United States Citizens and Green Card holders must file U.S. tax returns

I was not going to write a blog today, however, I read the article entitled “U.S. taxman reaches north” by Barrie McKenna on Tuesday and want to highlight the income tax filing issues for citizens of the United States and Green Card holders, raised in the article.

If you are a U.S. citizen, you are taxed on your worldwide income and you must file a U.S. income tax return each year. This is still the case even if you live in Canada, file a Canadian income tax return and have no ties to the U.S.. The U.S. is one of the only countries in the world that taxes you for the privilege of citizenship rather than residency.

The same holds true for Green Card holders. While you hold a Green Card, you are considered to have the same filing obligations of a U.S. citizen as noted above.

As discussed in McKenna’s article, most people caught by these filing rules will not owe U.S. income tax if they do not have U.S. source income; as you can claim the foreign earned income exclusion and claim foreign income tax credits. However, returns and various reporting forms are still required, even if you do not owe any tax.

What the article does not not mention, is that in many cases you cannot just give up your U.S. citizenship or Green Card and walk away. There are complicated exit tax rules. I would strongly suggest that you engage an accountant familiar with these U.S. rules to advise you of the income tax consequences, before giving up your citizenship or Green Card. You probably also want to discuss the issue with an immigration lawyer.

Finally, if you are required to file a U.S. return, you probably want to voluntarily file before being contacted by the IRS.

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.

LinkedIn IPO- The linked get in

When LinkedIn went public on May 19th, its shares soared to $94.25 from the Initial Public Offering (“IPO”) price of $45. It has been reported the initial IPO target price was to be $32 to $35 per share, but huge demand moved the IPO price to $45. Personally, I have concerns in regard to LinkedIn’s valuation, however, that is not the topic of this blog.

On May 20th, many newspapers carried the following unattributed quote “I got 500 shares and was told to consider myself lucky,” said one hedge fund manager, who flipped his holdings in the low-80s. “There are billion-dollar institutions that are not getting any stock.”

I chuckled to myself when I read that quote, as we mere mortal retail investors are never afforded access to these IPO’s. We pay the inflated IPO price after the huge profits have been made by the investment bankers' top customers; mutual funds, pension funds, hedge funds, friends and family and other major money managers who have access to these IPO’s before they trade publicly. So, I did not shed very many tears for the poor hedge fund manager who only had 500 shares to sell for a one day profit of $20,000; although his buddies probably made $200,000 to $1,0000,000 that day, so maybe he does deserve some sympathy for his large allocation envy.

The LinkedIn IPO was typical of any hot IPO; the shares stayed within the inner investment banking circle. The rich get richer. As a capitalist at heart, I am torn between allowing the market system to work and the distaste of what I consider a "capitalistic aristocracy". Yes, I understand the risk investment bankers take and the need to reward its best customers for buying other IPO's and other products, but the bankers and their customers make absurd amounts of money on these type IPO’s.

I guess what bothers me the most is that retail investors are typically only given access to IPO’s when the demand is insufficient from the investment banker’s best customers or the IPO is considered fairly priced, so there is no easy money to be made. Sort of a don’t call us when we have a great IPO, but we will call you when we have otherwise. The above discussion does not even account for the regulations in place for accredited investors that exclude the typical retail investor, for their “own protection" in certain circumstances.

The IPO process has an inherent systemic bias that I accept, but that does not mean I have to like it.

[Bloggers note: I know my loyal reader and commentator Skuj will follow with a capitalistic diatribe on this blog; so Skuj, in my opinion you can be a capitalist and still think the system is slanted unfairly at times].

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 Income Tax Planning tail wagging the Tax Dodge

It is said that the biblical verse "Render unto Caesar that which is Caesar’s", commands people to respect state authority and to pay the taxes the state demands of them. In modern day Canada, this phrase often seems to be interpreted as: render unto Stephen Harper the absolute minimum in income tax payments, even if the consequences of minimizing one’s income tax payments are at significant personal detriment.

Why the new modern day interpretation? I find that many people are so averse to paying income taxes that they dive into very short-sighted income tax plans oblivious to the consequences. I believe in minimizing income taxes to the greatest extent possible, however, you cannot tax plan in isolation.

Enough philosophy, lets get to some examples.

In many Canadian families, the high income earner either contributes to their own Registered Retirement Savings Plan ("RRSP") or makes a spousal contribution; in both cases the high income earning spouse receives the income tax deduction at their marginal income tax rate. However, over the years I have seen many people so focused on the the potential income tax savings a RRSP contribution will garner, that they also make RRSP contributions for their stay at home spouses, to utilize their spouses RRSP contribution limits (these are not spousal contributions). But, because the spouse has minimal or no income, no income tax refund is generated and the RRSP deduction is not utilized (it can however, be carried forward to a future year).

