Six Financial Lessons of COVID-19

The last couple months have been very distressing from a medical and self-isolation perspective. They have also been difficult from a financial and business perspective. I was recently thinking about whether we could learn any financial and business lessons from this time. I came up with six lessons, which The Globe and Mail published on Thursday. I would like to thank Roma Luciw of the Globe for her editing skills.

The article can be found here. If the article does not open, it can be accessed at no charge by signing up with The Globe.

Government program update

I also want to mention some important recent changes to government programs:

• The 75% wage subsidy program was changed last week. Please see this very detailed tax alert for the latest.
• On Wednesday April 15th, the Liberal government expanded the Canada Emergency Response Benefit (“CERB”) for people who make a $1,000 or less a month. See this summary of the CERB inclusive of the April 15th changes.
• On Thursday April 16th, the government announced an expansion of the the Canada Emergency Business Account and a new Canada Emergency Commercial Rent Assistance program to help small businesses with their rents. See this government release. 

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.

Steve Stamkos, Olympic Medals and Income Taxes

As a sports enthusiast, I am always interested in stories that combine sports and income tax. Today, I want to discuss a couple of these stories:

1. Steve Stamkos resigning with the Tampa Bay Lightning in June and the income tax considerations he would have had to ponder (if he ever truly considered the Toronto Maple Leafs as a final destination).

2. The income tax that Canadian Olympic gold, silver and bronze medalists have to pay on the bonuses they earned in winning their medals.

Steve Stamkos Signing

If you are a hockey fan, you were well aware that Steve Stamkos ("Stamkos") was a free agent this spring and that there were rumours negotiations were not going well with his current team, the Tampa Bay Lightning. As result, many Toronto Maple Leafs fans were hopeful Stamkos would sign with the Leafs, his hometown team (some fans felt that spending money on Stamkos at this time would

impact the current Leafs rebuild and thought such a move would be a year or two early - but I digress).

In the end, Stamkos resigned with Tampa Bay for a reported contract of $68,000,000 over eight years (or, an average $8.5 million a year), paid as $9.5 million in each of the next five years, followed by $7.5 million, $6.5 million and $6.5 million in the final three years. It was also reported that Stamkos' base salary will sit at $1 million each year, with the rest being paid as a signing bonus.

While Stamkos was deciding where to sign, there were various discussions on whether he would provide Toronto with a hometown discount to offset the preferential U.S. tax system. With the possibility that one of the NHL’s top players would potentially be moving teams, sports writers quickly had to get up to speed with economic and income tax issues.

I asked a friend last June (who prepares U.S. tax returns) to run some numbers comparing Stamkos’s average $8.5 million salary for a Florida resident to an Ontario resident assuming there was no foreign exchange issue (I did this to solely isolate the income tax consequences and to avoid the complications of dealing with fluctuating F/X rates and the purchasing power of the $U.S. – but yes, this would be a large factor in any decision). BTW: I understand that all NHL players are all paid in $U.S.

My friend ran some tax numbers based on a U.S. resident with single filing status using 2015 tax rates/brackets, and assumed no itemized deductions to keep things simple. He determined the income tax on an $8,500,000 salary would be around $3,320,000, or about 39.06%. Given the top U.S. federal marginal rate for 2015 and 2016 is 39.6%, this rate is in the ballpark as the top bracket for a single taxpayer is reached at $413,201 for 2015 ($415,051 for 2016).

A huge factor in calculating the income tax variance between the U.S. and Canada is there is no state personal tax in Florida. However, hockey players are taxable in the various U.S. states/cities where they play away games (which would likely push the average tax rate into the low 40s).

If Stamkos had decided to play for the Leafs in 2016 (again, assuming a neutral exchange rate for purposes of this discussion), his tax payable would have been approximately $4,510,000 and his average tax rate at 53.10% and his marginal rate at 53.53% (accounting for the increase in tax rates implemented by the Liberals). Thus, if Stamkos had decided to play for the Leafs, he would have owed approximately $1,190,000 more in income tax than in the U.S. and his average tax rate would have been 10-13% higher depending upon all the facts.

It is interesting to note that if the U.S./Canada exchange rate was $1.30 for his entire contract, Stamkos would have been neutral, from a purely cash flow perspective, in signing with Toronto.Yet, per this article, totally speculative and without confirmation, Stamkos supposedly wanted $14million to come to Toronto.

After reviewing the above, you now know why Stamkos and many other players must take into account the income tax considerations when deciding on which team and country to play.

