The Taboo Of Money- I Will Not Talk About It- Part 2

As discussed in my blog post last week, I am going to post small excerpts of a book I was writing on money taboos which I have abandoned. Last week I suggested you consider a frank discussion with your beneficiaries about your will. Today I discuss four of the eight benefits I see in having a family meeting to discuss your will; I discuss the final four benefits in next weeks blog post.

The Benefits of Having a Family Meeting

The following is a brief summary of what I believe to be the main benefits of having a family meeting about your will:

1. Avoiding Future Conflict - and Litigation!

Fans of Charles Dickens' Bleak House will of course remember the fictional case of Jarndyce and Jarndyce in which generations of family members fought over a large estate until the estate was completely consumed by legal fees. If you don't discuss your will with your children, any perceived actual or perceived inequalities in your will cannot be explained rationally to them, and conflict and estate litigation might well result. Of course, the kids might "lawyer up" despite your best efforts, but at least you have done your best to avoid it!

One of the key reasons for even considering a family meeting to discuss your will is the opportunity it provides for you to outline in a rational manner and hopefully in a calm setting why you have left certain assets to certain children, to charity or to whomever else you have decided to leave assets. It is a bit of a guessing game whether you will have properly perceived what your children perceive as inequalities; but in most cases, it will be obvious.

2. Explaining Intentional Inequities

An example of an obvious and deliberate inequity is where you have left more money to one child than to the others. Where you have left more money to one child (perhaps he or she makes less money than the other children), you can use the meeting to explain why and explain that it has nothing to do with loving that child more, you are just helping him since they have not been as fortunate as the other siblings.

The fallout on this decision may come from two sources. Most of us are familiar with the biblical parable of the prodigal son, in which the first son asks for his inheritance from his father early, blows through all the cash and then goes back to his dad for more. Rather than telling his son to suck it up and support himself, the dad then dishes out even more to the prodigal son, leaving his hardworking younger son angry. Remember that there may be reasons why the children are not equally successful - perhaps the least successful one is also the laziest and most unmotivated of the children. The others may question why they are being penalized in your will for their sibling's lack of performance. It is your right to give your money to whomever you wish, of course, but you should expect at least some resentment from the other siblings should you wish to proceed with this course. Be prepared to justify your decision.

Secondly, and more surprisingly, fallout may not come from the children who are not receiving equal inheritances, but from the child receiving the additional money. They may feel insulted that you feel they have been less successful, and embarrassed by your desire to give them extra help, rather than regarding the extra allocation as compassionate recognition that they require some additional financial assistance.

3. Avoiding Unintentional Inequities

There may be less obvious inequities. There may be consequences arising from your legacies that you did not anticipate, creating unintended conflicts between your family members. For example, in striving to be fair, you may bequeath a cottage or other secondary property to all your children equally, without realizing that doing so actually creates a burden on those of them who do not want the cottage but will be required to pay for its upkeep. You may also miss the opportunity to consider other ways of disposing of your assets, perhaps by intervivos gifts that will ultimately minimize taxes.

4. Clarification of Prior Gifts and Loans

Many of my clients have wanted to help out their kids during their lifetimes by providing them with a little (or a lot) of extra cash. The money might be used for a down-payment on a property, for education or to bail out a child who hits a bad financial spot. The most important thing is that the child must know whether the money was a gift or a loan and whether that money was expected to be an "advance" on the inheritance. How to intend to characterize these gifts or loans is an important issue to discuss in the family meeting, especially where you want to avoid an unintentional inequity if you were to die without making your intentions down and where one child has already received a significant portion of your estate.

The above issue can often be dealt with by utilizing a “hotchpot clause” in your will. Over the years, a legal concept now commonly known as a “hotchpot clause” has evolved to deal with the equalization of the beneficiaries of an estate, where one or more of the beneficiaries have already received money during their parent’s lifetime. When a hotchpot clause is inserted in a will, the clause will prevent a beneficiary (typically a son or daughter) from “double dipping” where the parent intended any money advanced during their lifetime to be considered a pre-payment of an inheritance, rather than an advance over and above an intended inheritance. See this post I had on the hotchpot topic for more information.

Next week I conclude this series with the final four reasons to consider a family meeting.

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.

The Taboo Of Money - I Will Not Talk About It -Part 1

As discussed in my blog post last week, I am going to post small excerpts of a book I was writing on money taboos which I have abandoned. Today and next week, I write on the taboo of discussing your will with your children, either individually or in a family meeting, while you are alive.

