Holding Companies – Issues to Consider

I have written several blog posts dealing with utilizing a holding company (“Holdco”) either directly as a parent company to your operating company (“Opco”) or indirectly as a beneficiary of a trust. These posts include:

Creditor Proofing Corporate Funds - This post discusses how a Holdco can protect surplus corporate funds and how for income tax purposes, the transfer of funds via a dividend from your Opco to the Holdco is in many cases tax-free (connected corporations).

Should Your Corporation’s Shareholder be a Family Trust instead of a Holding Company? - This blog examines some “fancier” tax planning to not only creditor proof funds, but allow for possible income splitting and multiplication of the capital gains exemption.

Corporate Small Business Owners: Beware; the Capital Gains Exemption is not a Gimme - This post explores the potential issues you may have in accessing the Capital Gains Exemption (“CGE”) including where your Holdco over time has accumulated too much cash and investment assets.

Because the concepts discussed in the blogs above are very complex (even for accountants), these posts have led to numerous questions by readers. In reading these questions, people are typically confused by the interaction of creditor proofing, income splitting and accessing the CGE, especially where they already have a Holdco in place with significant excess cash and/or investment assets. Thus, I thought today I would try and provide a bit of a road map for using a Holdco.

Working Backwards

Creditor Protection

The main reason small businesses owners typically consider using a Holdco in the first place is to creditor protect excess funds earned in their operating company. Most people find the concept of creditor protection (transferring cash and other assets from your Opco to remove the risk of someone suing Opco and making a claim on those assets) simple to grasp and in almost all cases; it makes business and income tax sense. Thus, I am assuming creditor protection is a given when considering using a Holdco.

Capital Gains Exemption

Where you do not think you can sell your business (the value of your business is just personal goodwill such as in a consulting business) a standard holding company often makes sense.

Where Holdco planning gets more complicated is when you want to ensure you have access to your CGE (while alive or when you pass away) and/or want to multiply the exemption and/or want to use your Holdco for income splitting purposes. The key concept to understand here is that; to access your CGE you or a family member must personally sell the shares of your Holdco (since you own the shares of your Holdco which in turn owns your Opco) and Holdco must meet various criteria to qualify for the CGE. If you have your Holdco sell the shares of your OPCO, there is no CGE, since it is a corporation selling, not an individual.

Situations Where you do not Currently have a Holdco in Place

If you currently own 100% of your Opco or own your Opco together with your spouse, you have a couple decisions to make before incorporating a Holdco.

Again, assuming creditor protection is a given, you need to determine if you think you will be able to access the CGE in the future. If the answer is no, you will probably be fine with a garden variety Holdco (Holdco owns 100% of Opco) especially if you already own Opco with your spouse.

Where you own Opco 100% personally and do not think you can access the CGE, you may want to give consideration to freezing (value of Opco is “frozen” at the current fair market value and you get special shares worth the frozen value) Opco and bringing your spouse in as a shareholder in Holdco. Again, in this situation, you would probably just use the typical Holdco/Opco structure with Holdco owning Opco 100%; however, you would have to concern yourself with ensuring you are not subject to punitive income tax rules, for which you would need income tax advice.

No Holdco in Place, but You may be able to Sell your Company in the Future to Access the CGE

Where you think your corporation is saleable to an arm’s length person in the future, the standard Holdco/Opco structure may not be appropriate, as damming cash in your Holdco may put your ability to claim the CGE in jeopardy.

In these cases, subject to your specific circumstances and only after consulting with your tax advisor, you may use either taxable dividends, stock dividends, an estate freeze or some kind of butterfly (a reorganization in which non-qualifying assets are transferred on a tax-free basis to a newly formed corporation, provided that no sale to an arm's length party of the shares of the small business corporation is contemplated at the time of the reorganization) to provide a structure that will allow Opco/Holdco to either constantly remain onside the criteria for the CGE or at least provide a mechanism to stay onside. Based on the recent Federal budget, your advisor may have to concern themselves with your company's safe income, in addition to the punitive rules I noted above.

