The Top 10 Estate Planning Mistakes

I think it is fair to suggest, that most of us wish to plan our estates to minimize any income tax and probate fees owing upon our passing. Yet, many of us do not seek professional assistance to deal with the various technical income tax, probate planning and "soft family" issues that must be considered when dealing with our estates.  As such, we often end-up eroding our estates because of unanticipated tax obligations and significant legal costs when family members litigate the estate. Today, Neil Milton an estates expert discusses the Top 10 Estate Planning Mistakes he observes in his practice.

The Top 10 Estate Planning Mistakes

By Neil Milton

There are many widely held myths and misconceptions about wills, probate and estates. These myths and misconceptions lead to estate planning mistakes. These mistakes can cause a lot of damage – both to your wallet and to relationships with family members. In this blog we have gathered 10 of most common and yet easily avoided estate planning mistakes.

1. Not Having a Will

The rules for how an estate is divided in Ontario when there is no will (intestate succession) can have some shocking consequences. Remarkably few people are aware that if you die without a will:

• Your common law spouse inherits nothing. Zero. (They might have a claim for support, but that is a very different thing).

• If you are separated but not divorced from a spouse, your legally married, they will inherit the bulk of your estate (The first $200k + a healthy chunk thereafter).

• If you are legally married and not divorced, your parents and siblings get nothing.

• If you have ‘step children’ that you have not legally adopted, they get nothing.

Everyone adult should have a will. If you do not have a will, get one now (74% of Canadians do not have an up-to-date will).

2. Do It Yourself Wills

Sure you can save $500 by doing your own will, but that does not mean you should. You can also do your own dental surgery. For both wills and dental work, the results of DIY are rarely satisfactory and often very expensive to fix.

3. Joint Accounts to Avoid Probate Tax

Do not put your investments or bank accounts in the name of one of your adult children to avoid probate tax without proper advice. You may save probate, but you may trigger significant income tax consequences. In addition, you may create a lot of grief and legal fees to fix the mess where the child whose name you put on the account, claims it for their own and the other children sue.

4. Joint Ownership of Houses to Avoid Probate Tax

Do not put one of your adult children on title to your house (“joint tenancy”) to avoid probate tax without very careful proper planning and documentation. You can create income tax issues and unless you document in writing your intention to give the house as a gift to that child to the exclusion of your other children, you do not save probate tax and you create lots of misery and a legal fee bonanza.

5. Assuming Your children get Along

Do your children really get along? Are they really facing similar financial circumstances and stresses? Many children have serious issues with their siblings. Do not assume that just because they are your children that they trust or work well with each other. This is particularly relevant to your choice of executor.



6. Choosing an Executor who is Not Up to the Job

Being an executor is a difficult job, not an honour. Good executors are a rare breed. They are prudent but decisive, can handle conflict (especially among beneficiaries), are attentive to detail, communicate well, are financially savvy, enjoy accounting and taxes, and must complete, send and receive many letters and forms. An ideal executor is tech savvy, and can scan, print, and email at will.

Your favourite caregiver may be a wonderful person, but that does not mean they will be a good executor. Being an executor is a hard job and you should provide for reasonable compensation (“pay peanuts, get monkeys” applies here). Also consider aging – your executor must be able to perform when the time comes, which may be a long time from now. At the very least, you should have an alternate if the primary choice is unable to act.

I strongly recommend that you consider using a professional to handle this complex job at a pre-agreed fair rate of compensation (which does not have to be a flat 5%).

See Mark's post on the duties of being named an executor for more information.

7. Putting Your Executor in a Conflict of Interest

Enormous trust is placed in an executor, and it is very difficult to force an executor to act at all or decently. If you do not trust someone absolutely to behave quickly, properly and fairly as between all beneficiaries, do not appoint them at all. Too many executors have massive conflicts of interest between their interests and the interests of other beneficiaries, and these conflicts were created by the testator.

For instance, if one child lives with you in your home, and you name that child your executor, they have a clear conflict between their desire to stay in the house as long as they can and to avoid paying rent, versus their obligation to sell the home and distribute the estate. It is unfair to them and the other beneficiaries to put them in this awkward spot – choose an executor without a conflict of interest.