Olympic Gold – Not Tax-Free

During the Olympics, The Globe and Mail ran a story written by Alicia Siekierska titled “It’s gold – for the taxman. In this article she noted that the Canadian Olympic Committee awards Olympic athletes with bonuses (wow, I never knew this. How un-Canadian to incentivize winning for our athletes :)  if they make the podium: $20,000 for a gold medal, $15,000 for a silver medal and $10,000 for a bronze medal).

The article discussed that the Income Tax Act paragraph 56(1)(n) considers only certain prescribed prizes as tax exempt. As noted in Income Tax Folio S1-F2-C3, “Section 7700 of the Regulations defines a prescribed prize as any prize that is recognized by the general public and that is awarded for meritorious achievement in the arts, the sciences or service to the public. It is a question of fact whether a prize is considered to have been recognized by the general public for purposes of section 7700 of the Regulations. In making such a determination, one should consider whether there is evidence suggesting a high level of public awareness of the prize and the extent to which the announcement or receipt of the prize is widely publicized by the media. For example, a Nobel Prize given to a scientist or the Governor General's Literary Award given to a professional writer would qualify”.

The article noted that the Olympics are not considered a public service and thus, the medal bonuses paid to athletes such as Penny Oleksiak and Andre De Grasse will be taxable.

The article quotes William Innes, a tax litigator with Reuters LLP. Mr. Innes states the CRA’s position on taxing Olympians prize money is “outrageous”. He feels winning an Olympic medal should fall under the service to the public section noted above. He goes on to say “I would think that the average man or woman on the street would hold that somebody getting an Olympic medal is providing a service to the public”.

For the Penny Oleksiak’s and Andre De Grasse’s of the world, this is probably a bit of a mute issue, as they will receive significant endorsement opportunities dwarfing the bonus money. But for the typical less high profile medal winners who do not have significant funding, it seems unfair they are taxed on their Olympic bonuses. You would think there would be some co-ordination in policy between the Olympic Committee and the CRA.

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.

How Not to Plan Your Estate!

Over the years, I have been involved with or been asked to assist with some "messed up" estates.  I often ponder how anyone who loved their spouse and/or children could ever leave their estate in such disarray?

So what is a "messed up" estate? Typically it involves:

• an outdated will
• transfers of family property in contradiction of the terms of the deceased's will
• terrible recording keeping
• investments in the wrong name
• missing tax information
• family members or second spouses, either threatening litigation or already having commenced such

Since so many people seem to ignore estate planning advice, I thought I would take a different tact and write an article on How Not to Plan Your Estate. My hope being, that if you read about the financial and emotional stress you can place upon your loved ones, you may take action.

I wrote this article during the Christmas holidays. I then asked Roma Luciw, The Globe and Mail's personal finance web editor, if she had any interest in this topic. She did and on January 15th, the article was published in The Globe and Mail business section under my byline.

If you did not read The Globe and Mail on Friday, here is the link to the article (The Globe changes the title for the online version if you were wondering). Thank you Roma for your editorial assistance and help in getting the article published in the paper.

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.

Overtaxing the Rich

Tim Cestnick of The Globe and Mail recently wrote a two-part column on how overtaxing the rich is counterproductive to the income tax system and Canada’s economy. Today you will receive my comments based on over 25 years' experience in dealing with high net worth people, when they perceive the personal income tax rate(s) to be excessive.

Tim’s first column used a parable (A parable is a story that illustrates one or more instructive lessons or principles) about ten men who go to dinner every night. The dinner bill was split based on our current marginal rate tax system, so four of the men paid nothing, the next five paid increasing amounts from $1 to $18 and finally the richest man paid $59 out of the $100 bill.

The restaurant owner decided to reduce the nightly bill by $20 because the men were such good customers. He also decided to reduce the individual bills on a proportionate basis such that the richest man saved $9 and the others, smaller amounts in the $1-$3 range. In Tim’s parable, the 9 other men were outraged at the savings the richest customer received and assaulted him. Obviously, the richest man stopped coming to dinner and the other nine men now had to come up with $50 more dollars for dinner.

Tim suggested that the restaurant owner was correct in how he divvied up the $20 reduction and that our tax system should provide the greatest relief in absolute dollars to those who pay the highest taxes.

He also suggested that should the Liberals come into power and follow through on their pledge to increase taxes on the rich, while reducing taxes on the middle class; that such an action would push the highest marginal rate past 50% and cause the rich to explore ways to bring down their tax burden and drive some to leave.

As soon as I read this column I had two thoughts.

1. This was a very innovative way to present the issue of taxes and tax cuts.

2. Tim was going to get a ton of negative comments about his viewpoint.

My second prediction was correct, as The Globe and Mail has received over 660 comments to date on Tim’s article.

Tim followed up his first column with a second column to address several of the various comments he received. Tim spoke to whether the rich will leave Canada over taxes and questioned if there is a psychological barrier to taxation over 50%.