As discussed in the “Should Your Corporation’s Shareholder be a Family Trust instead of a Holding Company?”, where you have children (especially teenage children or older), it will often make sense to “freeze” the current value of your operating company to you and/or your spouse (if they have original ownership in the Opco) and have a family trust (with a holding company as a beneficiary of the family trust) as the parent of Opco.

Excluding the cost of undertaking this transaction, this structure can provide for multiplication of the capital gains exemption, income splitting (many parents use this structure to tax effectively pay for University) and creditor protection. The nuance here is that the Holdco is not the parent of Opco, but a beneficiary of the trust and therefore is not an impediment to accessing the CGE in the future. Once again, there are punitive tax rules to be wary of and tax advice is essential.

What if I Have a Holdco already in Place?

In situations where you already have a Holdco in place with significant assets, your planning is very complicated and fact specific and beyond the scope of this post. However, typically, subject to your specific fact situation, your advisor will likely suggest either a butterfly, freeze transaction, payment of a taxable dividend or use of a stock dividend that will allow for potential access to the CGE in the future. In cases of a freeze, this may mean you will be required hold the shares at least two years to qualify for the CGE.

I have attempted in this post to provide a bit of a road map for using a Holdco or a variation of a Holdco. However, this topic is extremely complex and fact specific and as such, I have not even got into the various punitive income tax provisions such as the corporate attribution rules amongst the various other punitive rules.

Thus, I cannot stress enough, that this entire blog is simplified and that you should not even consider undertaking any kind of Holdco planning without receiving tax advice from your accountant or tax lawyer.

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. Please note the blog post is time sensitive and subject to changes in legislation or law.

Overtaxing the Rich

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

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

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

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

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

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

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

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

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

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

I provide my thoughts on these two issues below.

The Rich Won’t Leave Over Taxes

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

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

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

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

The Psychological 50% Barrier

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

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

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

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

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.

Financial & Tax Planning for the Terminally Ill - Part 2

Last week I wrote about organizing your affairs should you unfortunately be diagnosed as terminally ill. Today I will discuss some financial and tax planning considerations if you have been given a finite period to live.

Probate Fees & Income Taxes

Upon death, your estate will be subject to probate fees (more properly called estate administration fees in Ontario) and income taxes.

In order to minimize your probate fees and/or income taxes, I recommend you obtain tax and/or legal advice.

Probate Planning

This type of planning is complex and if not properly executed, can lead to income tax and legal issues. I have set out below some of the considerations in respect of probate planning. Again, get advice before considering any of the following planning strategies:

Joint Tenancy

In order to avoid probate fees, many people transfer their assets into joint tenancy, with the right of survivorship. This means that upon the death of one of the joint tenants, the property passes to the other tenant automatically. The risk with this type of transfer is if the property is capital property (such as stocks or certain real estate) that has appreciated in value, the transfer (if to anyone other than your spouse) will create a deemed capital gain and income tax liability.

So for example: if you transfer 100 shares of Bell Canada that cost you $2,000, either directly or into joint tenancy with your son and those shares are worth $5,000 today, you will have to report a capital of $3,000 if transferred directly, or $1,500 if transferred into joint tenancy; even though you just transferred the shares and did not sell them on the open market.

Where you are terminally ill, the deemed disposition may not be as large an issue as for a healthy person since you may only be accelerating the income tax liability a few months or years. This deemed gain upon death is discussed in greater detail below.

If you transfer a bank account or stock into joint ownership with one of your children to help you manage your money while you are alive, that child becomes the sole owner of that account when you pass away. That child may consider the account is theirs even if that was not your intention and decide not to share it with the other siblings. This can lead to estate litigation, especially where your intention is not documented.

Gifting

Similar to the issue above with joint tenancy, when you gift property to someone other than a spouse there may be a deemed capital gain where the property has appreciated in value. Thus, if you wish to make a gift, you should consider gifting cash instead of property to avoid any income tax issues (be careful to ensure any gifts are consistent with your wishes in your will- i.e. if you split your estate equally with your three children in your will, the gift should be 1/3, 1/3,1/3, or you may need to amend your will). However, care must be taken to ensure you will not need that money to live on or pay medical bills during your illness. I suggest you only gift money you are absolutely sure you will not need to live on.