8. Hedging Your Bets With Multiple Executors

Being an executor is a hard enough job without having to chase a co-executor for approval and signatures on everything. In most cases you should choose one person as your primary executor, and name an alternate. Do not name co-executors because you don’t trust one or you are too indecisive to choose between them.

9. Not Thinking Gifts Through or Keeping Them up to Date

Just because someone is your child does not mean that they will outlive you. You need to plan for contingencies. Similarly, if you appoint someone a trustee of funds for a minor child, make sure that they are willing and able to handle the task, and will be able to for the duration of the trust – if a trust for a child might last 20+ years, do not name someone who is already in their 70s as the trustee.

10. Not Giving Enough Away Sooner or to Charity

Gifts of things or experiences to your loved ones (to support their education, or travel for instance) while you are alive often have a much bigger impact on the recipients than lump sums of cash when you pass away (See Mark's blog post on Family Vacations. Meaningful gifts to mark milestones like graduation often get remembered much longer than cash inheritances. See Mark's blog post on Family Vacations for how meaningful and fulfilling a family vacation can be.

Even modest gifts to charity can have a big impact on the intended charity. Gifts to charity teach your values to your family. Also, a gift to a charity can create a legacy that is shared among your survivors giving them a common bond and remembrance of you that the same amount of cash, divided among them as inheritance, can never have. Lastly, there are tax benefits for gifts to charity.

Estate law is complex because life is complex. There are often many options, and choosing the options that are best for you and your family depends on your unique circumstances. We strongly recommend that you get advice from an expert in the field who can help you weigh the options, choose a desired outcome, and get there efficiently.

Neil Milton is an experienced estates lawyer who advises estate trustees (executors) and beneficiaries on all aspects of probate, guardianship, and estate administration, and helps resolve estate-related disputes. Miltons Estates Law has offices serves clients across Ontario from offices in Ottawa and Toronto, and provides a wealth of free information and eBooks on its website www.ontario-probate.ca. Feel free to contact Neil directly at nmilton@miltonsip.com or 1.866-297-1179 ext 224

Please note that this post is based on Ontario law. If you live outside of Ontario, it is strongly recommended that you consult with an estates lawyer licensed to practice in your province.

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

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.

Five Ways to Make a Charitable Donation

On Monday, I vented about the First-Time Donor’s Super Credit, an income tax program created to incentivize Canadian’s to make charitable donations. Today, I get off my soapbox and discuss alternative ways to make charitable donations and the related income tax consequences.

Cash Donations

Where an individual makes a charitable donation of cash, there is a federal non-refundable tax credit of 15% on the first $200 of donations. For donations in excess of $200, the non-refundable tax credit increases to 29%. In addition, the provinces provide provincial tax credits. In Ontario, for many people, the actual tax savings for a donation will range from approximately 40% to 46% of your actual donation, for any

donations in excess of the $200 limit.

Thus, for many Canadian’s, the tax credit obtained when making a donation is close to almost one-half of the actual donation made; not a bad tax savings vehicle, especially when you factor in the altruistic aspect of helping those less fortunate than you.

Donations of Public Securities

If you incur a capital gain on the sale of a stock or bond, the income tax rate on that gain at the highest marginal income tax rate is approximately 23%. However, if you donate securities, such as a stock or bond, listed on a prescribed stock exchange, the taxable portion of the capital gain is eliminated and the net after-tax cost of the donation is reduced substantially.

For example, if a high rate Ontario taxpayer (not super-rate) sells a stock for $3,500 that has an adjusted cost base of $500, they would owe approximately $700 in income tax on the capital gain the following April. If they donate the gross proceeds of $3,500, the donation would result in income tax savings of approximately $1600 when they filed their return next April. The net after-tax cost of the donation is $2,600 ($3,500 value of shares/donation less the $1,600 donation tax savings plus the $700 capital gains tax)

However, if the taxpayer donated the stock directly to a charity, the organization would receive $3,500, the taxpayer would receive a refund of approximately $1600 and they would owe no taxes on the capital gain, making the net after-tax donation cost only $1,900.

Clearly, where you have a stock or bond you intend to sell and you plan on donating some or all of the proceeds;  a direct contribution of the security to a charity is far more tax efficient.

Donation of Flow-Through Tax Shelters

Prior to March 22, 2011, you could also donate your publicly listed flow-through shares to charity and obtain a donation receipt for the fair market value of the shares. 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 very complicated), if you paid $10,000 for any post March 22, 2011 flow-through shares, only the gain in excess of $10,000 will now be exempt and the first $10,000 will be taxable.