I provide my thoughts on these two issues below.

The Rich Won’t Leave Over Taxes

Tim noted that Eugene Melnyk, owner of the Ottawa Senators moved to Barbados in the 1990’s to avoid taxes. According to David Macdonald of the Canadian Centre for Policy Alternatives; in his paper titled "Outrageous Fortune Documenting Canada’s Wealth Gap", 14 of Canada's wealthiest individuals reportedly no longer hold Canadian tax residency (see page 15 of the report).

The United States has also had several people leave for tax reasons, including Ken Dart of the Dart Styrofoam cup fame. According to this 2008 Los Angeles Times article,  Mr. Dart who renounced his U.S. citizenship in 1994, so incensed former President Bill Clinton, that the President would not attend a function with Mr. Dart.

Although I am not privy to every person who leaves Canada for tax reasons, I have had several very high net worth individuals threaten to leave Canada over the years. In each case, after looking into the income tax consequences of leaving (deemed disposition on departure of their capital assets), taking into account their family ties and lifestyle, they all stayed in Canada. I do concede my sample may not be representative of other accountants and my sample although containing some extremely wealthy people, does not necessarily contain the ultra-wealthy of Canada, who as reflected in the report above, may indeed move for tax reasons.

Although I personally don’t see the threat of the rich leaving Canada as a major concern, I agree with Tim when he notes “their capital is very mobile” and can be invested elsewhere in the world and that under the correct circumstances, can sometimes escape Canadian taxation.

The Psychological 50% Barrier

In Canada's two largest provinces, Ontario and Quebec, the highest marginal tax rates are now 49.53% and 49.97% respectively. Tim notes a psychological barrier is broken when tax rates exceed 50% and you are paying the government more than you keep resulting in a disincentive to work. In his second column, he quotes a high net worth taxpayer who says he does not need to work, he could stop anytime and that flow of taxes to the government would stop and not be replaced. This is very similar to the high earner in the parable.

Unlike the threat to leave Canada over taxes, which as I note above, often tends to be more grumbling than reality, my experience is that when you break the 50% barrier, entrepreneurs often do pull back by not investing in their current business(es) or by not making new investments in start-up businesses. The reality, whether you like it or not is; entrepreneurs and business people create the vast majority of jobs in Canada. They may need the skilled labour provided by the Canadian workforce, but in many cases, these “rich” businessmen can pull back with no impact to their standard of living, which certainly cannot be said by the average worker.

Often people who complain about the rich fail to consider the risk these business people took for their reward. If successful business people perceive the reward altered by the requirement to pay excessive tax, they may not want to open new businesses or expand current businesses. Many of my successful clients operate not just one business, but multiple businesses that create hundreds of jobs. These clients are habitual entrepreneurs and while for some (but definitely not all) their main objective may be to create substantial net worth for themselves, they create hundreds of new jobs in achieving their goals.

If we circle back to Tim’s comments, personally, I am not overly concerned that there will be a mass exodus fleeing Canada’s tax system if income tax rates exceed 50%. However, since I have already heard grumbling over the last year about the increase in personal tax rates, I do feel that should taxes exceed the psychological 50% barrier, there will be people who will try to utilize foreign jurisdictions to reduce their income tax burden and on the domestic front, cut back expansion of their current businesses and forgo aggressively pursuing new opportunities.

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.

How Your Birthdate Can Impact Your Financial Affairs and Retirement

Have you ever wondered if you had been born a few years earlier (or alternatively, a few years later), what effect it would have had on your financial affairs and retirement? I personally have pondered this issue; specifically wondering whether my housing and stock market returns would have improved if I had been born two or three years earlier.

Retirement

Based on my contemplation above, I was intrigued when I read a recent article by Ian McGugan in The Globe and Mail on the perils of early retirement, in which he noted that “there’s not much justice when it comes to retirement. Two people born a few years apart can follow identical investing plans and yet wind up with radically different results, simply because of the way the market performed over the course of their investing lifetimes”.

This issue of varying financial returns is known as “sequence of returns”. The sequence of returns you experience can cause a dramatic difference in your retirement funding, especially when you have negative market returns early in your retirement vs later in your retirement. This is because your portfolio’s value is reduced by both negative market performance and any withdrawals you take to fund your day-to-day expenses. However, based on the data discussed below, you also face a sequence of returns risk when saving for retirement, which is birth year, retirement year and market return correlated.