Consolidation of Accounts

Many of us have multiple bank accounts, investment accounts, RRSPs etc. If you are terminally ill it may make sense to consolidate these accounts into one or two accounts to simplify your executor’s life. You may also want to consider liquidating certain investments so your executor does not have to deal with these decisions. However, you need to consider the investment merits of liquidation versus the “ease of administration” issue.

Estate/Income Tax Planning

As a courtesy to your executor, gather up you prior tax returns and put them in a box or file cabinet and ensure you advise your executor where they are located. If you made a 1994 capital gains election (a special election for that year only, that allowed you to “bump” up the cost of certain capital property), provide a copy of that return.

Income Tax Smoothing

If you are terminally ill and have a finite period of time to live, from an income tax perspective, you will want to minimize your tax bill over the remainder or your life by smoothing your income as best as possible. Smoothing your income involves utilizing the lower marginal rates, rather than just the high rate on death. Typically this would be done by drawing on your RRSP or RRIF. This may have the secondary advantage of providing funds to live on.

Capital Gains

Upon death, if you do not leave your assets to your spouse or you are the last spouse to pass away, you have a deemed disposition of your assets at fair market value. See my blog on death and taxes for more details. You can utilize any capital losses against capital gains in the year of death and can carryback any excess capital losses for three years. In addition, where you cannot use all your capital losses on your terminal return, the losses are deductible against all income on your terminal return or the year proceeding death.

Purify capital gains exemption

The same deemed disposition rule holds true for shares in any private corporations you may own. As discussed in my blog “Corporate Small Business Owners: Beware; the Capital Gains Exemption is not a Gimme” shares you hold in a small business corporation may be offside the rules to claim the $800,000 Capital Gains Exemption (indexed to $813,600 in 2015) where you have significant cash and/or investments in your corporation. In order to meet the criteria to qualify for the capital gains exemption, it is often advisable to pay a dividend from the corporation to reduce the corporation’s cash and near cash assets. Where you have a terminal illness, it is imperative you review the status of your corporation with your accountant to ensure your company is onside the rules or is “purified” to qualify for the exemption.

Charitable Giving

Consideration should be given to any charitable contributions you wish to make upon death or while alive. Any donations made in the year of death are not subject to any limitations and are 100% deductible. The tax savings are worth approximately one-half of the actual contribution. The rules for donations made in your will were made more flexible in the 2014 budget.

Medical Expenses

Medical expenses qualify as a non-refundable tax credit. In the year of death, medical expenses may be claimed for any 24 month period including the date of the person's death, which were not claimed in a prior year. Sometimes you may wish to amend a prior year’s medical expense claim to utilize the 24 month period option. However, as you would typically have significant medical expenses if you are terminally ill, there is often not much to be gained by using the 24 month option as you would receive a full tax credit.

This topic is unpleasant and dealing with financial and tax planning may be the last thing on your mind if you are terminally ill. However, engaging in financial planning for your own demise is prudent and your final act of kindness for your family and/or executors.

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. Please note the blog post is time sensitive and subject to changes in legislation or law.

Financial & Tax Planning for the Terminally Ill - Part 1 - Getting Organized

Many of us do not consider our own mortality. Yet, if you or someone you know has been diagnosed as terminally ill, you are forced to face the reality of your/their impending passing. While the emotional and health issues are first and foremost, to lessen the burden for your family, friends and/or executor(s), it is very important to undertake both financial and tax planning.

A diagnosis of a terminal illness quite bluntly means that you are probably going to pass away in the near term. The near term for a terminal illness is defined by different medical practitioners and medical organizations as anywhere from 6 months to two years. Most likely you will not be able to work full-time (or you will want to stop working at some point) and may incur additional medical or nursing care related expenses that are not covered by the Canadian health care system.

Consequently, you may need to liquidate investments, retirement assets or draw on insurance policies to fund your day to day living and medical expenses. For the purposes of this post, I am going to assume you are lucky enough to have sufficient liquid resources to live comfortably until that fateful day.

If you have stress tested your death, as I have suggested in prior blog posts, the anxiety related to getting your financial house in order will at least be minimized. However, for today’s blog, I am going to assume you have done little to plan for your demise, and I’ll provide a comprehensive list of things you need to organize and consider.

