Why Spend Your Energy Being Frugal? Just Tax Plan!

This past February, I had some fun with a top ten list (look below the sports agent's fees post) on why you should vote for me in a blogging contest (thanks to all of you who helped vote me into the second round of the contest!). In this list I took some shots at frugal blogs and got some emails from furious Frugalites asking me what I had against frugality and frugal blogs? I responded to a couple of emails saying that I don't have anything against frugal bloggers or frugal blogs in particular: my issue is that I think people are far too focused on cost savings,
as opposed to increasing income and/or minimizing income taxes.

As per this tongue and cheek blog I wrote titled “Old and Not Thrifty”, I admit I am not thrifty, although my wife counterbalances my lack of frugality with her ability to get a great deal. Notwithstanding my personal spending habits, any long-time reader of The BBC will know I often write about how important it is to budget and spend within your means and I reiterate this now – always be cognizant of what you are spending. However, in my opinion, if you budget well and are frugal, I think you reach a point of diminishing returns. So you save $12 on a cheaper toaster, or $1.29 on a box of cereal. Yes, those are savings, but they are immaterial in my mind once you have already proven to be a disciplined spender. Why not put all that energy into producing more income or saving taxes?

Before you start sending me hate mail, this post is not intended for those whose financial situations are such that frugality is a necessity, but for those of moderate or greater income who seem to get a little carried away with their frugal efforts when they could be making a bigger change in another manner.

I can already hear the cries of “Mark don’t give me the you should earn more lecture. I am stressed out as it is with my current job and life.” So, I won’t tell you to consider turning a hobby or an expertise into a side business or to spend some energy creating a case for a raise from your current employer or to spend your energy looking for a better job opportunity. Nope, I am going to give you some lazy tips from my past blog posts to save you significant money in taxes so you won’t have to worry about saving money on the daily fresh fish special (if you call a fish floating with one gill above the water, fresh).

I have reviewed my past blog posts to unearth three effective if not fairly effortless ways to increase your cash-flow:

1. Capital Loss Planning

I have written several times about capital loss planning (see the third paragraph from the bottom of the post, “Creating Capital Losses – Transferring Losses to a Spouse Who Has Gains) where you have a capital gain and your spouse has an unrealized capital loss. If your situation meets the criteria in my post and you have, say, a $10,000 loss and your spouse has a gain greater than $10,000, you could potentially save almost $2,500 by undertaking this form of tax planning. That is a lot of cheap rolls of toilet paper. The only caveat for this tip is that you should probably get some professional advice to ensure you do not get tripped up by the technical rules with superficial losses.

2. Form T2200

How about spending your energy asking or prodding your company to provide you with a T2200 Form that allows you to claim your employment expenses. Many employees are shy about requesting these forms and many employers are reluctant to issue these forms (because of the administrative hassle). If you incur expenses such as automobile costs, telephone or home office costs and are not reimbursed or only partially

reimbursed, ask or convince your employer to issue this form so you can deduct any of your employment related expenses on your 2013 personal income tax return. Depending upon the amount of employment expenses you have been personally absorbing, you may save enough for a vacation, which to me is a lot more exciting than saving some money on steaks that expire that day.

3. Income Splitting with Your Spouse

Income splitting can be as simple as spending the higher income spouse’s money on living costs and using the lower income spouse’s salary to invest, so any investment income is earned by the lower tax rate spouse. Alternatively, income splitting can be as sophisticated as utilizing a family trust or a prescribed loan, the rate is currently only 1%.

I have just briefly touched on a few simple opportunities to save money through tax planning. My point? Frugality takes a lot of time and effort, whereas many tax planning strategies require only a few hours of consideration. Even if you require an hour of time from an accountant to review your plan, the tax savings can be substantial.

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.