Those of you who read my six part series on retirement, “How Much Money do I Need to Retire? Heck if I Know or Anyone Else Does!” will recall I discussed the concept of sequence of returns in Part 5 of the series, when I talked about the various factors that can impact both the funding of your nest egg and your withdrawal rate in retirement. In that post, I discussed some comments made by Wade Pfau, a retirement researcher who has a Ph.D. in economics from Princeton and is currently Professor of Retirement Income at The American College and the Director of Retirement Research for McLean Asset Management and inStream. Wade has a popular blog, called appropriately, Wade Pfau's Retirement Researcher Blog .

In Mr. McGugan's article, he notes a new tool created by Wade that reflects variances during the accumulation phase of your retirement. The tool, called The Retirement Wealth Index, reflects how many years of income someone would have accumulated if they had started contributing 15 per cent of their salary to a balanced stock-and-bond portfolio at 35 and continued until they hit 65.

The Globe and Mail article goes on to say that “Prof. Pfau estimates that someone reaching 65 this year would have accumulated 10.7 times their annual salary by following the strict investing regimen described above. That's among the poorer outcomes of the past 20 years. In contrast, an investor who turned 65 in 2000 would have had more than 18 times their annual salary. Even in 2005, a new retiree would have built up a nest egg worth more than 14 times their salary.”

This empirical evidence supports my intuitive observation. What a difference your year of birth can make in your investing nest egg.

Housing

I don’t have any empirical evidence for the affordability of housing, but obviously based on the price of homes in Toronto, in which the average cost of a detached home recently hit one million dollars, it is a huge issue for many, especially younger people.

I have personally observed that similar to the sequence of returns for investing, even a year or two can affect your housing returns. When I look back at friends and family who had comparable financial situations to me, but were either two to three years older or two to three years ahead of me in purchasing their first homes, they always seemed to buy when the Toronto market was weak or stable and to always be selling when the market had risen (and I was buying). As a result, they leapfrogged ahead of my housing affordability simply by virtue of timing and/or date of birth and ended up in areas I could not afford (unless I was willing to take on substantial debt). Of course, I realize I should not be complaining, as my housing experience pales in comparison to today's generation who face a monumental challenge in purchasing a starter home.

I am grateful for where I am financially in my life (although I do have some regrets based on non-birthdate decisions). I do however feel, that my own stock market and home buying experiences re-enforces how the luck of your birthdate can impact your financial future.

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.

The Two Certainties in Life: Death and Taxes - Video Interviews

As I am talking death and taxes this week and next, I thought it apropos to post three interviews I recently had with Rob Carrick of The Globe & Mail on the topic. The links to my three video interviews are here:

Why both spouses must know their finances

What to put in an "in case I die” file

The tax implications of a spouse’s death

I would also like to thank Rob for selecting our video interview on “The costly TFSA blunder that people keep making” as the most popular personal finance video of 2014. The link for all ten nominees is here, starting at number ten and counting down to number one.

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.

Tax Planning Strategies to Minimize the Old Age Security Clawback

Question: How does an accountant enrage a sweet, mild mannered genteel grandmother?

Answer: Tell her some or all of her Old Age Security (“OAS”) payments were clawed-back on her tax return.

One lesson I have learned over the years is that whether a senior is a multi-millionaire or just well to do, they consider their OAS payment as sacred and any tax planning that causes even one dollar to be clawed-back may result in a tirade against their shell-shocked accountant.

I can only surmise that people feel they are entitled to so little in retirement related payments that they feel it is very unfair to have any of it taken away. I also think some people mistakenly think they have paid taxes to fund the Old Age Security program; however, that is a common misconception. The plan is funded out of the general revenues of the Government of Canada, which means that you do not directly pay into the OAS plan.

In any event, it is prudent for you and/or your accountant to plan to minimize any OAS clawback and that is my topic for today.

Old Age Security

The OAS is a monthly payment available to most Canadians 65 years of age (will gradually increase from 65 to 67 over six years, starting in April 2023). The eligibility requirements are here:

The maximum monthly OAS payment is currently $563.74 (October to December).

For 2014, you must reimburse all or part of your OAS pension if your net individual income exceeds $71,592 (including the OAS pension). The total amount of this reimbursement is equal to 15% of your net income (including the OAS pension) that exceeds $71,592. The full amount of OAS will be repaid when net income exceeds approximately $117,700.

Avoiding the Clawback

Split Income Election

For most people, the best income splitting technique available, and the most effective way to reduce your income, and thus reduce your OAS clawback, is to elect to split pension income (pension income includes most types of pension income, excluding OAS, CPP/QPP). The election is made by filing Form T1032, “Joint Election to Split Pension Income” with you and your spouse’s annual tax returns. CPP can be split also, but a request must be made to Service Canada (Pension sharing form ISP-1002A)

Income Sources

Not all income is treated equally. Only ½ of your capital gains are taxed, while interest income is fully taxable. Dividends are a strange animal as they are subject to a dividend gross-up (38% for public co. dividends) which causes your income to be increased. Thus, dividends can be detrimental for OAS planning purposes; however, the dividend tax credit tail should not solely wag the investment decision.