Legal Documents to Prepare, Update, Review or Gather

1. Will(s) – Have an updated one in place

Hopefully you already have a will(s). If not, ensure you immediately have a one drafted. If you live in a province that allows you a second will (i.e.: In some provinces you are allowed to have a second will for the shares of your private company in order to minimize probate taxes; although the new rules for inter vivos trusts must be reviewed) consider whether a second will is applicable to your situation.

Where you have a will in place, ensure you review your will one final time to determine if it is up to date and reflects your current wishes. If you have not designated personal property such as jewelry and art in your will, you may now want to specify how that property is allocated; rather than leaving it to your family to sort out, possibly creating issues for your executor.

Although most terminal illnesses do not affect your mental capacity, I have seen circumstances where lawyers are concerned about the mental capacity of their clients and your lawyer may request a capacity test prior to allowing you to change your will.

2. Personal documents – Organize and store

Once you pass away, many financial institutions and government bodies will request legal documents (passports, birth certificates, drivers licence, etc.). You will therefore want to store all these documents in one place (safety deposit box) and make your executor or family aware of the location of these documents.

3. Powers of Attorney (“POA”) – Get your financial and personal care wishes down on paper

If you do not already have POA’s in place for both financial and health decisions, you will want to have both documents drafted as soon as possible. Whether you are just drafting a POA or reviewing a previously granted POA, ensure you are comfortable with your attorney (the person you have appointed) selection.

You will want to make your attorney for personal care (health) aware of your wishes for medical purposes.

4. Funeral Arrangements – Inform your executor or family about your preferences

You may have already prepaid your funeral or have specific wishes. You need to ensure any outstanding payments are made on prepaid plans and discuss your funeral wishes with your family or executor so they are aware of any specific wishes. Banks will typically allow your estate to pay for your funeral from your bank account; however, you may wish to give the money while alive to your executor so they do not have to deal with the bank.

If you were undecided about organ donations, this would be a time to make a final determination.

5. Insurance – Create a folder and summary with all your documents together with contact information

You may have life, disability, critical illness or any number and types of insurance in place. In order to assist your family and/or executor, you should create a file with all your policies, the amount of insurance and the contact information of your insurance agent where applicable.

In some cases your beneficiary designations under your insurance policies may be outdated (for example, many people still have their ex-spouse as a beneficiary) and need to be reviewed and changed. Many people also do not have updated beneficiaries for their RRSPs and RRIFs.

6. Real Estate – Organize all your deeds in a single file for easy reference

To assist your executor(s), you will want to create a file of title and purchase documents relating to your home, cottage and/or rental properties you own.

7. Information Check List – provide a list of helpful contacts

To help alleviate additional stress for your loved ones, I strongly suggest putting together an information checklist of:

•  your key contacts (lawyer, accountant, insurance agent, investment advisor, banker etc.)
•  location of assets (your bank accounts, investment accounts, and retirement account), credit cards
•  location of safety deposit box etc.

If you do not have something in place, this would be the time to prepare your list, as a courtesy to your executor(s), so they are not playing a game of hide and seek with your assets.

You will also want to summarize and provide documentation regarding any liabilities you have, such as mortgages, bank loans and lines of credit.

Finally, it’s a good idea to introduce your key contacts to your executor and/or spouse so they have familiarity with them.

8. Digital Information – provide a protected list of your passwords

As discussed in my blog Alzheimers and Death in the Digital World you will want to consider how you deal with the issue of passwords in respect of your online financial accounts and Internet/social sites.

I am going to stop here today. Next week I will discuss financial and tax planning issues you will want to consider if you or anyone you know is terminally ill.

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. Please note the blog post is time sensitive and subject to changes in legislation or law.

Can a Shareholder Be an Independent Contractor to Their Own Company?

If you perform services for a business, it is extremely important to determine whether you are an employee, a self-employed individual (i.e. independent contractor) or a Personal Service Business (if you contract through your own corporation).

I have discussed these controversial income tax issues a couple of times in “I am a Contractor Unless the CRA Says Otherwise” [see the second part of this post updating employee/contractor status] and in “Is Your Corporation a Personal Service Business”.