The Taboo

One of the biggest money taboos people have is discussing their will openly with family members.

People hate talking about their own death. People hate talking about their own money. People hate conflict within their families. Combine all of these hang-ups and a perfect storm of neurosis results, creating a virtual tsunami of taboos involving openly discussing one's wealth, one's death and disclosing one's personal opinion about family members. Many people view the thought of this discussion with horror, but my advice is simply - "get over it and do it!"

Reasons for the Taboo

In a 2016 Google Consumer Survey conducted by Legalwills.ca, the survey found 62% of Canadians do not have wills. The survey also noted that 12% of Canadians have an outdated Will (most never updated their Wills once they married and/or had children), which means that 74% of Canadians do not have an up-to-date Last Will and Testament.

I suppose the most common, although rarely admitted, reason for this is, that people are in denial that their lives will eventually end and that their lives will probably end at a time that they cannot control. Understandable, but foolish. None of us get out of this world alive, so get a move on and arrange your affairs so that all of the money, jewelry, collectibles and personal items you have worked for will ultimately be distributed in the most beneficial and tax-efficient way possible.

Once someone has faced up to the necessity of drafting the will, why then the fear of discussing its contents with family members - those who are actually going to benefit from the will? I have heard both rational and irrational reasons for avoiding the discussion. Here's a sampling of some reasons/excuses I have heard over the years for people not discussing their wills/estate planning with their beneficiaries:

1. It is none of their business.
2. My parents did not discuss their will with me, so why should I discuss it with my children.
3. It is bad luck.
4. If my children know what is in my will, they will be hovering over me like the Angel of death waiting for me to kick the bucket.
5. Discussing our intentions will just cause tensions amongst my children.
6. My will does not split my wealth equally among my children.
7. My children are not equally responsible and I have a trust for one child; I don’t want them upset at me while I am alive that I don’t trust their judgement.
8. I am leaving a substantial sum to charity, my kids will “freak” when they find out.
9. I have no idea how long I will live, my assets may be depleted by the time I pass away and the kids will be expecting certain assets that may not be in existence.
10. I have not drafted a will (see above).

Consequences of adhering to the Taboo

If you do not discuss your will with your children while alive, the following are possible

consequences:

1. Perceived or actual inequalities in your will that can be explained rationally while you are alive will never be explained. 
2. You may create unintended conflict amongst your children.
3. You may not have an accurate understanding of which assets your children truly want.
4. Income taxes may not be minimized.
5. Estate litigation may result.

There is no doubt that money brings out the worst in some people and a full disclosure of your family assets and planned distribution may cause problems in your relationship with your children and in their relationships with each other. But it is my belief that it is better to know the problems, confront the problems and solve the problems before you die and this can only be done by a full and frank discussion with your beneficiaries.

Next week I will discuss the benefits of having a family meeting to discuss your will and estate planning.

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.

Breaking The Money Taboo – It Makes Cents

In 1913, Sigmund Freud recognized the taboo of money when he wrote, “money questions will be treated by cultured people in the same manner as sexual matters, with the same inconsistency, prudishness and hypocrisy.”

One hundred years later, sex is often openly discussed, yet many money matters are still considered taboo. As consequence many people make bad financial and personal monetary decisions because they avoid the topic. This lack of communication can impact anything from your estate planning, to your marriage, to the selection of your executor, to even losing friends over how to split a restaurant bill.

In my opinion, the money taboo is out-dated and potentially detrimental from both a familial and financial perspective and needs to be broken.

The Free Dictionary defines a taboo “as a ban or inhibition resulting from social custom or emotional aversion”. I think that is a simple and elegant definition. Whether the taboo’s origin is Victorian, French, or biblical in nature, our parents and their parents have propagated the notion that it is bad social etiquette to discuss money matters of any kind.

Every culture and every family have different money taboos. For example, North Americans dislike revealing how much money they earn. It is taboo. Norwegians, on the other hand, have the tax records of all citizens available as public record and have no expectations of privacy.

I have observed first-hand, the financial cost to clients, friends and family and the related personal cost in regard to marriages, sibling and personal relationships where people did not have open frank discussions about money. This issue caught my attention to such a degree that in 2013 I decided to write a book on the topic, encouraging people to confront and/or consider various money taboos.