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

Donations on Death

Many people are hesitant to make substantial donations while alive, as they are concerned they may require those funds to pay for medical care or to cover their day to day living expenses. However, they fulfill their altruistic wishes by making a large donation(s) on their death. In general, donation bequests made in your will are deductible on your final terminal tax return, with no limitation. The requirements for supporting these donations can be found on page 16 & 17 of the CRA guide, T4011, Preparing Returns for Deceased Persons 2012.

The guide says “Support the claims for donations and gifts with official receipts that the registered charity or other qualified done has issued, showing either the deceased’s name, or the deceased’s spouse’s or common-law partner’s name".

Your executor can also claim charitable donations made through your will as long as they can support the donations. The type of support you have to provide depends on when the registered charity or other qualified donee will receive the gift:

•  For gifts that will be received right away, provide an official receipt.

• For gifts that will be received later, provide a copy of each of the following;

- the will
– a letter from the estate to the charitable organization that will receive the gift, advising of the gift and its value; and
– a letter from the charitable organization acknowledging the gift and stating that it will accept the gift.

Private Foundation

Private Foundations are beyond the scope of today’s post, although, I may discuss this topic in the future. However, for purposes of today’s blog post, I just want to note that wealthy individuals may wish to consider the use of a private foundation. These foundations are typically funded with a large initial charitable contribution (which is a creditable charitable donation as per the general discussion above). The foundation is often formed to create a sense of family philanthropy and donation decisions are often made as a family. Foundations are heavily administered by the CRA and must abide by a number of tax rules, including minimum donation disbursement requirements.

Your Time

If you give your time and effort to a charity, you cannot receive a charitable donation for your time or any services your provide (see this link). Therefore, I have not included time as of the five ways to make a charitable donation. However, in many ways, it is the best charitable contribution you can make. As someone who has been a Big Brother, granted wishes to various children through the Make-A-Wish program and been on other charitable boards, giving of your time can be very self-satisfying, while helping others in need. Whether you make cash contributions or not, you should consider giving your time and effort to your favourite charity.

As I circle back to my post on Monday, in my opinion, the income tax benefits already in place and the satisfaction of helping others in need should be sufficient incentive to make a charitable donation. We should not require a “super credit” to consider making a donation in the first place. But as I stated, if this credit helps even a few people get in touch with their more charitable sides, then I can’t fault it.

 

Charitable Giving - The First-Time Donor’s Super Credit - Why is it Necessary?

In August, Preet Banerjee of the Globe and Mail wrote an article titled “A super (secret) way to quadruple your charitable giving”. The article discussed the income tax benefits of the new First-Time Donor’s Super Credit (“FDSC”). While I applaud any charitable giving, I find it very sad that because of a shrinking donor pool; the government had to create such a program to entice Canadians to make their first charitable donation since 2007, or in some cases their first donation ever!

According to this CBC article, Canadians are one of the most generous nations in the world, yet “from a high of almost 30 per cent in the early 1990s, the proportion of taxpayers claiming charitable

donations on their tax returns had fallen to 23 per cent by the 2011 tax year.”

As Preet describes in his article, the FDSC was announced in the 2013 Federal Budget and is effective from March 21, 2013 to December 31, 2017. Essentially, this new credit is available as long as neither you nor your spouse or common-law partner has claimed a charitable credit since 2007 (Note: if you made a donation but did not claim it, you are still eligible).

For income tax purposes, the first $200 of charitable donations qualify for a 15% credit and any donations in excess of $200 qualify for a 29% federal credit. The FDSC increases those federal credits by an additional 25% on all donations claimed to a maximum of $1,000.The provinces also provide charitable tax credits, however, they vary by province.

The CRA provides the following example of the FDSC from a federal perspective where you make a $500 donation:

First $200 of charitable donations claimed:	$200 x 15% =	$30
Charitable donations claimed in excess of $200:	$300 x 29% =	$87
First-Time Donor’s Super Credit:	$500 x 25% =	$125
Total FDSC and CDTC:		$242

This program would appear to make some sense in the context of students entering the workforce or those who have endured hard economic times and have not had much if any discretionary income to make charitable donations. However, a lower income is not necessarily a deterrent to making charitable donations. Over the years I have often been asked to prepare a caregivers tax return by their employer; often the caregiver has made substantial donations and sometimes donated a significantly greater proportion of their income than their employer. 

