The T1135 Form – Yet Again! & Hiring The Blunt Bean Counter

This will be the fifth time I am writing about the T1135 Foreign Income Verification Statement since September, 2013. Today I am discussing the implementation of the April, 2015 Federal budget proposal in which the Conservatives promised to simplify the reporting requirements where your cost of foreign property is less than $250,000.

This proposal has now been implemented and a new T1135 has been released. Here is a link to the new form.

Qualifying for the Simplified Method

The basic requirement to file a T1135 form is still in place. That being, if you own specified foreign property with a cost of more than $100,000 at any time in the year, you must file the form. However, now where you own specified foreign property with an adjusted cost base of more than $100,000 and less than $250,000 throughout the year, you can file using the simplified method (or you can still use the detailed reporting method if you wish, but why you would is beyond me). Note, if your cost exceeds $250k at any time during the year, you cannot use the simplified method.

The simplified method is reported on Part A of the form. While this method is less onerous than the detailed reporting requirement, you will now be required to report the top three countries based on cost during the year under the simplified method. This determination will require some work if your broker does not provide such, or you are a do-it-yourself investor. 

Filing Online and Reassessments

It should be noted you can now file the T1135 online for 2014 and subsequent years. The CRA has also re-iterated that the period for reassessing your return is extended by three years if you have failed to report income from a specified foreign property on your return and Form T1135 was not filed, was not filed on time, or was filed inaccurately.

While the simplified reporting method is better than nothing, I would suggest that most accountants and taxpayers still don’t understand why the T1135 form is required at all, where all you are only reporting is foreign holdings held with your Canadian institution(s).

Hiring The Blunt Bean Counter

I am often asked by readers if they can engage me for various income tax, accounting and wealth management services. Although I rarely if ever, self-promote on the blog, today, I am going to make an exception. Below I’ve listed the various services my national accounting firm and I can provide to you.

Corporate Income Tax Planning

To help you minimize your corporate income taxes, we provide tax planning services including but not limited to: corporate reorganizations, estate freezes, purifications for the capital gains exemption, assistance with indirect taxes such as HST, in-bound and out-bound foreign tax planning, R&D claims, transfer pricing and valuations.

Corporate Financial Statements

To ensure all your corporate compliance needs are met, we typically provide the following services to owner-managed businesses: financial statement preparation, corporate tax return preparation, corporate and personal income tax and estate planning and personal tax return preparation for the business owner.

Estate Planning and T3 Estate Tax Returns

Many people are concerned about ensuring they minimize their taxes upon death and/or leave a legacy to their family. To assist you, we provide estate planning, which typically involves determining your estate tax liability and then trying to minimize and/or manage this liability through tax planning and will planning (with your lawyer). In addition, where you have had a family member pass away or are named executor to an estate, we can assist you in filing the required estate tax filings (which are often very complicated in the year of death, especially if the assets do not pass to a surviving spouse, due to the deemed disposition rules).

Wealth Management and Financial Planning

Most people are concerned with ensuring they have enough money for retirement. I am involved with quarterbacking my client’s wealth and retirement planning, typically starting with a financial check-up and financial plan. As financial quarterback, I try to ensure your investment advisor, lawyer, insurance agent, banker, business consultant integrate their advice into one efficient, optimum, coordinated plan, taking into account your investment, retirement, income tax and successions needs.
 
If you do not have an investment advisor or are looking for a new advisor, we recommend you meet several to find a fit from both an investment perspective and also from a personal relationship perspective.

Accountants cannot provide investment advice. We do however; work closely with several highly respected investment advisors whom we can introduce you to. The advisors typically require a minimum of $1,000,000 of investable assets (yes, I am aware, this is a large issue for people who are looking for a good investment advisor, but do not meet the minimum asset requirements). 

Personal Tax Planning

To help you reduce or minimize your personal taxes, my firm has several excellent tax people who can assist you with personal tax planning and tax return preparation. Unfortunately, because income tax season has essentially become condensed into one month (since the T3, T5013 slips do not arrive until early April at best) I now only prepare personal tax returns for my corporate or wealth clients.

If you would like to engage me or my firm for any of the above noted services, or want to discuss your specific situation and obtain a quote for services, feel free to email me at bluntbeancounter@gmail.com or click the hire The Blunt Bean Counter at the top right of the page.