As they say, the best-laid plans of mice and men often go awry and unfortunately two years later, due to time and work constraints and the realization that many of my proposed topics had psychological bents I was not qualified to discuss, I had only finished two (way too long) chapters of my proposed 17 chapters. I thus decided to set aside the book on money taboos and wrote Let’s Get Blunt About Your Financial Affairs (which was a collection of my best blog posts and thus required more editing than writing). Check - bucket list item taken care of.

As I expect to go in a different direction should I ever write another book, I figured I may as well get some use of the time I spent on my proposed book, so I have decided to post excerpts of the two chapters I wrote (the first chapter over the next couple weeks, the second likely in September). These two chapters are:

1. I Will Not Talk About It – this chapter revolves around our reluctance to discuss our will with our family

2. Asking For Money: The Intergenerational Communication Gap – this chapter discusses situations where children need money (example to escape abusive relationship or start a new career) and situations where parents need money (example: need to reverse mortgage their home since they have no money left and have medical bills or just daily expenses they can no longer afford to cover).

In these posts I am going to discuss reasons people have given me for continuing specific money taboos and review the consequences they face by adhering to these off limit discussions. I attempt to explain why we should consider challenging these prohibitions and how to break some of these taboos.

Hopefully by the time I conclude this “mini-series”, you may understand why I think Canadians need to talk about money.

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.

Public Retirement Systems: Comparing CPP/OAS in Canada to Social Security in the United States

I'm back. I made it through yet another tax season. I request your indulgence for a paragraph, as I have one last rant about the timing of the issuance of tax season T-slips.

You would not believe (or maybe you would, since you are probably like many of my clients, who received their tax slips into the first ten days or April, let alone the number of amended slips received up to the third week of April) how many returns we had to amend or hold because of late or amended T-slips. With current technology and payroll services, I really don't see why the CRA does change the required issuance date for T4's and T5's from the end of February to either the end of January or the middle of February. This would allow the corresponding acceleration of T3's for public entities and T5013's to say March 1st or 15th (I would keep trust filings for private trusts to March 31st so they would not have to amend each return for the tax slips received after March 31st). By doing such, taxpayers could file their returns on a timely basis without being rushed and constantly amending their returns.

Okay, let's move on to today’s post, which contrasts and discusses retirement benefits under the social insurance systems of Canada and the United States. 

 This post lays the groundwork for a future guest post by Alyssa Tawadros a senior manager U.S. tax with BDO Canada LLP, which will discuss various cross-border aspects of social insurance, such as:

• How CPP/Social Security contributions work when one goes on a temporary cross-border assignment (i.e. totalization agreements and certificates of coverage) 
• How contributing to the U.S.’s social security during one’s lifetime affects their ability to claim benefits for CPP (and vice versa)
• How each respective country taxes a resident’s social security benefits

Public Retirement Systems

As noted above, today’s post will compare retirement benefits under the social insurance systems of Canada and the United States. In Canada, this would be the Canada Pension Plan (CPP) and Old Age Security (OAS), and in the U.S. this would be Social Security.

  The Canada Pension Plan (CPP)

The CPP is a contributory public pension plan administered for employees and self-employed individuals. It provides a basic level of earnings replacement in retirement for workers throughout Canada, with the exception of Quebec. Quebec workers are covered by the Quebec Pension Plan (QPP), which is an almost equivalent plan. For simplicity’s sake, we will focus on the CPP only. In addition to retirement benefits, the CPP also provides disability and survivor benefits.

The CPP is financed by employer, employee and self-employed contributions as well as income earned on CPP investments. Contributions begin at age 18 and end at age 65 unless the individual has already begun receiving benefits or has died. Currently, the CPP contribution is 9.9% of annual pensionable income. Employees make half (4.95%) of the contribution and the other half is paid by their employer. Self-employed contributors pay the full 9.9%, and they receive a corresponding tax deduction on their tax return for one half of the contribution to represent the “employer” portion of the contribution. When calculating the contribution, there is an annual exemption of $3,500 that is deducted from the annual pensionable income. CPP contributions are limited by the “year’s maximum pensionable earnings”, which in 2017 is $55,300. The year’s maximum pensionable earnings approximates the average Canadian wage and is indexed to average wage growth annually.

For example, let’s say you’re employed and your total annual income in 2017 is $130,000. Since this income is in excess of the maximum pensionable earnings, the CPP contributions are calculated based on pensionable earnings of $55,300. After the deduction of $3,500, you and your employer’s contribution would each be $2,564.10 (4.95% of $51,800), for a total contribution of $5,128.20.