The ultimate example of the tax tail wagging the tax dodge is the purchase of a Flow- Through Limited Partnership (“FTLP”) unit. These tax shelters are condoned by the Canada Revenue Agency and certainly have income tax benefits, but also have investment risk. In simple terms, you purchase a FTLP for say $5,000, obtain an income tax deduction for $5,000 and then have a mutual fund of small cap resource stocks with a nil cost base that you can sell two years hence. People become so enamoured with the income tax savings that they don’t realize they have over allocated their portfolio to risky small cap resource stocks (I call these people, tax shelter junkies) and in some cases, in the ultimate irony, they purchase such a large amount of FTLP's, that they create alternative minimum tax, defeating their original intent of saving on income taxes.

Now, let’s next look at some probate misplanning.

Probates taxes in Ontario are for all intents and purposes 1.5% of your estate upon death. Yet people blindly transfer stock investments to their children to avoid these taxes. These people are very pleased with themselves, as they have saved 1.5% in probate fees. However, their chest thumping quickly seems to abate when I inform them they may now owe 23% capital gains tax on the deemed disposition they caused by transferring their investments to their children.

Many Canadians also commonly open a bank account with joint ownership and the right of survivorship with one of their children for ease of administration as they age and to avoid probate tax. The parent typically assumes that the monies in joint ownership belong to their estate to be shared by all their children. However, the child they opened the account with often considers those funds to be theirs alone. Thus, the parent may have saved 1.5% in probate tax, but they also may have been the catalyst for litigation amongst their children.[I have an all encompassing blog discussing various probate issues including income tax, legal and estate issues such as the Pecore case (which has applicability to the joint ownership transfer above) in progress, that I hope to post in the next week or two].

In conclusion, care must be taken to ensure your income tax planning does not leave you barking up the wrong tree.

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 power of free flowing information-Sino Forest Shareholders pay the price

Sino Forest Corporation (“Sino Forest”), ticker symbol TRE, has been a high-flying stock over the past couple of years, going from $6 in 2008 to a high of $25 in 2011. Sino Forest is a commercial forest plantation operator in China. On June 2, 2011 the stock began the day priced at $18.21. However, that day, Muddy Waters Research, a relatively new research firm initiated coverage on Sino Forest with a strong sell, saying the company's value was less than $1and stating “Like Madoff, TRE is one of the rare frauds that is committed by an established institution. In TRE’s case, its early start as an Reverse Takeover Over, fraud, luck, and deft navigation enabled it to grow into an institution whose “quality management” consistently delivered on earnings growth.”

Following the initiation of Muddy Waters coverage, Sino Forest’s stock price fell to $14.46 from $18.21. The next day as the report gained widespread media coverage; the stock price took a further hit and fell to $5.23, a 71% drop in stock price. Sino Forest's stock closed at $4.01, on June 7th, the day before I post this blog.

As of this writing, it is not clear if Muddy Waters is accurate in its accusations or how much it has made by selling short. However, I do not wish to focus on either of these very important aspects, but rather, I wish to discuss the fact that a little known research firm can issue a single report that can cause a publicly listed stock to lose 71% of its value in two days.

With the advent of the internet, information flows freely and it can be digested by the markets instantly. I have no issue with the consequences of this report should the report prove to ultimately be accurate. However, what are the consequences if Muddy Waters’ allegations are proven incorrect? I would suggest Muddy Waters would face significant legal action, but what about the investors that fled the stock as the price fell off the cliff? They could be out as much as $14 a share. In this era of instant information, how can the stock exchanges protect investors from erroneous reports and/or manipulation through false information or do they even have a responsibility?

In this case, the Toronto Stock Exchange halted Sino Forest on June 2nd. Sino Forest came out with a statement saying “The board of directors and management of Sino-Forest wish to state clearly that there is no material change in its business or inaccuracy contained in its corporate reports and filings that needs to be brought to the attention of the market. Further, Sino-Forest recommends shareholders take extreme caution in responding to the Muddy Waters report”. However, once the halt was lifted, the stock dropped from $14.46 to $5.23; so much for protecting investors.

So how could/should the world stock exchanges deal with this issue? Should they halt the trading of every stock that has an accusation against it until a full investigation is done? As an investigation could take months, a full halt would be impractical and paralyze companies. One thought I have is, maybe there has to be a standard unwind process, where the exchange advises all purchasers that any purchases from a point in time will be subject to an unwind provision should certain information prove false. However, that would be punitive to purchasers while protecting the sellers. Maybe it is just caveat emptor and if you have done your due diligence, you use unprovoked unsubstantiated attacks to add to your position. I would suggest this alternative requires unshaken confidence in your own due diligence and nerves of steel.

