC Corp. to fund the donation, the proceeds from the sale of stock will be $2,000. However, you must account for the taxman and you will owe approximately $250 in tax (again assuming you are a higher rate taxpayer) on the capital gain and thus, the maximum donation you can make is $1,750 (unless you top it up with $250 of personal cash) and the tax savings on your 2018 tax return in relation to the donation credit will be approximately $875. Thus, net-net, you are out of pocket $1,125 and only made a $1,750 donation as opposed to the $2,000 donation you wanted to contribute.

Donation of Stock


Alternatively, if you donate your shares of ABC Corp. directly to a charity (instead of first selling the shares), the charity receives a $2,000 donation (the charity can then sell or hold the shares), you receive a $2,000 charitable donation receipt and receive a tax credit worth approximately $1,000 on your 2018 tax return. Thus, as with the donation of personal cash, the charity received $2,000 and you are only out of pocket approximately $1,000.

However, you will not have to pay the $250 in capital gains tax that you would on a typical public market sale, since the Income Tax Act exempts the gain from capital gains tax when qualifying shares are donated directly to a charity. If you are feeling really altruistic, you can then donate the $250 tax savings from your personal cash.

Qualifying Securities


To make the donation the investment must be a publicly traded security. The most common publicly traded securities are shares, debt obligations, and mutual funds that are listed on designated stock exchanges.

Practicalities


You should first confirm with the charitable organization that they accept donations of marketable securities and try to give yourself some time for the transfer and paperwork to occur. You should try to do this by early December at the latest. Each organization has their own paperwork and rules, but in the end, many can arrange electronic transfers.

Corporations


Corporations can also donate shares and eliminate their capital gains tax. In addition, the gain can often be added to the tax-free capital dividend account (see this blog post on capital dividends).

Since corporations can be taxed in various manners depending upon the type of income and their corporate status, you need to run the numbers with your accountant to understand the specific benefit to your corporation, but in some cases the savings are even better than for an individual.

If you have marketable securities with unrealized capital gains and wish to make a donation, I would suggest donating the securities to a charitable organization is the most tax efficient way to make the donation while achieving your altruistic objectives.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.

Monday, October 22, 2018

Should You Simplify Your Investment Holdings for Estate Purposes as You Age?

Clients often ask me if they should sell stocks, real estate etc. for tax purposes. I typically answer back, “your decision should be an investment decision, do not let the tax tail wag the dog". However, where the question is framed as “Mark, I am starting to get my estate in order and I think it is too complex, should I sell certain assets to reduce the complexity?", my answer is often couched with “it depends”.

Before I delve into this issue, let us first take a step back. This question/issue arises in two ways:

1. The client consciously decides they need to make their estate more manageable for their spouse and/or children. The reasoning behind this decision is often they had to deal with a messy estate left by their parents, sibling or friend. In other cases, they just know their family is not as sophisticated as they are, and they want simplicity.

2. During an estate or financial planning discussion I ask my client if they were hit by a car leaving the meeting (I am very popular among my clients for this line of questioning 😊) would their family know what assets they own and where there are? Or, I just point out a complexity that makes the client step-back and consider whether they need to simplify things for their estate.

Whether it is the client or a question I asked that brings forth this issue is irrelevant. The key take-away is that when you are undertaking estate planning, simplification of your estate should be considered when practical.

Simplification of an estate at its finest is when you clean up complexity with no foregone investment opportunity cost or tax cost. Unfortunately, simplification for many people often comes with at least some investment and/or tax cost and thus, may not be practical where the tax and/or investment cost is higher than the person is willing to absorb.

No Cost Simplification


The following are examples where you can simplify your estate for your family at no cost:

1. You have four investment brokers handling your affairs. To simplify your estate, you consolidate to one or two.

2. If you have multiple corporations, you may be able to amalgamate, dissolve or consolidate without any tax consequences.

3. You open a joint account with a child (your trust implicitly) with enough money to cover a few months expenses and your funeral expenses if you died.

Simplification With an Investment or Tax Cost


In contrast to the above, there are many examples of where a decision to simply will result in a tax cost or possibly foregoing an excellent investment opportunity. For example:

1. Let’s say you were born in a foreign country and have kept investments or business structures in place back home. However, your children do not speak your mother tongue or understand the business culture and customs of that country. I have seen clients liquidate those investments to simplify their estate for their spouses/children’s benefits and bring the money back to Canada.

2. Some people have shareholdings, partnerships or joint ventures with friends or business associates. In the case of say a partnership, both parties often have no desire to keep the partnership going if one partner were to die and the other’s children step in. Thus, as they age they either sell the business or real estate earlier than they envisioned, or when a property is sold, instead of re-investing together, they go their separate ways.