Currently, when the contributor reaches the normal retirement age of 65, the CPP provides retirement benefits equal to 25% of the contributor’s pensionable earnings for the years that the contributor is aged 18 to 65. A certain number of months with lowest earnings may be automatically disregarded under a general “drop out” provision to account for certain periods when one wasn’t working (e.g. unemployment, attending school, etc.). The maximum CPP retirement pension one could be entitled to is calculated as 25% of the average of the maximum pensionable earnings for the last five years. For 2017, that maximum is $13,370.04. The average annual amount of benefit for new beneficiaries is typically much lower than the maximum. In 2016, the average amount of benefit collected was $7,732.202.

It is possible to apply for and receive CPP benefits as early as age 60, but the pensioner will receive a reduced amount. On the other hand, by delaying CPP benefits until the age of 70, the pensioner will get an increased benefit. Calculating what your benefit might be at retirement is quite intricate, but estimates can be requested for ages 60, 65 and 70 from the Service Canada website. In order to qualify for CPP benefits, the pensioner must be at least a month past their 59th birthday, have worked in Canada, have made at least one valid contribution to the CPP, and want their CPP retirement pension payments to begin within 12 months.

You may be aware that in 2016 the government introduced Bill C-26, which sets out amendments to enhance CPP benefits. The main changes will be an annual payout target raised up to 33% from 25% and to increase the Year’s Maximum Pensionable Earnings to $82,700 when the program is fully phased in by 2025. The program will be funded by an increase in contributions by employees and employers from 4.95% to 5.95%, phased in slowly starting in 2019. In today’s dollars, the Department of Finance has indicated that the maximum benefit under the enhanced CPP will increase to nearly $20,000.

Old Age Security (OAS)

OAS is a government program that provides a basic level of retirement income and is funded out of the general revenues of federal government. It is not tied to past work history or funded through payroll taxes. It operates as a monthly payment available to seniors aged 65 and older who are Canadian citizens or legal residents living in Canada or elsewhere – provided that the minimum residence requirements are met. In addition, low-income seniors who qualify for OAS may be eligible for the Guaranteed Income Supplement (GIS), which is a tax-free benefit. To qualify for the GIS in 2017, a single pensioner’s income must be $17,544 or below and married pensioners’

combined income must be $23,184 or below.

The OAS maximum monthly benefit for 2017 is $578.53. The benefit is subject to a reduction also known as a “clawback” starting at incomes of around $70,000. The benefit is fully clawed back at incomes around $120,004. It should be noted that when people complain their OAS is clawed-back, it is not their own money, but the governments money. Here is a link to a post I wrote on strategies to reduce the claw-back.

The annual retirement benefit for someone who is entitled to maximum CPP and OAS benefits is around $20,312 ($578.52 x 12 + $13,370.04). However, as the average CPP benefit in 2016 was lower than the maximum, an estimate of the average retirement benefit from CPP and OAS would be around $14,674 ($578.52 x 12 + $7,732.20)

How Does Social Security Compare?

Social Security is similar to CPP in that it is a mandatory publicly-provided system providing retirement assistance which is funded by contributions from employees and employers and the self-employed. The funding is by way of FICA taxes (FICA stands for Federal Insurance Contributions Act) where contributions to Social Security are 12.4% of eligible earnings. Similar to CPP, half (6.2%) is paid by the employee and half by the employer. Those who are self-employed are liable for the full 12.4%, but receive a deduction for 50% of their contribution on their tax return to represent the “employer” portion. Similar to CPP, there is a maximum earnings cap known as the “wage base limit” which is $127,200 for 2017. So as you can see, Social Security requires higher annual contributions than CPP, mainly because the both maximum pensionable earnings and contribution rate is significantly higher.

Using our example from above to compare both systems, the individual earning $130,000 a year would contribute the maximum under both systems since the salary is higher than the maximum earnings cap in both countries. For 2017, the individual would contribute $7,886.40 to Social Security ($127,200 x 6.2%) or $2,564.10 to the CPP (ignoring exchange rate considerations).