I really don’t have an answer to this perplexing issue and I am not sure there is an answer; but the world exchanges will need to address how they handle potentially erroneous information that is disseminated worldwide within minutes.

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 Blunt Bean Counter Noted in Rob Carrick’s Reader

Today my blog Investment Bravado, Little White Lies and Why Kiss and Tell Investing can get you shot was mentioned in Rob Carrick’s The Reader.

Rob has honoured my blog several times in the past few months. As a blogger who can only hope to "bluntly blog" on some complex income tax and investment topics, I sincerely appreciate the “critical acclaim“ from a truly sophisticated financial writer.

Not that Rob needs much introduction, but here are links to follow Rob’s various online writings:

The Reader

His columns in the Globe and Mail

His Facebook

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.

Investment Bravado, Little White Lies and Why Kiss and Tell Investing can get you shot

How many of us have heard cocktail bravado along these lines? “Boy did I make a killing buying gold” and “I bought my Mercedes with the profits I made on that tip”. Based upon these double martini induced boasts, Bill Gates & Warren Buffett should have multiple challengers for their positions as two of the world’s wealthiest men. But like the Mercedes in your neighbour’s driveway, that is in reality leased and like that phantom profit from the stock tip, cocktail investment bravado, is more often than not, in my opinion, false or exaggerated. 

Based upon 25 years of cocktail parties and my first year university psychology course, it is my observation that people lie or exaggerate about their stock investments to maintain or enhance their self-esteem and their perceived social financial status. Robert Feldman, a University of Massachusetts psychologist says "People lie because they need to present themselves as competent and worthy. Money is one key way people feel they are valued."

Exaggeration, tale-telling, even outright lying are merely tools to serve this ignoble enhancement of our own self importance. Even on the macro level, we like sensationalized financial news. Ever wonder why the markets wander a few points up or down when the media throws around adjectives like skyrocket or plummet? Keeping the market interesting justifies our interest in it and, by extension, validates our collective social financial activity and identity. Not only do we need to lie to feel good about ourselves, we would rather hear sketchy hyperbole from borderline sources than bad news from an honest one.

In addition to the various types of investment bravado noted above, it is also my experience that investors are also generally disinclined to admit their mistakes. Most investors seem to prefer smoke & mirrors, and martinis to black coffee and straight talk. An unsettling dishonesty attaches itself to this disinclination to admit error or respect those that do.

My persona on this blog is The Blunt Bean Counter. Believe it or not, some thought went into this moniker. I am blunt. I am also pretty open, much to my wife’s chagrin. So if I think I am on to a good stock, I don’t need to keep it to myself; if I get killed on a stock investment, I admit it. This “kiss and tell” philosophy on investing as it turns out, ended up being the conduit to a human psychology experiment in a national newspaper, so maybe in essence I am an amateur psychologist, even if not by intention.

You see, when Larry MacDonald asked if he could profile me for the Globe and Mail’s Me and My Money column, I knew I was going to do something somewhat controversial for the column. Me and My Money is presented in a somewhat standard format of first discussing your investment philosophy, then secondly informing the readers of some of your stock holdings and then thirdly informing the readers of your best and worst stock picks and finally you provide advice.  

I knew from the outset that I was going to have the same stock as my worst and best pick, a first for the Me and My Money column as far as I know. That stock is Resverlogix (“RVX”) and if you have not read my tale detailing my ownership of this stock, hit the link above. 

The Me and My Money Column was published on February 12th and for anyone who wishes to read the column, click this link.

I have no idea what the record is for comments on the Me and My Money column, but I am sure I am in the top ten. The comments started fast and furious.

Most centered on how I was greedy. I did not mind being called greedy, I was greedy in respect of the call options I held in RVX and I was cognizant of this greed and the risk I took because of his greed. An example of some of the comments I received was: “Three animals in the market. The Bull. The Bear. The Pig. This is an example of being a pig.”

However, after the initial avalanche of negative comments, suddenly there was a wave of support for the column starting with:

“Thanks for this, we've all been there (at least those of us that are honest) but apparently some here are deluded enough to believe it can never happen to them.”

“Hey, it takes a lot of guts to come on a national website and admit to one's bone-headed investment moves... Great investors like Peter Lynch aren't born... They learned through trial and error.” 

These comments reflect the essence of what I am getting at. Few people are totally honest about their investing trials and tribulations and even fewer admit them. I guess for many, money is a reflection of self worth and success and cocktail chatter allows them to espouse freely without address. For a selected few the bravado is warranted (although these people are typically not bragging in pubic), for some, they utilize selective disclosure (yes, they made a large profit on a certain stock or investment, they just have a slight memory lapse about the 3 other stocks they had significant losses on) and finally, for some, they are just trying to look good both to themselves and others, no matter if the tale is more fiction than fact.

