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, April 19, 2021

Solving the sibling wealth gap

We Canadians are famous for staying private about money. But finances can undermine family unity in insidious ways. At the top of this list is wealth disparities among siblings.

To help address wealth gaps among siblings, I’ve asked my colleague Jeffrey Smith to share his experiences on this subject when advising high net worth families. Jeff is a Senior Manager in BDO’s Wealth Advisory Services practice, based in Kelowna, BC.
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By Jeffrey Smith

As a child, I never really noticed wealth disparities at family gatherings. Everyone seemed to be the same: grandparents, parents, aunts, and uncles. No one had a lake house or cottage, or did multiple family vacations; everyone met Fridays at my grandparents to visit. We were all the same, or so I thought.

Now, many years later, I see these differences within families—in both my own and others. The issue comes up regularly when doing financial and estate planning for families and advising them on how to manage their wealth.

Many families suffer from friction caused by one sibling having more money than the other. Whether this is due to differing lifestyle choices or career impairment due to health, sibling relationships can break down due to income and wealth disparity. Parents can’t solve all these problems for their children—sometimes the biggest challenge is to not intervene—but they can at least avoid increasing the conflict.

Two siblings, two lifestyles


Consider this fictional example with some true-to-life themes.

A large family with many children includes two brothers who have been very close from the time they were toddlers. That all changed when they graduated university. The older one (let’s call him “Dan”) finished his schooling a few years before the younger one (let’s call him “Stewart”). By the time Stewart graduated, Dan had married into a wealthy family. This allowed Dan to live a life of leisure, at least in Stewart's eyes. Meanwhile, Stewart began looking for his first job.

He also began to feel jealous of Dan. For the first 25 years of their lives, they were equals; now Dan leads a privileged life, where money is almost no object. Animosity grew as Dan invited Stewart to expensive events and enjoyed his possessions, which Stewart couldn’t afford. Unfortunately, what was once the closest of childhood relationships deteriorated into occasional chats based more on obligation than brotherly love.

Sibling wealth disparities are so different from other differences in wealth. Comparing yourself to a friend or co-worker, you can internally justify why they may appear to be ahead of you financially. Maybe they inherited a large sum or came from a wealthy family; however, when comparing your financial success to your brother or sister, those justifications sometimes fall. (Though not in Dan and Stewart’s case.)

From the perspective of an outsider, siblings would have had the same advantages and disadvantages growing up, been influenced by the same parents, and had access to the same financial and academic resources. Therefore, when one sibling finds more financial success, people can make assumptions about intelligence and work ethic.

Is that reasonable, though? What if one sibling suffered from a medical impairment or financial hardship early in life? What if finances are different because of divorce or one having more children than the other? What if one married into wealth? What if the wealth variances are solely a reflection of drive, determination and work ethic?  Obviously, a complex and delicate area.

When wealth gaps occur, it can impact the sibling relationship. As wealth is generated, lifestyle changes naturally occurpeople may eat out more or travel more. The experiences and bonds that were created growing up on a level playing field now have unequal pressure. This can harm the relationship, sometimes irrevocably.

The role of planning


While sibling wealth variances based on independent individual circumstances are subject to many variables that cannot be controlled, family related wealth variances can be controlled or minimized in many circumstances. Families need to avoid negative pitfalls from poor planning that may inadvertently lead to significant wealth disparity for the next generation. Let’s consider a situation that is fictional but reflects real-life realities.

A successful farming family plans its family business succession. The parents decide to retire, and help their son continue the farm by giving him the equipment and an equivalent amount of cash to their daughter. The parents decide they wish to retain ownership of the land for retirement income via rent. 

At first glance this all seems fair. The son receives debt-free equipment and the daughter receives cash to do what she pleases. Everyone appears happy, except for one bit of information that is far more important than it seems: What price is the son paying to rent the parents’ land?

The question arises at a client review of their net worth and income. As the family’s advisor, I would ask why the son is paying far less than market value for renting the farm. The answer? Rent was based on the parents’ expected cash needs and did not consider fair market rents.

Here is where wealth disparity is inadvertently created by mom and dad. The son has been operating a farm. Depending on the amount of time, amount of savings, and how one wants to quantify the savings and overall impact on the son’s business, the total benefit could reach millions of dollars. Therefore, the son receives a significant benefit compared to his sister because of his parents’ retirement.

In this example, we can help this fictional family by identifying and quantifying the unintended wealth inequality. They would then be able to equalize it, and likely strengthen the sibling bond in the process. But it does underline that one must look at all factors when transitioning a business. If you don’t consider all related transactions, you too could be creating unintended consequences.

What grandparents can do


It’s not just parents who need to watch for planning missteps on wealth. Grandparents can cause hard feelings and friction when they name grandchildren directly in the will. When a sibling does not have children, they may feel like they’re penalized for not having children.