3. I have also seen situations where a parent has a holding company and to avoid the estate complications of the deemed disposition of that property and the other post-mortem tax issues, they distribute the cash or assets as a taxable dividend to themselves, such that the corporation has no assets left. The parent has thus pre-paid tax, possibly years earlier than required (the tax would typically not be due until the latest death of the deceased or their spouse, if they left the holding company shares to their spouse).

Having it Both Ways


Some clients try and kill two birds with one stone. They keep their structures in place, but purchase insurance to cover any estate liability so that the family is not scrambling to sell assets to satisfy the CRA and the family keeps the more complex structure. The only real advantage here is that the simplification of the estate becomes less time sensitive, but the complexity remains.

Simplification is Not Required


In some families, the spouse and/or children are sophisticated business people and can seamlessly step into the parent’s shoes. This allows the parent to keep a complex structure in place but does not guarantee the estate will not initially be messy for estate and/or tax purposes.

Others have teams of advisors whom they expect to step in and guide the surviving spouse and/or children, so the estate complications are greatly reduced.

It Depends


So, I come full circle back to my answer in the first paragraph. Does simplification of an estate make sense? My answer is still “it depends”. Where there is no cost to simplifying, there is no question simplification should be undertaken. Where there is a tax cost or estate complexity cost, it depends on various factors; from the complexity of your estate, to the potential returns that would be forgone by simplifying, to the tax liability that will be incurred, to the sophistication of your spouse and/or children.

The only definitive advice I can provide is: always consider how complex your estate is, and consider whether you can simplify it for your family.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.

Monday, October 15, 2018

Obtaining a Clearance Certificate for an Estate

I have written numerous times on this blog about estate issues. I was quite surprised when I realized I had not posted on the issue of obtaining a clearance certificate for an estate. So today, I remedy this omission and discuss when a clearance certificate is required and how you go about obtaining one.

What is the Purpose of a Clearance Certificate?


A clearance certificate provides the following for an executor(s):
  • Confirmation that an estate of a deceased person has paid all amounts of tax, interest and penalties it owed at the time the certificate was issued
  • Confirmation the legal representative can distribute assets without the risk of being personally responsible for the tax debts of the deceased and estate
Consequently, if as an executor(s) you decide to distribute the assets of the estate without obtaining a clearance certificate, the CRA can hold you personally liable for any unpaid tax debts of the estate.

Do You Have to Obtain a Clearance Certificate?


In a complicated or contentious estate, I would suggest this is not even a consideration. Obtain a certificate. However, where an executor is the sole beneficiary of an estate or the beneficiaries are siblings that get along, the answer is not as clear-cut. I have had estate lawyers suggest a clearance certificate should be obtained, since it is always better to be safe than sorry. On the other hand, I have had estate lawyers suggest that there is no point when there is no reason to feel there are any unpaid tax debts and there is no contention in the estate.

As an executor, you need to understand the estate may have tax exposure to past transactions you may not even be aware of, even if you are sure there are no current debts. For example, the deceased may have missed filing a form such as the T1135 Foreign Verification form for several years that is subject to penalty or claimed the qualifying small business corporation capital gains exemption in the past and it is subsequently audited and denied or transferred property to family that resulted in a deemed disposition and never reported the deemed disposition. These are just a few of many potential tax issues that could result in taxes owing if uncovered or if the CRA audits prior returns.

I suggest being safer than sorry is generally the most prudent route. However, I have seen several estates where the executor(s) decide to not request the certificate because they are the sole beneficiary or do not feel there are any unpaid tax debts.

When Do You Request a Clearance Certificate?


You should request a clearance certificate once you are ready to distribute the remaining funds/assets of the estate. The certificate should only be requested once you have paid all tax debts and filed all applicable personal and T3 (estate returns). The request cannot be filed until you have received notice of assessments for all returns filed, especially the last return filed.

How to Apply


This is what the CRA says is necessary to apply:

For an individual (T1) or trust (T3):
  • a completed Form TX19
  • a completed Form T1013, Authorizing or Cancelling a Representative, signed by all legal representatives, authorizing an accountant, notary or lawyer, or any other person, to act on your behalf. Also use the form if you want the CRA to send the clearance certificate to an address other than yours
  • a detailed list of the assets that the deceased owned on the date he or she died, including all assets he or she held jointly, and all registered retirement savings plans and registered retirement income funds (even if he or she named or designated a beneficiary) and their adjusted cost base and fair market value.
One of the following:
  • a complete and signed copy of the taxpayer’s will, including any amendments, renunciations, disclaimers and probate documents that apply. If the taxpayer died intestate (without a will), attach a copy of the document appointing an administrator (for example, the letters of administration or letters of verification issued by a provincial court)
  • a copy of the trust agreement or document for a living trust
Also include the following documents if they apply to your situation:
  • any other documents proving that you are the legal representative
  • a copy of the Schedule 3, Capital Gains (or Losses) from the final tax return of the deceased
  • a list of all assets transferred to a trust, including (for each asset): a description, the adjusted cost base, and the fair market value
  • a statement of how you propose to distribute any holdback or residual amount of property
  • the names address and social insurance numbers or account numbers of any beneficiaries of property other than cash
It has been my experience that the statement of how you propose to distribute can be problematic. What I have done in the past is advise the CRA who will report the income for the period from the filing of the last return and the issuance of the clearance certificate. For example, if two brothers are the beneficiaries and there is a $200,000 GIC earning 2% interest, I advise the CRA that each brother will report ½ of the interest on their personal tax returns.