As an observer of human investment behaviour, I find it fascinating that many need to accentuate or exaggerate the positive, yet, they are mute when their investments go sour.

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.

SR&ED-ing the Misconceptions: What most Businesses don't know about SR&ED Credits

On Tuesday, I wrote about the financial benefits of claiming Scientific Research & Experimental Development (“SR&ED”) expenses. Today, I have a guest blog on SR&ED claims by James McDermott, the director of marketing & business development of the BeneFACT Consulting Group Inc. (“Benefact”) a SR&ED consulting company. My firm Cunningham LLP , has worked with various R&D consultants including Benefact over the years to assist clients in maximizing their SR&ED claims. This blog clarifies several points of confusion in regard to the SR&ED program and provides examples of qualifying SR&ED in industries you would not expect a SRED claim.

SR&ED-ing the Misconceptions: What most Businesses don’t know about SR&ED Tax Credits by James McDermott

The SR&ED program is among the most generous R&D tax incentives in the world, paying in excess of $4 Billion (CDN) to more than 20,000 eligible claimants every year. Based on program criteria, participants can receive significant cash refunds or tax credits to offset a portion of qualified projects. Eligible expenditures include salaries and wages, parts and materials, subcontracts and capital expenditures. In most cases, SR&ED tax credits are fully refundable for small and mid-sized businesses, even if no taxable income is present.

While the program is generous in its application, claimants often struggle with qualification criteria and face a litany of program misconceptions. In dealing with prospective SR&ED participants we regularly encounter intelligent professionals that are utterly baffled by the program. The good news -- nearly all of the collective confusion is based on inaccurate information and a widespread lack of awareness. Businesses that take steps to educate themselves and clarify their eligibility are typically pleasantly surprised by the outcome.

According to CRA’s own statistics, only 25% -33% of SR&ED eligible businesses actually file claims. These estimates, among many things, provide strong evidence that a large segment of eligible Canadian businesses are missing the boat. With overwhelming advantages for claimants (see Mark’s blog of Tuesday), why is the program underutilized? What are the factors that prevent program participation?

In our experience, there are a few recurrent “confusion points” that continue to stand out.

Do we really conduct SR&ED?

Businesses have a difficult time determining whether they actually carry-out SR&ED eligible activities. Without dedicated R&D facilities or labs devoted to research, businesses falsely assume they cannot apply for SR&ED credits. Potential claimants should instead consider time and cost overruns, difficult one-off jobs, recalls or onsite trouble-shooting as strong indicators of qualifying work.

Our work is “not new”

 For work to be considered SR&ED eligible, claimed projects do not have to be “new” to their relative industry. If the underlying technology is not accessible in the public domain and is new to the claimant’s organization, grounds for eligibility exist. Most notably, commercial success or failure is irrelevant so long as technological knowledge is gained. Incremental changes to existing products, methods or processes (regardless of the outcome) can be typically considered SR&ED eligible.

We have $0 in taxable income

Potential claimants often assume that losses preclude them from program participation. This is a myth. For most (small and mid-sized) organizations without taxable income, SR&ED credits are fully or partially refundable.

Outside of the three scenarios listed above, there are also numerous businesses that disqualify their own eligibility based entirely on industry identification. Although some are correct in their assumptions, it is prudent for businesses to fully investigate their eligibility. To support this, below are few interesting examples of often ignored SR&ED eligible work.

Occupational Therapy

While it is recognized by the CRA as an eligible field of science, the SR&ED program remains almost totally ignored by occupational therapy practices. Despite this, opportunities are found (especially in larger practices) where new test protocols, outcome measures and treatment techniques are being developed. Examples include, but are not limited to: Speech-Language Pathology, Orthopaedic Services, Maxilo-Facial Surgery, Audiology and various forms of Physical Rehabilitation.

Insurance industry & Financial Services

Outside of claimed IT projects, SR&ED is typically overlooked within insurance and financial services firms. Potential claimants in this area should also consider efforts in actuarial and mathematical modelling. The development of predictive algorithms or data correlation (through statistical modelling) can be leveraged into a SR&ED claim.

Construction & Civil Engineering

Construction and civil engineering businesses traditionally undervalue their eligibility and often go without filing claims. Most firms in this field incorrectly discount their development efforts due to the fact that a majority of their projects are regulated by “code”. In reality, exceptional value exists in work related to the use of new materials and the creation of more efficient processes. Environmental factors and site- specific conditions, as an example, introduce the type of technological obstacles that can form the base of a strong SR&ED claim.

For further assessment of your SR&ED eligibility, visit http://www.benefact.ca/ or contact James McDermott, Director, Marketing & Business Development at james.mcdermott@benefact.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.