With a high contribution you would hope it would come with a high reward at retirement – especially since the U.S. does not have an analogous program to OAS. Social Security is a credit-based system and the number of credits one has determines whether one is eligible to collect. In 2017, one credit is received for every $1,300 in earnings up to a maximum of four credits per year. To claim retirement benefits, 40 credits are needed, generally representing ten years of work. However you can’t collect retirement benefits until you earn 40 credits and reach the age of 62 or older. Retiring at age 62 is considered early retirement, with the full retirement age being 67 for those born in 1960 or later. Similar to CPP, if one collects early starting at age 62, they get a reduced payment. Conversely, if they wait to collect after age 67 they get a higher payment, which tops out at age 70.

The retirement benefits depend on how much money was earned during one’s working years and when they started collecting. The program was designed to replace roughly 40% of pre-retirement wages for an average earner. Getting the highest benefit possible means that the income must have been at or above the Social Security ceiling each year for at least 35 years. In 2017, the maximum benefit for one retiring at the full retirement age is $32,244. However the published average benefit for 2016 was around $16,092. Similar to CPP, the average collected is typically less than the maximum benefit.

Expanding CPP – was it a necessary step?

Currently, Social Security covers a much higher income range (and requires a higher contribution) than CPP and generally aims to replace more pre-retirement wages than CPP. However, the U.S. does not have an analogous program to OAS. Social Security tends to provide a larger benefit at retirement to those who were high income earners during their working years in comparison to CPP and OAS. In contrast, Canada’s system can provide more benefits to those who had lower incomes when they are working. This is consistent with the Department of Finance’s study that found lower income families had the lowest risk of undersaving for retirement as OAS and CPP benefits provide a relatively high income replacement at their income range.

CPP reform appears to be targeted more toward middle class families. The Department of Finance found that 24% of families nearing retirement age are at risk of not having adequate income in retirement to maintain their standard of living. They also suggest that roughly 1.1 million families will have trouble maintaining their standard of living at retirement. The Department of Finance identified a number of factors which have increased the level of savings required, such as the decline of workplace pension plans, the shift from defined benefit plans to defined contribution plans, and younger workers living longer lives. The enhancement to the CPP is meant to provide higher, predictable retirement benefits. Although the mandate is arguably needed in today’s world, both employees and the employers must now take on a higher burden through increased contributions. Where labour can often be one of the largest costs of a small business, the increase in contributions lowers the bottom line and can be an inhibitor of growth. Ideally, the gradual phase-in will help small businesses integrate the changes into their business and financial planning. 

I would like to thank Alyssa Tawadros, Senior Manager, U.S. Tax for BDO Canada LLP for her extensive assistance in writing this post. If you wish to engage Alyssa for individual U.S. tax planning, she can be reached at atawadros@bdo.ca

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.

Realized Capital Gain/Loss Reports – Rely on Them at Your Own Risk

Back in the day, when I was young and energetic, during tax season I would write a series called Confessions of a Tax Accountant, in which I would highlight contentious and/or interesting issues that arose in my practice.

On a few occasions (especially in the middle of tax season when I am most cranky), I wrote about the inaccurate capital gain/loss reporting by some financial institutions. These reports can be flawed in three ways:

1. Incomplete cost base information for U.S. stock holdings
2. Failure to reduce the adjusted cost base ("ACB") on the sale of flow-through shares.
3. Phantom or inaccurate information on the disposition of stocks and mutual funds.

U.S. Stock Holdings

Many financial institutions provide you capital gains summaries in $U.S. based on your U.S. purchase price and U.S. sale price. If you then multiply that gain by say the average foreign exchange rate for 2016 your capital gain/loss is wrong since you need to translate the purchase and sales price for each stock sold at the F/X rate on the day of purchase and sale. I wrote about this issue in this blog post and will only add; that I have seen this again several times this year and you should inform your advisor you want this report in $Cdn based on the conversion rates when you purchased and sold any stock.

Flow-Through Shares

I discussed this matter in this 2014 blog post. The issue was, and still is, that the capital gain or loss reported by financial institutions on their realized gain/loss report is almost always incorrect. Why? This is because the initial ACB of your flow-through share should be reduced by the resource tax deductions claimed in prior years and these reports typically ignore this cost base reduction and reflect the original purchase price, not the reduced ACB.

I have been told that from a liability perspective, the financial institutions do not want to get into making tax cost base determinations, especially in respect of flow-throughs (although, I have seen some of the better investment advisors and investment management firms adjust this on their own) and thus, they put general disclaimers on the report that the institution is not responsible for the accuracy of the capital gain/loss statement. While I can understand this position, I cannot understand why the financial institutions do not put an asterisk beside these calculations with a comment that the ACB may have been reduced by prior tax deductions claimed to at least highlight this issue.