Interim Distributions


If you have been an executor, you will know beneficiaries have an expectation of receiving their share of the estate promptly (a cynic would say: often before the deceased is buried). Thus, often, an executor will make an interim distribution because it appears there will be minimal tax debts or quite frankly as a way to appease the beneficiaries. If you are interested in reading more about this issue, I suggest reading this article on interim distributions by Lynne Butler, an estate lawyer and writer behind the excellent blog, Estate Law Canada.

The Finalization Process


Upon filing the clearance certificate, the CRA will send you an acknowledgement letter (they say within 30 days) of receiving your request for a clearance certificate.

The CRA says “that the assessment can take up to 120 days, assuming you provide all of the necessary documents. However, in certain situations, the CRA may need to do an audit before it issues the clearance certificate”. In my experience, the process often takes much longer, even where an audit is not undertaken.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.

Tuesday, October 9, 2018

Sometimes You Just Have to Shake Your Head

Some people make financial decisions that just make you want to shake your head. Often these head shaking decisions are the result of not obtaining professional advice. Today, I am going to discuss a few situations were not obtaining the proper advice can lead to potential issues and/or detrimental consequences. I also discuss a non-financial situation that has caused my head to shake so hard I fear for my brain's safety.


Not Using Accountants and Lawyers


Look, I get it. accountants and lawyers can be expensive, but when you require them, you just need to accept they are a cost of personal or business life. Over the years, I have noted the following negative results that occurred because people refused to engage the proper professional advisor, which left me shaking my head:

Selling the Assets of a Business


Occasionally people figure they will split the difference and hire only a lawyer instead of an accountant when selling the assets of their business. The theory being the legal work must be done, and the lawyer must also be proficient at business and tax planning. The major consequence of doing this type of transaction without the advice of an accountant is that sometimes only the gross sales price of the assets is addressed in the agreement, but the allocation of the sale price is not dealt with. This leads to two issues:

1. The most tax efficient allocation of the purchase price is not negotiated for the vendor.

2. With no allocation, both sides just choose what is best for them. As a result, the CRA has two different allocations on the same transaction. Not a recipe to avoid an audit.

Transfer of Property to a Family Member


Over the years, I have discussed this issue multiple times. Many people transfer properties to their children for tax or probate purposes. Where you transfer your principle residence to a family member, the transfer can result in the loss of a part/all of your principal residence exemption on a future actual sale to an arms length party. Where you transfer land or a rental property to a family member, a deemed disposition on the transfer of the land or rental property may result. When I am engaged on a file that relates to cleaning up these type transfers, I shake my head and I think of the expression: penny wise and pound foolish - since these files typically result in the client owing significant taxes and incurring large professional fees, that could have been avoided with advice upfront.

As a reminder, where you transfer your principal residence to a child (say 50% ownership) who has their own principal residence or does not live in the house, you have effectively changed a tax-free principal residence into a 50% taxable asset (the value of the house at the time of transfer becomes the cost for the child, and any increase in that value becomes taxable to the child when the house is ultimately sold).

If you transfer land or a rental property to a child, the transfer will likely result in a deemed disposition to the parent at the fair market value (“FMV”) of the property and tax is due immediately on the difference between the original cost and the FMV at the time of transfer. In these circumstances the income tax liability and penalties (since the transfer often occurred many years ago) are so large I shake my head not only in disbelief but with profound sadness.

Note: Above I say likely because in certain circumstances a lawyer may, on purpose, separate legal ownership from beneficial ownership (the real value) before the transfer for probate planning purposes. If you are considering this, you must get tax as well as legal advice to ensure your specific situation does not result in a taxable event and both your accountant and lawyer agree the intended result is the actual result - i.e.: no taxable event and probate savings.