Depending on the amount of money and number of grandchildren, the estate may erode significantly. Consider whether instead your children should receive equal units and then they control how much is passed on to their children; or you still leave money to grandchildren, but allocate equal amounts to each family regardless of how many children. There is no right answer, but these important planning areas warrant conversation and consideration. There are ways to keep the playing field equal, and in doing so keep the peace within the family.

Managing emotions can be difficult when discussing finances. But money and success should never ruin the foundation of family and relationships. Having good, open conversations, being honest about how you feel, and expressing what is bothering each party can mend the most fragile of family relationships and create stronger bonds.

Jeffrey Smith - CPA, CA, CFP, CLU - is a Senior Manager in BDO’s Wealth Advisory Services practice and can be reached at 250-763-6700 or by email at jrsmith@bdo.ca.

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.

Monday, April 5, 2021

Confessions of a Tax Season Accountant — 2021 Edition

In the old days of this blog, some readers may recall I wrote a series of posts titled “Confessions of a Tax Accountant” during income tax season. Those posts would discuss interesting or contentious income tax and filing issues that arose as I prepared my clients’ tax returns. Two years ago I condensed the confessions down to a single confession. Last year COVID struck. I didn’t confess last year. I just prayed.

Today, to bring some normalcy back to the blog, I will again provide a single tax season confession for the 2021 tax season.

Home office claims

The most important change for your 2020 tax filing is how you claim your home office expenses. I detailed these changes a month ago, so please refer there for more details.

A couple new tax credits


For 2020, there are a couple new tax credits:
  • Digital News Subscription Credit – This non-refundable credit may be available if you paid for a digital news subscription in 2020. The limit is $500. You can find the details here.
  • Canada Training Credit – Per the CRA, “Eligible workers of at least 25 years old and less than 65 years old at the end of 2019 and later years, and who meet certain conditions will accumulate $250 a year, up to a lifetime limit of $5,000 to be used in calculating their Canada Training Credit, a new refundable tax credit available for 2020 and future years. Based on the information on their return, the CRA will determine their Canada training credit limit for the 2020 tax year and provide it to them on their notice of assessment for 2019 and will be available in My Account.”

U.S. capital gains reports


I apologize for repeating this point—it’s at least the fourth time I’m mentioning it on the blog—but it is a major pet peeve of mine. Here goes: We continue to receive realized capital gains reports for clients for their U.S. holdings brokerage accounts that are not properly converted for Canadian taxes.

To properly report your U.S. or any foreign stocks trades, the original purchase should be converted at the exchange rate at the date of purchase (or, if not available, at the average exchange rate for the year of purchase), and the sale should be converted at the exchange rate on the date of sale (or, if not available, at the average exchange rate for 2020).

I continue to receive capital gain reports with both the purchase and sale converted at the 2020 average exchange rate. Since the U.S. dollar has risen over the years, a purchase made several years ago likely would have a large foreign exchange gain component that is not being reported.

Property received by inheritance


As baby boomers or, more particularly, their parents age and pass away, many Canadians have inherited real estate, stocks or other capital property. A tax season issue I have been noticing is that people who have inherited property and then sold it often do not know what their adjusted cost base is on the inherited property. This is problematic in determining the related capital gain.

The reason for this cost base gap is most typically that the child who inherited the property does not have a copy of their parent’s terminal tax return (final tax return of the parent for their year of death). On a terminal return, there is what is known as a deemed disposition that reports the fair market value of a deceased person’s real estate, stocks or other capital property. The deemed disposition amount would become the child’s adjusted cost base for when they sell the property.

This is best explained by an example. Say Mr. A and Mrs. A were the parents of Susan. Mr. A and Mrs. A owned a cottage property that was purchased many years ago for $200,000. When Mr. A passed away 10 years ago, he left the cottage to Mrs. A (this is typically a tax-free spousal transfer with no tax implications). However, Mrs. A passed away five years ago when the cottage was worth $900,000. When Mrs. A’s accountant filed her terminal return, they reported a deemed disposition of the real estate at $900,000 and paid capital gains tax on the gain of $700,000 ($900,000 value at death less $200,000 original cost). Susan’s adjusted cost base upon inheritance became the $900,000 deemed disposition amount.

Where you have inherited real estate, stocks or other capital property, it is important that you obtain and keep a copy your parent’s final tax return so you can provide your accountant the return to ensure the correct adjusted cost base if reported when you sell the property.

Medical receipts


Many clients provide multiple tax receipts for the same pharmacy or medical practitioner. Your accountant will love you if you ask the pharmacy and your medical practitioners to provide a yearly summary of all payments, so your accountant only has to deal with a few receipts instead of multiple receipts.

Here’s hoping you have a 2020 refund or owe less tax than you anticipated. 

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.