Phantom Gains and Losses

This year, in addition to the above issues, I have already twice noted very significant errors in the general realized capital gains/losses reports that the financial institutions send to their clients. I think because I am involved with wealth advisory services that I am more finally attuned to these issues, but in one case there was a massive phantom gain that made no sense since the fund was an income preservation type account and in the other, the report reflected a huge loss in a conservative balanced stock fund that seemed unlikely given the recent strength of the markets.

In the first case, I spoke directly to the advisor for the financial institution. They investigated and reported back that I had identified an error (a complicated transaction had taken place and had not been accounted for correctly) and they would amend my clients report and further, that they would have to amend all their other clients’ reports.

In the second case, I asked the client to call his advisor to double check. He was told the error had been caught and an amended report was on its way.

To be fair, with people moving from institution to institution, cost base numbers can easily get “messed up” and there are some very complex transactions that also cause ACBs to be reallocated.

So the lesson you should take from today is: when you receive a realized gain/loss report from your advisor, take a quick scan through it to see if something seems out of whack, on either the gain or loss side.

Note: I am sorry, but I do not answer questions in April due to my workload, so the comments option has been turned off. Thus, you cannot comment on this post and past comments on other blog posts will not appear until I turn the comment function back on. 

This is my last post for a couple weeks, so see you in May.

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.

Lifestyle Expansion - The Plague of Boomers, Millennials and Everyone in Between

Over the years, on more than one occasion, I have had to read the riot act to clients who make high six-figure incomes about their spending habits. The discussion is almost always in context of their retirement planning and how if they continue their current spending, they will either not have enough to retire on, or will have to sell their house and/or cottage very early in their retirement to fund their future needs.

This issue is not isolated to high-net worth people and those near retirement; it is the same problem for someone who makes $80-$120,000 as for someone who makes $600,000 and the same issue for millennials (although more in context of saving for a home than retirement). If you continually expand your lifestyle to fit your increasing income or current income level, the reality of your retirement or your future living situation, may be far different than you envision it. That being said, obviously if you make $600,000, you have more leeway to catch-up, even if it seems incomprehensible you even have such an issue in the first place. 

The term “lifestyle creep” is often used to reflect this worrisome spending issue. Investorpedia defines lifestyle creep as “a situation where people's lifestyle or standard of living improves as their discretionary income rises either through an increase in income or decrease in costs. As lifestyle creep occurs, and more money is spent on lifestyle, former luxuries are now considered necessities”.

If you are in your late 40's or early 50's, the insidious part of lifestyle creep is that your current earnings support whatever you wish to do and thus you carry on without a care in the world. It is only when I force someone to face the reality that once the gravy train (salary or business) stops, their income requirements are so massive, that their current and retirement assets will be insufficient to fund their needs (even if they significantly reduce their costs in retirement) that I get their attention. 

From a psychological aspect, some people find it very important to maintain a certain image or lifestyle and/or keep up with the Joneses. However, the Joneses may have way more money than you and it is only your current income that allows you to keep up. The reality is you may be swept aside by the Joneses in retirement, as they may only hang out with those "friends" who can spend with them and who have the capital to continue spending at excessive levels.

For some people, all they need is that sobering meeting and they immediately start getting their act in gear. For others, their spending habits are so entrenched and/or so financed; they need to engage a financial planner or money coach. Most discouragingly, some people just pull an Ostrich and put their head in the sand.

Lifestyle creep is not only an “older person” issue. I observe many millennial's spending their entire salaries on bottle service at restaurants, expensive vacations, cars and costly bachelor and bachelorette parties to exotic locales for their friends.

Fixes and Suggestions

So if you have that sobering moment and come to the realization your lifestyle has expanded to your salary or business income, what can you do? Here are a couple basic solutions:

Spending Review

The first step to tackle this issue is to undertake a detailed review of your spending. Track you’re spending for 2-3 months and add on your large one-time expenses not included in the tracking period. Then analyze the results of your spending review and note your excesses. If you are a reader of this blog, you know I am not frugal and have written many times that in my opinion, it is important to enjoy your life and “knock off” some of your Bucket List items while you can. However, there is a huge difference between enjoying your life and spending excessively. All of us can easily cut-back, especially those of us who spend like there is no tomorrow. The obvious areas are always: restaurants, travel, clothes, cars, nanny’s and cleaning ladies (not saying don’t hire them, you may just not need them as often as you currently pay them for), dog walkers etc. 