However, how about the situation where a shareholder of a corporation (whom you would typically consider to be an employee) wishes to treat themselves as an independent contractor and pay themselves a consulting/management fee instead of a salary? As I have been asked this question several times by readers, today, I will discuss a 2012 court case that "sort of" addressed the issue.

Pluri Vox Media Corp

In the 2012 court case, Pluri Vox Media Corp.v The Queen, 2012 FCA 295, the sole shareholder of Pluri Vox took the position that he was an independent contractor (not an employee) to his own company for the following reasons:

1. He was not paid a predetermined salary, but was paid a fee between $3,000 and $8,000 per month based on the commercial activity Pluri Vox undertook.
2. The company asserted that the varying compensation was indicative of the financial risk the shareholder undertook.
3. The shareholder was not directed on how to perform his duties and was able to hire assistants without Pluri Vox’s consent.

Nonetheless, the court ruled the shareholder's status to be that of an employee. As a result of this, the company was liable for payroll source deductions that were not remitted in the past.

This ruling was founded in part on the finding that there was no contract between Pluri Vox and the shareholder and that the shareholder did not invoice Pluri Vox for his services and did not charge GST (despite being registered for GST with the CRA).

However, Justice Webb made an important comment in respect of whether a shareholder can be a contractor to their own company. He stated:

"It would also seem to me that, while this would be unusual, an individual could enter into more than one contract with his or her own company and therefore could provide services in different capacities. It follows that the simple fact that an individual is a director or an officer of a company does not, in and of itself, exclude the possibility that other services may be provided by that individual as an independent contractor. When that occurs, it will be necessary ..... to apportion the amounts paid between the services performed in one capacity and the other."

Thus, the court provided for the possibility a shareholder could be an independent contractor to their own company in certain circumstances.

Justice Webb also commented that where applying the "control" test often used by the courts, “[t]he importance lies in the corporation's legal power to control the employees, not whether the employees feel subject to that control”.

Unfortunately, while the court actually addressed two important concepts, it failed to provide clarity for employee/contractor situations involving a shareholder of a company. Thus, if you own your own corporation and pay yourself as a contractor or through management fees, understand the CRA may come knocking at your door.

Employee vs Contractor

The link above to "I am a Contractor Unless the CRA Says Otherwise" is now almost four and a half years old. I may update this topic in the future, but until then, it should be noted a 2013 Federal Court of Appeal hearing, 1392644 Ontario Inc. (Connor Homes) v. Canada (National Revenue), 2013 FCA 85, has placed a new strong emphasis on the role of “intent” in the determination of whether you are an employee or contractor. In the case the judge applied a two-step approach:

1.The intent of the parties

2. Does the actual reality of the working relationship confirm the intent of the parties?

To reach a definitive conclusion, both steps must be consistent. In examining intent, the courts will examine the contractual relationship or the behavior of the parties, such as were invoices issued and whether or not the worker registered for GST/HST purposes and made various other filings as an independent contractor. The second step will involve a review of the same tests applied in the Weibe Doors and Sagaz Industries cases I note in the "I am a Contractor" post.

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. Please note the blog post is time sensitive and subject to changes in legislation or law.

How Your Birthdate Can Impact Your Financial Affairs and Retirement

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

Retirement

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

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

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

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

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

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

Housing

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

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

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

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Topics of Interest

I am burnt out from personal income tax season and trying to get out my various December corporate year-ends. So I am taking a break from writing this week.

During the year I jot down topics to write about and draft blogs. It’s a process; from just an idea, to a draft, to a complete blog that just needs revisions. My ideas for this year take me until the summer when I hit the golf course. At that point I’ll be re-posting the “Best of The Blunt Bean Counter”.

However, I could use a few suggestions for future blog post topics for next fall. So if you have an idea or topic you would like me to discuss, leave a comment on this post, or feel free to send me an email to bluntbeancounter@gmail.com

See you next week, when I write about how your birth date affects your financial position.

Bloggers note: Sorry, by accident I closed the comments section for this post. However I have received many suggestions for future topics to my email.  Thank you. The comments section is now available.