Based on the number of charitable requests I receive from friends, family and associates for every biking and running charity event, I find it almost inconceivable that most people have not been "guilted" into at least one donation since 2007. You would think most Canadians would almost have no choice but to make a donation or two a year just from family and religious expectations.

Over my 25 years as an accountant, spanning various firms, I have worked with clients making hundreds of thousands of dollars if not millions of dollars. These clients often make so many donations and have so many donation receipts, that we cannot staple their tax returns. Yet, one particular firm I used to work for, for some reason had several clients whose charitable donations consisted solely of a single donation of say $100 or a few small donations which I found shocking given their financial resources. I have a hard time accepting there could be people in the top 1% of earners in Canada potentially claiming the FDTC.

Believe it or not, I have had the occasional client complain to me about how much tax they have to pay. Where they make minimal charitable contributions, I may inform them in as nice a way as a Blunt Bean Counter can, that they are missing the best tax planning vehicle around, the donation tax credit you receive when making a charitable donation. Sometimes this awakens their charitable giving and sometimes not.

I had not given much thought to the FDSC until Preet’s article. But when I read the article, I couldn’t help thinking that it is absurd for a country as prosperous as Canada to require such a program, when we already have such a generous donation tax credit scheme. However, if the program changes even a few people’s charitable behaviour, than I guess it has to be considered a success. Wednesday I will discuss some alternative ways to make charitable donations and the associated tax advantages.

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.

A Butterfly Garden- One Child’s Wish

As I noted in my Bloggers for Charity wrap-up on Monday, the Make-A-Wish® Foundation of Canada is my favourite charity. Make-A-Wish® grants wishes for children with life-threatening medical conditions and is the largest wish-granting organization in the world.

Today I want to tell you about Rachel, a special girl who was the recipient of a “Wish” and is now a tremendous Wish Ambassador for the Make-A-Wish® Foundation. In addition, I want to draw attention to Rachel’s volunteer wish grantor to provide some perspective on the Make-A-Wish® wish granting process and possibly provide incentive for readers of this blog to become Make-A-Wish® supporters. Being a wish grantor myself, I can tell you that not only is the wish unforgettable for the wish child, but that the experience of assisting in granting a wish is incredibly satisfying.

It is very important to understand that privacy and confidentiality are the cornerstones of the Make-A-Wish® Foundation and that Rachel and her family have provided permission for her name and picture to be used by Make-A-Wish® and for this blog. Permission has also been obtained from the wish grantor for use of their comments. Some Make-A-Wish® children and their families prefer not to have any publicity around their wish and experience, which is always respected.

To give the wish granting process some context, I am going to talk about Rachel’s magical wish for a Butterfly Garden from the perspective of her wish grantor, and from Rachel’s perspective based on a speech she wrote for a recent Make-A-Wish® event, so please excuse any choppiness.

Volunteer Wish Grantor: When we first met Rachel and her family we knew that this was going to be a very special wish. Since being diagnosed with cancer, Rachel has been an inspiration to other children suffering life threatening illnesses. She wrote a book about her experience with cancer called “I can, eye can.” In her book she talks about her passion for animals and her dream of one day becoming a veterinarian.

We were immediately welcomed into her family’s home. During our first visit, Rachel eagerly showed us her backyard and told us about all the plants she wanted in her butterfly garden. Rachel was not only a bright young girl, but she also demonstrated an innate creativity and passion for wildlife. Rachel presented us with a “Butterfly Diagram” which depicted, in great detail, all the components of her dream garden including a pond, bicycle path, swing set, and lush plants to attract a variety of butterfly species. Rachel’s love for butterflies was evident very early on!

Rachel loved to spend time outdoors and most of our visits included burying each other in leaves and pushing Rachel on her swing set. We accompanied Rachel and her mom on a trip to the zoo for the Make-a-Wish® Scavenger Hunt. After an exciting day of looking at the animals, we asked Rachel what her favourite part of the day was and she excitedly replied, “the butterfly garden of course!”

Wish Child, Rachel: When my mom told me I had a deadly cancer called Ocular Melanoma and I would have to have my left eye removed, I was almost 5 and I was devastated.