Holding Company

If you transfer your non-registered investments into a Holding Company (a rollover tax election form needs to be filed), you will no longer earn this income personally and you may reduce or eliminate your holdback. This sounds like a sexy solution, however it often comes with complications. First of all, you will most likely have to pay an accountant to prepare financial statements and tax returns, which will eat up around half your OAS savings. In addition, upon your death, or upon the death of your spouse if you leave your assets to them, you will have a deemed disposition of your Holding Company shares. That means your estate must pay tax on the value of your holding company at death. This may cause a double tax on death that can often only be alleviated by undertaking some complicated tax planning.

However, you may be able to plan around the double tax issue as discussed by Tim Cestnick in this article: 

To quickly paraphrase Tim’s plan; you transfer your investments into a Holdco and take back an interest free loan. Each year the Holdco declares a dividend to you equal to the full amount of the after-tax earnings of the company. It is important to note the dividend is payable, not actually paid. To cover your yearly cash requirements, you repay your interest free loan as required. Depending upon your financial situation and longevity, at some point the loan is paid off and the company then begins to actually pay the declared dividends, but this could be 15-20 years from now.

When you pass away, your heirs become the owners of the Holdco. The investments can then be distributed from the company in the form of the declared and unpaid dividends and may allow for some income tax savings. More importantly, the value of the company’s shares at the time of your death may have minimal value because the dividend liability owing by the company may be around the same value as the investment assets. This significantly reduces the double tax issue.

This planning is complicated and before you undertake Tim’s plan, you should consult your accountant to ensure the plan makes sense based on your personal circumstances.

A Holdco also is very effective if you have significant US assets, as the Holdco assets are not subject to US estate tax.

Finally, if you have a separate will for your Holdco (at least in Ontario) you can minimize your probate fees.

TFSA

If you have not maximized your TFSA, you should transfer non-registered money that is generating taxable income into your TFSA, to the extent of your unused contribution limit.

Alter Ego Trust

Alter Ego Trusts are special trusts that can only be created by individuals 65 or over. During the individuals lifetime they must be the only person entitled to receive the income of the trust and the individual creating the trust must be the only person entitled to receive the assets of the trust prior to the death of the individual. There is also a similar concept known as a “joint partner trust” with pretty much the same rules, for married or common law partners.

Where you have non-registered assets throwing off significant interest and dividend income that is causing an OAS clawback, it may make sense to transfer these assets to an Alter Ego Trust to reduce your clawback. Generally the transfer of these assets to the trust is tax-free.

However, since the income earned on these assets will be taxed at the highest marginal rate in the Alter Ego Trust, you have to consider whether the OAS clawback savings and other advantages (probate protection), outweigh any extra income tax costs (i.e.: is the extra tax payment a result of having all this income tax at the highest rate, less than the OAS you get to now keep by moving those assets into the trust).

I have outlined various strategies above that may be used to reduce your OAS clawback. However, I caution you; the complications and extra costs of some of these strategies need to be compared to the actual OAS savings they produce, as I have found that many clients over 65 want fewer complications in their life, not more. Consequently, you may face a tug of war between complicating your financial life or just accepting an OAS clawback.

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

The Costly TFSA Blunder & Playing With Matches - The 20% Matching Penalty

In general, I understand the policy reasoning behind many of the income tax legislative changes made by the Department of Finance (that does not mean I agree with all these policy changes). I also typically understand the rationale behind most of the CRA's administrative polices. However, there are four tax rules and administrative policies I cannot comprehend and are major pet peeves of mine. They are:

1. You can be penalized for re-contributing to your TFSA in the same year you withdrew funds. This rule may make administrative sense for the CRA, but when 75,000-100,000 people over-contribute/incur penalties each year, there is a problem with the rule in my opinion.
2. You can be penalized 20% of the income you did not report on a T-slip, even though the CRA has that information on hand.
3. The necessity to file a T1135 Foreign Income Verification Form to report specific foreign stocks that do not pay a dividend, even if they are held at a Canadian Institution (rule on hold for 2013, to be effective 2014, see last weeks post).
4. The fact the CRA has an April 30th personal filing deadline, yet many slips (T3, T5013) are not issued until the 2nd week of April (even though the deadline for those slips is March 31st). IMHO, the deadline to file all these tax slips should be moved up 15 days.

I was fortunate enough to be interviewed by Rob Carrick of the Globe and Mail on my first two pet peeves and was thus able to vent on a medium other than my BBC soap box.