Auto Savings

Once you undertake your review and decide to reduce your expenses, force yourself to do so by having automatic transfers from your bank account into your retirement or investment accounts, or if you are in debt, increase your monthly repayments (I am astonished at how many people who make $500,000 to $1,000,000 are in debt).

Work Longer

As noted in my recent blog post The Victory Lap, working longer or part-time in retirement is not only healthier and keeps you physically and mentally sharp, but it is a way to save you from having to encroach on your retirement capital. For some of us, it may be the only way to fund our retirements.

Financial Planner or Money Coach

As mentioned above, engaging a blunt accountant, financial planner or money coach is a vital step for many “free spenders”, since it provides discipline and structure in getting their finances in better shape.

Other Articles

Here are a few links to articles on this topic for high earners close to retirement, entrepreneurs or millennial's.

How boomers living the high life are at risk in retirement

Top earners not saving enough are in for a Shock

Millennials - Are You Showing the Signs of Lifestyle Creep?

Fighting Lifestyle Creep and Saving Money as an Entrepreneur

Lifestyle creep is sinister, as you often do not realize it is an issue until it has already become part of your financial fabric. If you are starting to creep, stop it now. If you are already caught in the spending web, take the steps noted above to get your spending under control.

Note: I am sorry, but I do not answer questions in April due to my workload, so the comments option has been turned off. Thus, you cannot comment on this post and past comments on other blog posts will not appear until I turn the comment function back on.

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.

T1135 - Some Guidance on Common Issues

I have written multiple blog posts over the last few years on the T1135 Foreign Reporting Income Verification Statement. I have no interest in writing one more time on how to complete the form, but I thought I would provide you some guidance on some common questions I receive.

U.S. Bank Accounts and other Foreign Accounts

Cash situated, deposited or held outside of Canada even if in Canadian dollars is considered specified foreign property and subject to reporting on the T1135.

So, if you hold a $U.S. denominated bank account with a Canadian Financial Institution, you do not need to include the account on your form T1135. However, if you have a bank account with a U.S. or foreign bank you must include that account on your T1135.

Mutual Funds & ETFS

Mutual funds that are resident in Canada do not need to be reported, even if they hold foreign stock. However, any mutual funds not resident in Canada must be reported.

To the best of my knowledge, the CRA has not definitively answered how to treat ETFs. What they have said is that for the purposes of country reporting, the residency of the mutual fund or exchange traded fund itself is the country of the investment. Thus, one can seemingly infer that ETFs that are resident in Canada would be excluded from reporting. That may be easier said than done and some people make that determination based solely on whether there is a Canadian tax slip issued (inferring the ETF is thus Canadian resident). How is that for an opaque answer? 

Canadian Stocks denominated in $U.S. 

A Canadian stock denominated in $U.S. held at a Canadian brokerage does not need to be reported on the T1135. It is residence of the issuer that is the determinative issue, not the denomination.

Joint Ownership

Jointly owned investments must be split for purposes of the T1135. Thus, if you and your spouse jointly own U.S. stocks with a cost of $160,000 Cdn, you are each considered to own $80,000 of U.S. stocks. Each spouse must then independently calculate whether they have other foreign assets that would cause them to exceed the $100k threshold (i.e. you have more than $20k in other foreign assets).

Personal Use Property

If you own a personal use property outside of Canada, it is excluded from reporting. This will include a U.S. Condo, European Villa, time share or similar property. If there is incidental income, that income does not disqualify the property, as long as the primary use is personal use. This can be very subjective, so be careful.

New Immigrants and Returning Residents

An individual does not have to file Form T1135 for the tax year in which he or she first become resident in Canada. However, if you were formerly a Canadian resident and are returning, the exemption does not hold and you must file a T1135 from the entire year.

Gross Income for Rental Properties

The T1135 form asks you to report your income for real property. One would think that means you are required to report the net rental income (gross rental income less rental expenses), however, you are supposed to report just the gross rental income on the form and ignore the related expenses.

The above guidance is based on various CRA comments and CRA documents I have read. The CRA is not bound by any of the above, so I take no responsibility for the accuracy of the above guidelines.

Note: I am sorry, but I do not answer questions in April due to my workload, so the comments option has been turned off. Thus, you cannot comment on this post and past comments on other blog posts will not appear until I turn the comment function back on.

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.