But one day my mom and I were walking home from school when I spotted five yellow caterpillar machines parked in front of our house. I was speechless. And that’s when my wish for a butterfly garden began to come true.

A job that normally takes months to complete took only five days because of all the incredible volunteers who helped. They tore down our old deck and replaced it with a beautiful stone terrace. They arranged boulders around the yard, and planted flowers, decorative grasses and other wonders.

When it was almost done I looked at the faces of all those people and I was so grateful. And I remember telling them, “I may not know all your names, but I’ll never forget you.”

And so today I’ll say it again to you. I may not know all your names. But I’ll never forget you.

Thank you for helping wishes come true for kids who know what it’s like to have a life-threatening illness. Kids like me.

Volunteer Wish Grantor: When we shared the news with Rachel and her family that her wish was going to come true, her parent’s eyes filled with tears of excitement and Rachel ran laps around the living room. Rachel was going to receive the garden she’d dreamed of. The months that followed were exhilarating. Rachel was ecstatic to be involved in the planning of her garden, especially the opportunity to accompany a landscape designer, in picking out the plants for the garden. As volunteers worked tirelessly, that warm weekend in September, Rachel eagerly joined in. She assisted the volunteers with a variety of tasks from laying sod to planting flowers. Rachel loved to be given special projects to work on! There were many tearful moments as the family expressed their gratitude for the devotion of the volunteers who worked tirelessly to create a magical garden for Rachel. Since the completion of her butterfly garden, Rachel has spent much time playing outdoors with friends.

If you would like to donate to the Make-A-Wish® Foundation to support more magical wishes in 2012, please click this link, if you would like to learn more about volunteering, click this link.

Make-A-Wish® and Rachel recently worked together to achieve a Guinness World Records Title for Largest Human Star. Click here to see a video with Rachel being interviewed by Susan Hay of Global News and more information from the event and record itself.

Not all children choose to be front and centre like Rachel when speaking about their wish experience; however, all children who have wishes granted have unforgettable wish experiences that let them temporarily escape their current medical concerns.

For more information about Make-A-Wish® please visit: http://www.makeawish.ca/

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.

Bloggers for Charity

Bensimon Byrne one of my firm’s clients and a very successful advertising agency, deserves recognition for raising almost $100,000 for the United Way over the last four years. Every November they have a variety of events to fund raise on behalf of the United Way. One of the events includes an auction where friends, clients and suppliers of the firm donate services or goods that are then auctioned off.

Our firm having no goods to offer donates services; last year bidders could win a free tax planning and wealth meeting with yours truly, one of the most prized auction items :). This year, I considered auctioning off a free Guest Blogger spot on my blog, which got me thinking, why not have other bloggers do the same thing Canada wide, to raise money for charity?

I have thus enlisted the help of five of the best known financial bloggers in Canada; Boomer & Echo, Canadian Capitalist, Michael James On Money, Canadian Finance Blog and the Retire Happy Blog. Each of them have agreed to participate in Bloggers for Charity (see downloadable badge below) and tomorrow will nominate five other bloggers to join the Blogger for a Day effort. All bloggers, should feel free to join the effort (this initiative is not limited to financial bloggers) whether nominated or not and encourage their blogger contacts to join the Bloggers for Charity initiative.

For my readers, I know many of you have latent writing aspirations, so please feel free to bid and let the writer in you free. Please send your bid to my email at bluntbeancounter@gmail.com.

Here are the so-called rules:

1. Each blogger will auction off the opportunity to write a guest post on their blog.

2. All bids will be made in confidence to the blogger’s email account. The blogger at their discretion can email back bidders the current top bid or note the amount of the leading bid on their blog to encourage bidding.

3. The auction will close on December 16, 2011. The blogger will notify the winning bidder by email.

4. The winning bidder will be required to send the blogger a copy of a donation receipt, dated between December 17th and December 31st (personal information can be blacked-out) to confirm the donation has been made. (This donation will be tax deductible to the winning bidder as long as the donation is made to a registered charity).

5. For unanimity amongst bloggers, it is suggested that January 17, 2012 be the date all the Blogger for a Day posts are posted.

