RRSPs and Corporations - Your Silent Creeping Tax Liability

Happy New Year and I hope 2022 brings you and your family good health and a quick return to something resembling normality. This is my first blog post since December 31st when I officially retired from my public accounting firm. The term “retired” is used loosely. I look at it as a bit of a sabbatical after almost 40 years in public accounting. I will be looking for a new opportunity outside the public accounting realm in accordance with the terms of my retirement agreement, possibly in the family office, multi-family office or investment manager space; I am too young (at least in my own mind) to full stop retire.

Back to the topic at hand. In late December I was updating a retirement spreadsheet I have for changes in my current circumstances and future income tax minimization. 

 

In reviewing the income tax section of the spreadsheet, the quantum of my future or "deferred" tax liability struck me once again. Whether you are currently working, near retirement or in retirement, you have silent creeping tax liabilities accumulating in your Registered Retirement Savings Plan ("RRSP") and/or corporation [for me, in my professional corporation ("PC")]. In my experience, we tend to "forget" or minimize this tax liability, so I though I would discuss it today.

RRSPs are Great while you are Working, not as Great when you Retire

I think most readers will know this, but to quickly recap, contributions to a RRSP result in a tax deduction in the year made (or subsequent year if you don’t fully claim the contribution) and your RRSP grows tax-free until you convert the RRSP by the end of the year you turn 71. For most people, a RRSP works well as their contributions are made at a time their marginal tax rate is higher than they expect in retirement, so they have an ultimate tax savings. Despite the tax effectiveness of your RRSP, the value is somewhat of an illusion, as you are also accumulating a large, deferred tax liability, as the entire value of your RRSP will be taxable in your retirement.

There are a couple options for a RRSP when your turn 71, including a lump sum withdrawal, the purchase of an annuity or the option most people select, converting their RRSP into a Registered Retirement Income Fund (“RRIF”).

Once you convert your RRSP into a RRIF any future withdrawals are subject to income tax (you are now paying tax on your accumulated lifetime contributions and earnings that were tax-free in your RRSP) a sometimes nasty surprise in quantum for some people. You must start drawing your annual minimum RRIF payment by December 31 of the year following the year you establish your RRIF. Since you will typically still be 71 the year following the establishment of your RRIF, the minimum withdrawal will be 5.28% (you may be able to use your spouses age to lower the withdrawal rate) and will rise each year to around 10.2% by 88 and the withdrawal rates will continue to rise dramatically after age 88.

Each year this minimum withdrawal will be taxable on top of any old age security, CPP, pension income and any other investment or other type of income you earn. The marginal tax rate on these RRIF withdrawals can be substantial depending upon your financial circumstances. Luckily for many, you can elect to split your RRIF pension income with your spouse (Form T1032 -Joint Election to Split Pension Income) and thus, you can often lower your effective family tax rate through this election. However, even with the election, the deferred tax hit on your RRIF withdrawals can still be substantial.

Corporations – You have only Paid Part of the Tax

As noted above, I was struck by the quantum of my tax liability for not only my RRSP, but the investments retained in my PC. For purposes of this discussion, consider a PC to be the same as any corporation you may have. Most active companies will have paid corporate tax historically anywhere from say 12% to 26%, depending upon the corporate province of residence. You have thus deferred anywhere from say 20%-40% in tax by keeping the earnings in your corporation (again depending upon the province). Assuming you need to take money from your corporation in retirement, you will then have to deal with this deferred tax liability when you take the money (typically as a dividend).

Similar to a RRIF, you will owe income tax on this deferred tax (the deferred tax is less than your RRIF, since the corporation paid some tax, whereas you paid no tax on your RRSP). If you have been earning investment income in your corporation, you may have some tax attributes like refundable tax to reduce your tax liability, but the original money earned and deferred by the original active company is still subject to a tax hit even though it is now co-mingled with investment income earned on these deferred earnings. Without getting technical, you still have a large, deferred tax liability as you withdraw funds from your corporation.