Sports Agents Fees - A Large non-deductible Expense for NHL Players in Canada

From Mr.Sub Shoot-out at Air Canada Centre

Unlike many hockey fans, I am not excited that the NHL is back. Personally, I think this season is a farce. In protest I watched the first season of the Sons of Anarchy instead of the Leafs and Hab's home opener. It took me several years after the first baseball strike to come back. I love sports, but I can easily live without watching them. So in keeping with the NHL’s legal battle theme for the 2012/2013 season, I today discuss an interesting income tax case involving an NHL player.

Many professional athletes hire a sports agent to assist in negotiating employment terms with their teams and endorsement contracts with corporate entities. Typically, when an agent secures an employment contract for an athlete, he/she is required to pay a commission fee based on a percentage of the contract amount usually between 3-5% (for a list of the top paid baseball agents, follow this link). Although one would think such a fee would be a deductible expense to the athlete, that is not the case in Canada as Michael Caruso of the Florida Panthers recently found out when he went to tax court.

Mr. Caruso’s case brings to light the differences in how athletes are taxed in the United States and Canada. As any sports fan could tell you, U.S. based players often cry the tax blues when they are traded to a Canadian team. The additional income tax payable became a significant point of discussion following the recent Toronto Blue Jays/Miami Marlins trade. According to this article, it may cost Jose Reyes traded from the Marlins to the Blue Jays as much as $5million in extra income taxes because of the trade to a Canadian team.

Not only do U.S. based players typically pay less income tax as noted above, but the IRS allows them to deduct their agent’s fees on their income tax returns; although as discussed in this sports agent blog  the IRS are auditing agent fees to ensure they are actually paid in the year they are claimed. 

The Canada Revenue Agency (CRA) position on the deductibility of agent fees is set forth in IT-168R3. Paragraph 6 specifically disallows the following expenses: “Players employed by sports clubs are limited to the same deductions from employment income as are available to any other employee by virtue of section 8. For example, fines paid by players personally are not deductible. Legal fees incurred in the negotiation of player contracts are also not deductible”.

Back to Mr. Caruso. In 2008 he entered into a three year contract with the Florida Panthers. In 2008 he paid his agent MFIVE Sports Management (Anton Thun is the best known MFIVE agent) $2,927 and deducted the same amount on his personal tax return. The CRA promptly disallowed the deduction. Caruso then appealed to the Tax Court of Canada but the judge ruled in favour of the CRA. 

The Canadian tax rules allow a deduction for legal expenses incurred in order to collect or establish a right to salary or wages from an employer or former employer. Michael Caruso’s appeal was rejected for the following reasons:

i) There were no facts to suggest that Michael Caruso’s agent, MFIVE, was authorized to practice law. Note that the CRA’s requirement only allows for legal expenses to be deducted.

ii) Even if MFIVE’s services were considered legal services, the services were not for the purpose of collecting or establishing a right to salary or wages. A right to salary or wages can only exist after an employment contract has been signed – MFIVE only assisted in negotiating an employment contract that would subsequently give rise to a right to salary or wages.

Although most of us have little sympathy for well-paid NHL players, it seems blatantly unfair to disallow an agent’s fee. In my opinion, the CRA is not recognizing the economic reality of the “employee” expenses a player incurs.

Top Ten Reasons to vote for The Blunt Bean Counter

Jeremy from Modest Money is running a poll of the top Finance Blogs in Canada. Last year I was nominated in the Investing category and thanks to my loyal readers and my mom who voted 10 times, I managed to come in fifth. This year Jeremy has grouped investing and personal finance blogs together, so a top twenty finish would be solid. If you get a chance, visit Jeremy’s site to look around and vote for me. Don’t ask me why, but I had a sudden inspiration to have some fun and decided to create a David Letterman like top ten reasons list, why you should vote for The Blunt Bean Counter:

10. A vote for me is a vote for all unloved accountants everywhere (see the Big Cajun Man’s comment about many peoples “visceral hatred of accountants”).