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.

Financial Statement Reports for Dummies

In March 2011, I wrote a blog post titled Reading Financial Statements For Dummies. That post dealt with some tips on what to look for when reading financial statements ("F/S"). Today, I discuss the various types of reports that are attached to a set of F/S and the circumstances under which those reports are typically prepared.

Of course, "Dummies" is used in the popular culture context; since I even asked for help from my accounting standards quality control person in preparing this blog post. After all, I am first and foremost a tax guy, who the heck wants to be known as a boring audit guy :).

When you pick up a set of F/S for a private or public company, the first thing you will typically notice is the report attached to the financial statements. These reports which are signed by an individual accountant or accounting firm, indicate the level of assurance or credibility that a company wants or requires for its users (i.e. the readers of the F/S).

The type of report and the continuum of assurance goes like this:

Notice to Reader/Compilation Reports 

The lowest level report that can be provided by the preparer (typically an accountant or accounting firm) is a Notice to Reader report, often referred to as a compilation report; which actually provides no level of assurance. For these reports, the preparer receives information supplied by management or the owner of the company and “compiles” the financial information into a set of financial statements. It is clearly stated in the report that the preparers work is limited and that there is no assurance provided on the set of statements.

In a compilation engagement, the F/S do not have to be prepared in accordance with a financial reporting framework such as Canadian Accounting Standards for Private Enterprises (“ASPE”) (i.e. they could be prepared on a cash basis instead of the accrual basis, as long as this is specifically indicated).

A compilation engagement is typically prepared in circumstances where the only users are management and there is no need for all the disclosures necessary for a general purpose use (in most cases there are no notes attached to these F/S) and the company does not have any financing or arm's length shareholders. Thus, these statements are often just used to file income tax returns and as such, are the most cost effective F/S alternative.

The report contains a cautionary statement that the statements may not be appropriate for the users’ purposes. Even though no assurance is provided, when preparing a compilation report, the preparer must comply with professional standards, basic accounting principles and consider the reasonability of the information provided. The overall concept is that the preparer must ensure that the financial statements are not “false or misleading.”

Compilation services are not regulated in all provinces. One should check if the engagement is regulated and that the person engaged to perform the engagement is regulated.

The next type of report on the continuum of assurance is the Review Report:

Review Reports 

In comparison to a compilation report, a review report provides a moderate level of assurance. Specifically, a review engagement is commonly referred to as “Negative assurance” – meaning that nothing during the review has come to preparers’ attention causing them to believe that that the F/S are not, in all material respects, in accordance with Canadian ASPE.

The preparer determines the “plausibility” of the financial statements, primarily through the use of enquiry, analytical procedures and discussion with management and/or owner. “Plausible” is used in the sense of being worthy of belief, which is a moderate level of assurance.

This type of engagement is useful when a company does not need audited statements (which will be discussed next – which provide the highest level of assurance) – however, management or third parties want some assurance that the financial statements are plausible. For many of our client's who borrow money from the large banks, a review engagement is accepted in lieu of an audit and is the mid-price alternative (not that our clients are every concerned with price in respect of their F/S :).

Audit Reports 

An audit is the highest level of assurance that can be provided on financial statements. The procedures in an audit are much more encompassing than a review – such that the preparer can provide an opinion that the company’s financial statements are presented fairly, in all material respects, in accordance with the applicable Canadian accounting framework.

Although auditing has changed from the days of examining every document, current day computer assisting testing still requires extensive testing.

It is important to note that the audit provides “reasonable” assurance meaning that the preparer does not provide absolute assurance. Absolute assurance is not obtainable given the need for judgment, the use of testing and the fact that audit evidence is generally persuasive rather than conclusive.

Because of the detailed nature and the amount of work done, the cost to perform an audit and prepare audited financial statements can be expensive.

The type of report required is a matter to be discussed and agreed upon by the accountant/accounting firm and the client. You may be surprised to know that for each type of engagement, management is responsible for the preparation and fair presentation of the F/S.

As discussed above, each type of report provides a different level of assurance or credibility to the financial statements. If you have need to review a financial statement, it is important that you understand the level of reliance given to those set of statements, as all F/S reports are not created equal.