Not Paying for a Will


In this September, 2016 blog post I discussed that 62% of Canadians do not have a will. If that statistic is not enough to make your head shake, how about this situation: a few years ago, a lawyer I work with called me to discuss whether I was interested in taking on a client who had engaged him (I ultimately decided to pass on taking on this file for a few reasons). He told me that the client’s father did not want to incur the cost of hiring a lawyer and paying for a will even though he had various businesses and multiple real estate properties. The father passed away and the client was now dealing with the estate. However, the inaction of the father was only a minor head shaking compared to the second part of the story. The wife, who was left with a huge mess by her late husband, somehow also did not see fit to have her own will drafted. She then died without a will, leaving the estate in a tangled web, with the children tasked with sorting it out. Why a surviving spouse who had to deal with the aftermath of an estate left by their spouse who passed away without a will, would not immediately ensure they had their own will drafted, is beyond comprehension!

The Small Dog Park is for Large Dogs


I cannot conclude this post without a final non-financial head shaking situation. My wife and I have two dogs. We started taking our new puppy (she is about 17 lbs) to the dog park to play and socialize with other dogs. We entered the section for small dogs (the park is split into small and large dog sections) and encountered a man with a very large dog. I politely asked him if he could take his large dog to the section for large dogs. He told me his dog does not get along well with other dogs and therefore he must keep him apart from other large dogs. I said I appreciate that, but this is the small dog section. He said, too bad, he was not leaving. My wife and I looked at each other and simultaneously shook our heads. We walked away; which for me is a good thing, since I tend to talk back, but the combined size of the owner and dog were enough for me to keep my trap shut.

If that was not bad enough, a month later we went to the same park and encountered the same situation with a woman and her large dog. Again, I politely asked if she could take her large dog to the section for large dogs. Same response: no, my dog does not get along with other dogs. I suggested she should not bring her large dog to the dog park for small dogs if her dog has social difficulties. She got upset and said we were the third couple today telling her to leave and she was tired of being told what to do and was not leaving. My wife and I looked at each, shook our heads, and wondered if there is a correlation between dogs that don’t get along with other dogs and less than brilliant dog owners.

So, in conclusion. If you are undertaking a financial transaction, please obtain tax and legal advice and if your dog does not get along with other dogs, don’t bring them to a dog park.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.

Monday, September 24, 2018

CRA Adjustment and Information Requests and Tax Update

Today, I provide an update on what I am seeing between my clients and the Canada Revenue Agency (“CRA”) as far as T1 Adjustment Requests, personal and corporate information requests and administration issues. I also provide a reminder relating to Deferred Security (Stock) Option Benefit balances.

T1 Adjustment Requests


A T1 Adjustment Request is probably the most often filed tax form with the CRA. You or your accountant would use this form to report a late received tax slip, an amended tax slip, information that was inadvertently missed, or anything else that should have been reported or claimed as a deduction and was not on your return.

The CRA is often inundated with these forms and last week I was told there could be up to a 6-7-month turnaround on the reassessment of a T1 adjustment; so keep this in mind if you are waiting for a response on a previously filed T1 Adjustment Request or filing a request.

I was also informed by a CRA representative, that the CRA can only process one T1 adjustment per taxpayer at a time (I was not aware of this) and thus, if you have an adjustment in progress, wait until it is resolved before sending in the second adjustment.

Information Requests


These requests continue to arrive on a frequent basis for my clients:

Personal Tax Requests

For personal tax returns, the information request which is essentially a request to provide back-up documents to substantiate deductions and credits claimed on your 2017 tax return, continue, as in prior years, to be typically for the following deductions and credits:

Medical receipts – I have noted in prior blog posts, make your life easier: ask your pharmacy and medical practitioner to print out one yearly receipt. That way you won’t need to provide 20 or 50 individual receipts when you receive a request.

Donation receipts – Typically for larger donation claims.

Tuition Tax Credit – This request is typically for the children of taxpayers attending University, especially when outside Canada. These claims often indirectly also affect the parents, as their child may have transferred up to $5,000 in tuition credits to their parent.

Corporate Information Tax Requests

These requests seemingly arrive daily for my corporate clients. Surprisingly to me, the majority of these request still relate to professional fees (I noted this in a prior blog post). Clients are still getting requests to support their professional fee claims as far back as 2015.

I can only presume the CRA has had some success in the last two years reviewing such claims. I am not sure exactly what they are finding, but I would guess personal type expenses such as professional fees for matrimonial or family law advice, will preparation and/or corporate organizations (that often need to be amortized rather than deducted on a current basis) are the type of expenses they are looking at. But that is just my own conjecture.

If you receive a brown CRA envelope in the mail, there is probably a  good chance you will be asked to provide back-up documentation for one of the above type requests.

Deferred Security (Stock) Option Benefits


I have noticed over the last couple years that some new clients have reminders on their Notice of Assessment that they have deferred stock option balances (from where they deferred reporting the stock option benefit on stocks they owned between 2000-2010). I don't want to get into the details of this, since the history is fairly complex. I just want to remind you that if you previously elected to defer stock option benefits, ensure you keep track of the benefits deferred (you should be filing a Form T1212) and what stock they relate; since if you sell the stock, the benefits need to be reported.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.