9. What other blogger provides a tax twitter tip a day while constrained by a ridiculous 140 characters?

8. I am not a frugal blogger like half of Canada’s bloggers (that deserves 1,000 votes on its own).

7. What other fun loving blogger gives you girls an alternative to the “I got a headache” excuse by suggesting you tell your significant other that you just want to stress test his death before you get down to it?

6. I provide ideas that can potentially save you thousands of dollars, instead of trying to save you 49 cents on a box of 12 Popsicles.

5. I discuss the various neuroses you will develop in trying to get wealthy, so you feel better if you are not wealthy.

4. I may occasionally be blunt and sarcastic, but at least you don’t feel like you are reading a Happy Days Blog.

3. What other blogger will tell you to use a 1% prescribed interest loan to set-up a family trust to allow you to pay for your kids private education tax-free and then tell you, that you only need $500,000 to $1,0000,000 to do it. Come on, no one else teases you like this?

2. What other blog solves a tax problem you did not know you had in a way you don’t understand (full disclosure, I read this years ago in a newspaper).

1. If I win the $100 contest prize, I will go on eBay and buy copies of Great Hockey Classics (which is on VHS by the way) Toronto vs. Montreal, the 1967 Stanley Cup Playoffs (awesome link) and provide those copies to Leaf fans born in 1968 who have not seen the Leafs win a cup in 45 years.

This reason ties my blog together in a nice blue bow. Who needs to watch Leaf games when you know they will not win the Stanley Cup anyways?

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.

Is Personal Income Tax Planning a Fallacy for most Canadians?

As a tax accountant, I could make your head spin with all the income tax planning machinations I can undertake for corporate income tax clients in the correct circumstances.

But what about personal income tax planning? In my opinion, for the average middle class Canadian, personal income tax planning is almost a fallacy. Surprisingly, probably to most, personal income tax planning for higher income earning Canadians is also somewhat restricted. However, there are greater planning opportunities available that I discuss below.

I understand the "middle class" has stratified over the years and is not easily definable; but for purposes of this post, I will define middle class as a family, with either one or both spouses earning T4 employment income with a family income between $70,000 to $100,000, with no self-employment income (self-employment provides for some tax planning opportunities).

To be clear, I don’t consider the maximization of personal and family credits, medical expenses credits or charitable tax credits, etc. as tax planning. Although there can be some planning involved, the reality is that in most cases if you purchase an income tax software program, these credits will be maximized automatically for you.

Why do I say income tax planning is a fallacy for the average person? Because other than purchasing a RRSP, for all intents and purposes, there are no significant planning opportunities. Really, think about it. I am sure you have already read several income tax planning tip columns in your favourite newspaper this year; what was the best tip you read? That you can claim your safety deposit box fee? For those who incur employment expenses, maybe you can claim some employee expenses such as your car on your return. 

Even as I review a tax tips column I wrote for Jim Yih’s Retire Happy Blog last year, I am struck by how limited income tax planning is for the average person.

For all you socialists out there, I will tell you that as usual, higher income and higher net worth people do have some personal income tax planning opportunities. But, compared to the planning possibilities my corporate clients have, they are still very limited in nature.

Some personal income tax planning opportunities available to higher income Canadians (and in some cases middle income earners) include:

Income Splitting- For example, the use of a prescribed loan.

Capital loss utilization- See the 3rd paragraph from the bottom of this blog post on transferring capital losses to a spouse.           

Rental Properties – For those with enough disposable income to purchase a rental property, I discuss the income tax implications of purchasing a rental property in this blog post.  

Flow Through Shares- Higher income Canadians often purchase Flow Through Shares to reduce their income tax liability. I discuss this opportunity in this blog post.

Interest deductibility- In this blog post I briefly discuss how to mitigate your income tax exposure when claiming investment interest.

This post is not like an April fool’s joke where you reach the bottom and I provide you with ten great personal income tax planning tips. Unfortunately, all I can tell you is that for most Canadians, the personal tax planning joke is on you.

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.