6. The winner can write a post on any topic (subject to censorship by the particular blogger), although in the spirit of the contest, it would be great if the winning bidder wrote about a charity or charitable experience, but that is not a requirement. The only rule is that the guest post cannot be a marketing piece. However, at the bottom of their post, the guest blogger can provide their name, name of their company and a brief description of their company and its products. Alternatively, the guest blogger can remain anonymous.

7. All bloggers who participate are asked to email my assistant Lynda at Lynda@cunninghamca.com to note their participation and then to email Lynda with their winning bid so I can tally the donations received. All individual donation totals will be kept confidential.

8. Bloggers participating in the Bloggers for Charity initiative can download a badge (see below) to denote their participation.

9. All participating bloggers will be noted below as they join the initiative.

LIST OF BLOGGERS


Boomer & Echo                           Canadian Capitalist

Michael James On Money            Canadian Finance Blog

Retire Happy Blog                        Financial Highway

Canadian Financial DIY                Where Does All My Money Go

Young and Thrifty                         Canadian Personal Finance Blog

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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.

My 7 Links Project

Jim Yih of the Retire Happy Blog, who has acted as an informal mentor to me, recently nominated me to take part in the My 7 Links Project started by Katie at Trip Base.

The purpose of this project is to assign seven of your blog posts to each of the seven categories below, and then nominate five other blogs to do the same. This project was actually an interesting little mental exercise. Anyways, without further fanfare, here are my seven links:

Most beautiful post

An income tax and money blog does not lend itself to beautiful posts. However, if I must, my blog about creating your Bucket List (this blog is at the bottom of my Sign that Will blog) wins my beauty contest for its discussion. Though not necessarily beautiful in its own right, a bucket list may lead to beautiful adventures and beautiful places.

 

Most popular post

Easily my most popular post is: CRA Audit - Will I Be Selected? The title says it all. This blog discusses the situations in which one may be selected for an audit both on a personal and a corporate level.

Most controversial post

The Kid in the Candy Store: Human Nature, RRSPs, Free Cash and the Holy Grail examines whether RRSPs are the holy grail to Canadians, an assertion disputed by well known financial writer Jamie Golombek of CIBC. What made this post cool to me, was that Mike Holman of Money Smarts picked up this theme and wrote an excellent blog titled Canadians Are Not Withdrawing From RRSPs At An Alarming Rate.

Most helpful post

Dealing with the Canada Revenue Agency and Dealing with the Canada Revenue Agency Part- 2 were very practical blogs about dealing with the CRA under various circumstances.

 

Post who’s success surprised you

I thought my post Intergenerational Communication Gap was a bit too philosophical to be successful, but it garnered some attention. It, deals with the fact the older and younger generations do not communicate with one another about money.

A post that didn’t get the attention it deserved

My post on Probate Fee Planning-Income Tax, Estate and Legal issues to consider has picked up over the last little while as far as reads are concerned, but I don’t think people appreciate how difficult it was to merge the various issues of probate into one comprehensive blog. The blog covers income tax issues, joint ownership and right of survivorship issues, legal precedents, the question of legal versus beneficial ownership of property and the legal concept of evidence of intention. All these topics have been discussed before, but I could not find any blog that brought them all together in one place. In order to do this, I had two lawyers review the blog for accuracy.

Post that I am most proud of

This is easy. My post titled Resverlogix, A Cautionary Tale wins this category hands down. Although writing this blog was cathartic, it relayed a very interesting story detailing the ups and downs of investing in one specific stock and putting too many eggs in one basket and how I tried to protect myself in case those eggs cracked or in my case, splattered.

Blogs I nominate for 7 Links

As the 7 Links Project has now been around for a while and I have lost track of which bloggers have taken part, I nominate all the bloggers on my Blog List to participate if they have not yet done so (I know many have already done so). However, I do not seem to recall seeing a 7 Links done by the Canadian Capitalist, Michael James on Money and Money Smarts, nor did I find one when I did a quick search on their sites. Since I am sure they have been nominated numerous times, I either missed them or they have decided not take part. If it is the latter, I urge them to reconsider as they are 3 of Canada's best blogs and would have some great links.. 

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.

For Income Tax, “If It Seems Too Good To Be True... It Probably Is.”

Jeff Gray of the Globe and Mail recently wrote an article titled “Lawyers targeted over charity tax schemes”  which reported on a court case in which a tax lawyer who provided a comfort (opinion) letter in connection with a charity tax shelter scheme is being sued. The article noted that this is but one lawsuit levelled against legal firms in relation to charity and other income tax schemes.

