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 23, 2019

2019 Year-End Financial Clean-Up

This is my last post for 2019 and I wish you and your family a Merry Christmas or Happy Holidays and a Happy New Year.

As in many prior years, my last post of the year is about undertaking a "financial clean-up" over the holiday season. I feel this clean-up is a vital component to maintain your financial health. For full transparency, much of this post is similar to last year's, except for the portfolio review section.

So, what is a financial clean-up? In the Blunt Bean Counter’s household, it entails the following in between eating and the 2020 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 among 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 rate 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 million-dollar 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 almost all investment managers provide benchmarks, they measure their returns against). The Internet has many model portfolio's you can use to create your own benchmark if you are a do-it-yourself investor.

While 2019 has been a great year in the markets, I would not skip reviewing your investment portfolio because your returns were strong. I say this for the following two reasons:

1. Your returns should still be measured against the appropriate benchmark as noted above. That is how you should compare your returns on a yearly and multi-year basis. So even if your return is good, you may have still under-performed your benchmark last year or over a 3-, 5- or 10-year comparative basis.

2. We are usually concerned with ensuring our returns are not worse than a benchmark. However, what if your returns were way higher than the benchmark? This can also be a concern that your manager is over-reaching their mandate. For example, say your manager way outperformed in 2019. I would ask them why they so outperformed. Assuming their answer is not just that they are awesome and that is why you use them, dig into their reason. Make sure it is just that they were lucky or skillful in 2019 and outperformed within their mandate—and that they did not take more risk than the mandate you provided them.

For example (this is a real case, but I am changing the facts and situation a little to protect the innocent), I was in a meeting where the investment advisor way outperformed in 2019. I asked them why they so outperformed in 2019 and got a somewhat satisfactory answer. However, I also found out they had sold off over 25% of the equity position in late November as they felt they had got their returns and the market was frothy. I nearly fell out of my seat. The investment advisor undertook a massive reallocation which he did not discuss fully with the client, and his actions clearly reflected a market timing mentality that should raise significant red flags despite the great 2019 returns. So sometimes, "too good" returns should be reviewed as intently as poor returns.

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). 

The CRA recently reviewed or audited multiple clients of mine on their auto expense claims, and not having logs has been problematic. Thus, I would suggest if you are not going to keep an annual log, you should at minimum keep a log for a month or two each year.

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 among others: physiotherapists, massage therapists, chiropractors, and orthodontists—even some drug stores provide yearly prescription summaries. This also condenses a file of 50 receipts into four or five summary receipts.

Year-end financial clean-ups are not much fun and are 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 or investment advisor could be the most important thing you do financially in 2020.

Book Giveaway

The three winners of  the Charles B. Ticker book giveaway, “Bobby Gets Bubkes: Navigating the Sibling Estate Fight” were:

Mike P.
Elaine B.
Kim H.

The winners have been notified.

The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

Please note the blog posts are time sensitive and subject to changes in legislation.

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.

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