The Costly TFSA Blunder 

Many Canadians continue to over-contribute to their TFSAs. Most of these over-contributions result because you take money out of your TFSA and then re-contribute those funds back in the same year. However, unless you have additional contribution room, you are not allowed to re-contribute those funds until January 1st of the next year.

As TFSAs have been promoted by the CRA and financial institutions as a savings account, where you can take money out and put money back in; the re-contribution rule is counter intuitive and a trap for many Canadians.

I discuss this issue and other TFSA related issues in this interview with Rob.

Playing With Matches- The 20% Matching Penalty

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

Under Subsection 163(1) of the Income Tax Act, where a taxpayer has failed to report income twice within a four-year period, he/she will be subject to a penalty. The penalty is calculated as 10% of the amount you failed to report the second time. A corresponding provincial penalty is also applied, so the total penalty is 20% of the unreported income. This penalty can apply even if you owe no tax!

To avoid the chance of this penalty, I strongly suggest you make a checklist of any T-slips you expect to receive and follow-up with any missing slips. You may also want to call the CRA in June or July and confirm with them all the slips their system is showing. You can do this with your "My Account"; however, not all slips are reflected online.

I discuss this insidious penalty and other income matching issues in this interview with Rob. 

Tax Tips for Dividend Investors

 

Rob interviewed me on a third, less controversial topic, that being tax tips for dividend investors. Please keep in mind the three points I discussed in the interview. When you prepare your tax return, you should have dividend income from the same companies as you reported last year, unless:

1. The company stopped paying dividends;
2. You are missing a T3/T5 slip - if so, please follow-up or you may be subject to the 20% penalty discussed;
3. You sold the stock - if so, you must report a capital gain.

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

Wealth & Estate Planning Missteps

Wealth & Estate Planning Missteps

To help you avoid parting with your wealth, I'd like to share my article (link here) that I wrote today for the Globe and Mail Online Personal Finance Tax Section titled "Want the kids to inherit the house? Avoid these common tax mistakes." This article deals with common wealth and estate planning errors parents accidentally make because

they lack knowledge or because they listened to a tip they picked up at a cocktail party. These missteps relate to real estate transfers, probate planning and inheritance issues.

I would like to thank Roma Luciw, the Globe’s personal finance web editor, for providing me with the opportunity to write this article during Financial Literacy Month.

Long time readers will be shocked that Roma was able to have me condense my originally submitted article to only 650 words. I really appreciated Roma’s editorial expertise.

Dream Job by Richard Peddie - Book Giveaway Winners

The two winners of the autographed copies of Richard Peddie's Dream Job book giveaway are Steve K. and Imelda L.You will be contacted by email to arrange delivery.

Thanks to all the people who entered the contest. I had several women who entered on behalf of their husbands or boyfriends, since they thought they would like the book. Very interesting, I wonder how many guys would enter on behalf of their wives or girlfriends if it was a women related book giveaway. Just saying :)


 

The BBC and the Globe and Mail

I would like to thank Roma Luciw and Dianne Nice of The Globe & Mail for featuring me in an article and online chat respectively this past Wednesday.

I really enjoyed Roma's article on Ten tax related things that leave Canadians stumped, as there are numerous income tax provisions and tax policy decisions that really leave one shaking their heads when preparing their personal income tax return.

Do you have any head scratchers in relation to filing your personal income tax return? If so, please provide it as a comment to this post. You will feel better venting and you may provide me with a topic for a future blog post.

Dianne and I discussed Tax Tips for Investors. There were some excellent questions. The link provides a recap of the entire chat. You may want to take a quick read to see if there are any answers that are relevant to your income tax situation.

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

Tax Tweets of the Day for the Week Ending March 8, 2013

My Twitter tax tips for this week are listed below. My twitter handle is @bluntbeancountr. That's it for my tax tips. I am done for this year. I hope there have been one or two tips that were beneficial.

Online Chat - Globe and Mail

I will be participating in a live online chat with Dianne Nice of The Globe and Mail on Wednesday March 13th at 12:00. The topic will be Tax tips for investors. The link to join the chat is here. Please feel free to join the chat and ask a question. Dianne is taking some questions prior to the chat if you wish to send in a question beforehand. Let me know if you are a reader of The BBC.

If you join the chat, I would appreciate questions that are reasonable to answer online given the time constraints as opposed to "Mark, I have a hedged account in Singapore in U.S. dollars on which I have covered calls in German Marks and I wish to monetize the account. Will it work?