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.

Reading Financial Statements For Dummies

Today I will discuss some simple tips to utilize when reading financial statements (that clicking sound you just heard are the other readers hitting the escape button when they saw reading and financial statements used in the same sentence). For the two of you still here,"Dummies" is of course used in the popular culture context; however, in the case of reading financial statements, I often feel like one and I am an accountant.
If you are a non-accountant, what should you look for when reviewing a company’s financial statements? I will assume you do not have the background to review such technical items as the accounting policies to determine how revenue is recognized or such; so here are a few simple things non-accountants can look for in the financials:

1. Cash is always king, so always include a review of the statement of cash flows, especially in the case of mature companies. None other then Warren Buffett says "it’s good to compare how much different cash flow is from net income: if the latter is substantially higher than the former, you could have some aggressive accounting to worry about" (see Larry MacDonald's blog Buffet on accounting manipulation for further Buffett comments).

2. For those with a sense of accounting adventure, you can try and calculate the Current Ratio and Debt Ratio:
The current ratio measures liquidity, (a sense of a company's ability to meet its short-term liabilities with liquid assets) and is calculated by dividing Current Assets by Current Liabilities. A ratio of 1:1 implies adequate coverage and the higher above 1:1 the better. If it is relatively low and declining, that is not a good sign.
A company's debt ratio is calculated by dividing Total Liabilities by Total Assets (or alternatively, Total debt divided by Total Assets). This ratio tells you the extent by which a company’s assets have been financed with debt. For example, a debt ratio of 40% indicates that 40% of the company's assets have been financed with borrowed funds. Debt can be good or bad. In times of economic stress or rising interest rates, companies with high debt ratios can experience financial problems. During good times, debt can enhance profitability by financing growth at a lower cost.

3. If you have always wished for a "Coles Notes" summary of the financial statements you are in luck. Effective for all periods ending on or after December 15, 2010 new audit standards in Canada will result in changes to the auditor’s report, which will make it far simpler for investors of any sophistication to determine the key issues in the statements. One major change is the requirement for an “Emphasis of Matter” paragraph in the auditor's report. Companies will now be required to highlight matters that are disclosed in the financial statements that are of such importance, they are fundamental to the users’ understanding of the financial statements. The issues noted in the Emphasis of Matter discussion are disclosed elsewhere in the financial statement notes, but the new paragraph prevents companies from being able to hide these issues in the many pages of notes.

4. The notes to the financial statements are ignored by many novice investors, but the notes often have important nuggets of information. One of the first notes on any set of financials are the accounting policies and accounting estimates notes. For most non accountants, trying to follow and understand the accounting policies and estimates will be futile, however, if these notes disclose a change, try your best to understand the impact of the change on the F/S which should be disclosed in the case of a change in policy. You should also always read the “Subsequent Events” note to determine if anything of a substantial nature has changed for the company that is not reflected in the financial statements. The commitments note will inform you of any required outlays over the next several years and finally the contingency note, which will inform you of potential lawsuits and such. Some of these items may not be disclosed in the Emphasis of Matters note discussed in #3 above.

5. Most public company financial statements reveal how many fully diluted shares are outstanding. I like to see what constitutes that number, so I add together the common shares issued, stock options outstanding and warrants issued. Then I review the terms of the the warrants and options to get a feel for the stock price at which maximum dilution would occur.

6. If you are looking at anything less than a “large cap” company, potential financings must always be considered. I have been sideswiped on several occasions by a private placement or financings at a discount to the current stock price that have deflated a stock on the move. I like to see enough cash on the balance sheet to sustain the business for at least 18-24 months so the company is not hand to mouth each month, although for some small cap stocks, it may be closer to 12 months. For these type companies, the Management Discussion and Analysis will often provide the burn rate for the company. If the burn rate is provided, divide the total of the actual cash on hand, plus short term investments, plus the accounts receivable (a little tricky, but assume A/R is a fairly consistent number) less the accounts payable by the burn rate and you will have a crude idea of how many months of cash the company has available.

The above are just some simple review steps that even non-accountants should be able to undertake to gain a better insight into the companies they have stock ownership in.

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.