In my opinion, this article raises three distinct issues. First, what is the responsibility of the tax accountants and tax lawyers who provide comfort letters? Second, what is the culpability of the financial advisor in recommending the charity scheme? And finally, should an individual be expected to recognize a tax scheme that seems too good to be true?

With respect to the accountants and lawyers, without being self-righteous, our firm has never promoted income tax shelters nor condoned the purchase of such by any clients, with the exception of certain types of flow-through share investments.

I suspect that the comfort letters Gray discussed in his article most likely interpreted the income tax law correctly from a technical perspective; in other words, the lawyer likely concluded that the tax benefits being promoted were in line with the specific relevant provisions of the Income Tax Act, although in this case, they may have been the "shades of grey" provisions. The Canada Revenue Agency (“CRA”), however, felt that the tax shelter was a sham and denied the benefits to the individual participants. The issue (according to the article) before the courts in relation to the lawyer is whether there was negligent misrepresentation on the part of the lawyer issuing the comfort letter. The plantiffs' argue the lawyer breached “the standard of care of a senior tax lawyer” for his legal opinion on the scheme and for allowing “comfort letters” from him to be included with its promotional materials?

I am not aware of the specific facts of this case, and as a non-lawyer I have no idea if any or all five general requirements for negligent misrepresentation have been breached. Thus, I have no intention of commenting on the legalities of the case. In addition, in this situation you can call me the “Wimpy” Bean Counter as I am constrained by professional conduct rules as to what I can say about other professionals. I do however query how income tax shelters such as this can be mass marketed to anyone other than accredited investors if accounting firms such as mine, see red flags immediately?

The second issue is also somewhat concerning. One would hope the advisor in this case clearly communicated the obvious risks of this scheme and the fact that he would receive a commission for selling this tax shelter. Let’s hope the commission for selling the tax shelter investment did not influence or have any effect upon his recommendation. However, when a declaration must be signed stating that the participant is aware the tax shelter scheme may be re-assessed by the CRA, one has to wonder how any advisor could recommend such a tax shelter to the average investor?

In regards to the individual’s responsibility, I wrote about this issue in my June 14th blog titled Income Tax Planning - Tail Wagging the Tax Dodge. In this blog I discussed how I have seen many taxpayers blinded by income tax savings to the detriment of their common sense.

In the Globe and Mail article, Mr. Gray stated that Fern Delarosbil, a project management consultant in 2003 purchased the tax shelter as recommended by his financial advisor. For every $2,500 Mr. Delarosbil gave to a designated charity, he would get a receipt for $10,000. Although I have some sympathy for Mr. Delarosbil and others like him, since they apparently relied on the comfort letter and their financial advisor, when does individual responsibility rear its head?

I grant you Mr. Delarosbil is not an income tax expert and his financial advisor suggested he participate in this charity scheme, but did he not see any red flags? Did he not wonder why in this case he would receive $4 for every dollar contributed, yet if he made a donation to the United Way or his local church that the charity donation receipt would have been on a dollar for dollar basis? Was he not somewhat alarmed that he had to sign a tax risk disclosure document saying he had been clearly warned that the scheme might not work and that he could face a reassessment by the CRA? I mean if that is not a slap in the face to wake up and smell the odour of this deal, then I do not know what is.

Over the years I have seen lots of wacky tax shelters and charity schemes, from comic books, to sports equipment, to movies, to papaya farms in Costa Rica. When clients receive documents recommending these schemes they often remark to me that they seem too good to be true. In most cases I reply that they are too good to be true and unless they find the idea of being reassessed in the future, possibly going to tax court and possibly owing back taxes and interest titillating, they should stay away.

In the end, it keeps coming back to the fact that there is an insatiable appetite for any kind of tax savings vehicle in Canada, regardless of the associated risk. Concurrently, as these tax shelter schemes fall by the wayside or have made their way through the tax courts, several insurance based products have also stepped into the breach to satiate the tax savings appetite. Again, these plans appear to be technically correct, yet they cause one to raise an eyebrow given the tax benefits being touted . I would not be surprised if some of these insurance based strategies are looked at closely by the CRA in the future – in fact, the CRA has already commented that they plan to do so in at least one case.

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.