Tips for Week of March 4 - March 8, 2013

If you have a Line of Credit for investment purposes, check your December, 2012 statement for a summary of interest paid in 2012 & claim the interest expense. #blunttaxtip

Did you own foreign property with a cost of over $100,000 at any time during the year? If so, file Form T1135. #blunttaxtip

Note: Check out this post on foreign income reporting by My Own Advisor.

If u sold a US stock in 2012, use the F/X rate from the yr of purchase to determine cost; use 2012’s average or actual rate for the proceeds. #blunttaxtip

Did you sell a REIT in 2012? Reduce the ACB by the return of capital from prior years. #blunttaxtip

Last tip of the year. Don’t file late no matter what! There’s a 5% penalty + another 1% per month up to 12 months. #blunttaxtip

Note: Even if you cannot afford to pay the tax due, file your return to avoid the penalties. You can usually make arrangements with the CRA to pay off your tax liability over time if you provide reasonable terms of repayment.

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

Newspaper Paywalls - The Future or the Last News Stand?

This is my last official blog post of 2012, (I will announce the winners of the book giveaway on Wednesday) so I would like to wish my readers a Merry Christmas and /or Happy Holidays and a Happy New Year. See you in January.

Newspaper Paywalls

Over the last few years, there has been a growing trend amongst newspapers to implement paywalls. Papers moving forward with paywall initiatives include such prestigious papers as the New York Times and Wall Street Journal. As described in this Wikipedia link, a paywall is a system that prevents Internet users from accessing webpage content, most notably news content, without a paid subscription.

I find this transition fascinating. The change falls somewhere in the middle of being a sustaining technology and a disruptive technology – if one could apply technological jargon to this situation. There are alarming similarities between the transformations the newspaper industry and music industry have been forced to undergo in the last 5 years or so. While the revolution in the music industry may have been more radical and accelerated, it is still similar in many ways to the changes newspapers have had to make in order to survive.

I see the following similarities between these two industries:

Music in many forms became freely accessible to the public (whether legal or not is another discussion). Many newspapers and other Internet sources have been providing free access to news, sports, and entertainment etc. for several years now.

The music industry could not stop/or unwillingly let the genie out of the bottle and Apple, via iTunes, capitalized by providing a low cost music option in the legal download world. Newspapers are now trying to shove their genie back into its bottle by creating paywalls and charging for access to online news. 

The entire newspaper industry seemingly overnight is battling a societal shift, in which consumers expect free online content and are very hesitant to pay for such information. It is interesting to note that in Toronto, two popular free newspapers, The Metro and 24 Hours, are owned at least in part, by the owners of the Toronto Star and Toronto Sun respectively.

The Globe and Mail (“G&M”) recently went to a paywall when it launched its Globe Unlimited digital subscription service for its Globeandmail.com website and apps. The other three Toronto papers have also announced paywall intentions for 2013. 

While paywalls result in extra revenue for newspaper companies (charging for online content or creating demand for hard copy subscriptions), that revenue is often negated at least in part, by a decrease in advertising revenue. According to this article in the International Business Times , the New York Times increased subscription revenue by 8% in its second quarter of 2012 including paywall revenue, but had offsetting advertising revenue losses of 7%.

This July, 2011 article reflects how the implementation of a paywall can radically decrease online traffic once it goes up (it is my personal uneducated opinion that these numbers are understated as many papers offer some free online content or allow for a certain level of free visits that distort the true loss of readership). I would have liked to have been a fly on the wall when the NY Times held their initial meetings discussing the business case of implementing a paywall. You can imagine a boardroom filled with marketing, accounting and newspaper people, all with different agendas and ideas, sitting around a table trying to figure out if they will lose 10% or 40% of their online readers and how many readers the paper will require to become paid online or newspaper subscribers to compensate for the immense loss they will incur in online and hard copy advertising revenue. The revenue discussion does not even account for the issue of whether the people who stop visiting your site once the paywall is established, will ever return to your site for any free online content.

As noted above, the G&M recently implemented a paywall. They used the following pay structure: G&M newspaper subscribers were granted free online access. Casual online visitors are allowed up to 10 pieces of G&M content per month for free, after which they need to subscribe to Globe Unlimited or they will not be able to access anymore articles for that month. A Globe Unlimited trial is available for 99¢ for the first month, after which the cost is $19.99 per month.

As a G&M newspaper subscriber, I have free online access. If I decided to stop my newspaper subscription, I would pay the $19.99 per month. However, I am an avid newspaper reader for both personal enjoyment and because I need to stay abreast of what is happening financially because of my blog and profession. However, I am not sure in this day and age of free content that everyone feels the same. It will be interesting to see how the various Toronto papers’ paywall implementations are accepted or rejected by their readers. Their reaction will shape those newspapers and the Canadian newspaper industry for a long-time to come; or possibly a short-time to come, for those with less than compelling online content.

P.S. For those visually inclined, check out this interesting infographic on paywall trends.


Image source: www.bestcollegesonline.org

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

How Not To Move Back In With Your Parents - Book Review and Giveaway

Rob Carrick of the Globe and Mail is one of my favourite finance writers. Back in March, he had the audacity to release his latest book, How Not To Move Back In With Your Parents, during income tax season. As such, I wasn’t able to read the book until recently, but, as they say, better late than never. Rob has been kind enough to provide me with two copies to give away to readers (see the details at the end of this post).

The book is promoted on Rob's website as a book that speaks not only to late teens and 20/30-somethings, but also to their parents. Rob states “There’s a lot parents can do to help their kids develop good financial habits, and to strategically assist them as they graduate, move into the workforce and start a family”.

As a father of a 22 and 20 year old, I was intrigued by the book’s premise.
I just finished reading the book and quite enjoyed it. Rob is blunt (a trait I certainly admire) and I really appreciate his no-nonsense, give it to them straight-up approach in providing advice to both parents and their children. While his approach would seem to resonate with parents of my generation, Rob also seems to have a finger on the pulse of the younger generation, which is reflected in his humorous and informative case studies.

Personally, I think Rob may be slightly ambitious with his dual objective of speaking to parents and young adults. It is not that I don’t think he does an excellent job in reaching both audiences; I am just dubious that the younger audience will take heed until they have made many of the mistakes he tries to save them from. I know that when I try to give my son financial advice, it is like talking to a wall, a wall that has eyes that roll up and down and I know a little bit about finances. Hopefully, I am wrong and young people have/ will embrace this book, because it is definitely an excellent guide for them.

Chapter Outline

Below is a chapter summary. I have noted my favourite comment Rob makes in each chapter. I just find them insightful, practical and several caused me to chuckle.

Chapter 1: Affording College or University – “Unless your parents are okay with you being loaded down like a mule with student debt, they should be paying as much attention to RESPs as to TFSAs and RRSPs”.

Chapter 2: How to Handle Debt, Both in School and Afterward – “Shrewd handling of credit is one of the things that defines a financially successful person”.

Chapter 3: You and Your Bank – “Banks are basically stores that offer financial products for sale. They are in business to sell you stuff, not to be your adviser, your partner or your friend”.

Chapter 4: Saving, Budgeting and What to Do if You Have to Move Back Home – “A little parental support at a key moment can help position you for a lifetime of success”.

Chapter 5: Looking to the Future: RRSPs and TFSAs – “A moderate, steady approach to retirement saving is the best present you can give your future self”.

Chapter 6: Mobility: Or, Cars and You – “Stay car-free as long as possible after you graduate”.

Chapter 7: Buying a Home – “Renting can be the shrewder move than buying if you cannot properly afford the full cost of buying and owning a home”.

Chapter 8: Weddings and Kids – “Arrange the best wedding you can afford”. Also, I could not resist this nugget on engagement rings that probably alienated half the females reading the book: “Men, don’t buy that crap about spending 3 months’ salary – spend what you can afford and remember that you can always buy a nicer ring later on as an anniversary present”.

Chapter 9: Insurance and Wills – “Young adults starting a family have a lot of expenses and term life is the most economical way to provide for a family in case of disaster”.

I am going to give away one free copy of Rob’s book to both a young adult and a parent. To enter the book giveaway, in the comment section below, please provide your first name and the first initial of your last name and identify yourself as a parent or young adult. Then, either provide a comment on the blog post, or give me your best financial tip for a young adult from a parents perspective; or if you are a young adult, the best tip you would give to another young adult. For my more social savvy readers, you can tweet your comments to me, including the hashtag #BluntBC. I will announce the two winners next Wednesday on my blog and twitter account.

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

The Globe and Mail - Let’s Talk Investing Interviews

I would like to thank Rob Carrick of The Globe and Mail for interviewing me for the “Let’s Talk Investing” series. I link the three interviews below.

Following the first interview (Why you should give your Kids their Inheritance while you’re Alive), my so called friends and family let me know that I had a face and personality made only for blogging, and offered to buy me media training for my next birthday present. I dejectedly stated in a weak defence, that I did not have any takes in any of the interviews, and I should at least be given credit for that. They did not buy that, but I did not expect much mercy.

However, the reviews for my second (How to keep the Kids from Fighting over your Will) and third interviews (Your Inheritance and the Taxman) where much more positive, so much so, that I was offered a TV series to be called The Blunt Bean Counter Gets Blunt.

Just joking about the TV series. The interviews were a fun experience and I had a great lunch with Rob, lamenting the fact we are both long suffering Maple Leaf fans.

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