Income Taxes and Your Retirement Withdrawal Rate

I have written a couple times on how much money you need to retire. In 2014, I wrote an extensive six-part series titled How Much Money do I Need to Retire? Heck if I Know or Anyone Else Does! (The links to this series are under Retirement on the far-right hand side of the blog). 

 

I updated this series between January and March 2021. Most of my various retirement articles and series revolve around the 4% Withdrawal Rule, which is one of the most commonly accepted retirement rules of thumb. Simply put, the rule says that if you have an equally balanced portfolio of stocks and bonds, you should be able to withdraw 4% of your retirement savings each year, adjusted for inflation, and those savings will last for 30-35 years.

In Part 1 of the original 2014 series, I had a section on some of the criticisms of the 4% rule. The first and the most impactful limitation being the model does not account for income taxes on non-registered accounts and registered accounts Note: many of the studies I discuss in both 2014 and again in 2021, still support that the 4% withdrawal works despite any income tax limitations, but I thought it important to reflect this limitation of the rule.

 

I plan to write a future blog post on possible tax planning that you can consider to minimize the tax hit from your RRSP/RRIF and corporation in retirement.

 

As discussed above, where you have a RRSP and/or corporation, income taxes are a creeping liability. Thus, it is important to ensure that when you are younger, you are cognizant of these taxes and as you get closer to retirement, you ensure you have a financial plan that accounts for these deferred/creeping taxes.

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.

Get Your Bucket List Done!

This is my last blog post of 2021 and I wish you and your loved ones a Merry Christmas and/or a Happy Holiday and a Happy New Year. Today I veer off from my usual financial fare to potentially provide you impetus for a New Years resolution; creating and crossing items off on your bucket list.

In 2010, after I watched the movie the Bucket List starring Jack Nicholson and Morgan Freeman, I created my own bucket list. Over the years I have occasionally written about some of the larger bucket list items I have been fortunate enough to cross off my list from playing golf at Pebble Beach to my safari to Africa. I have also discussed some of the smaller bucket list items I crossed off my list such as going to the Rock and Roll Hall of Fame in Cleveland and attempting to learn how to play the guitar (ended up with tennis elbow) and writing my book Let’s Get Blunt About Your Financial Affairs.

What has been crucial in working through my bucket list was writing down my actual list and talking about the list often to others which functioned as a catalyst to actually move forward on many of these items. I discuss this in greater detail below.

My firm BDO Canada LLP (until December 31st when I officially retire) is celebrating its 100 birthday this year an impressive milestone for any company. BDO was also recently selected as one of Canada’s Top 100 Employers for 2022. One of the reasons BDO was selected as a top employer was for the various programs it has implemented in respect of mental health. This priority was reinforced during a recent firm-wide webcast when BDO had Ben Nemtin speak to everyone about mental health and the use of bucket lists.

Wikipedia states that Ben was “the creator, executive producer and cast member of the MTV series The Buried Life”. He also is” co-author of the book What Do You Want To Do Before You Die?, which entered The New York Times Best Seller list”. Today I am going to discuss how Ben used a bucket list/buried list to not only accomplish the above producing and writing achievements, but even more importantly, how he payed forward his accomplishments to help others.

During his BDO presentation, Ben started his talk by discussing the depression and anxiety he had in part due to the pressures of being a member of the Canadian Under 19 National rugby team. He told us how his friends got him out of the house and how he and his friends (again per Wikipedia) eventually ended “up on a two-week road trip with a camera and a borrowed RV to complete a list of "100 things to do before you die." Along their journey, they asked people the question, "What do you want to do before you die?" For each item they accomplished on their list, they helped a complete stranger do something on their own list”.

If you have ten minutes, watch this inspiring Ted Talk by Ben, which includes the key steps to creating and crossing items off your Bucket List and a great story how he and his friends payed it forward to help someone in an incredible way.

Here are Ben’s six key steps:

1. What is important to you – listen to your heart and stop and think about what you really want to do

2. Write down your list – as I note above, it is so important to put your thoughts to paper

3. Talk about your list – if you don’t talk about it, you won’t accomplish it yourself and no one is going to help you (Ben notes many people help you accomplish your list when they hear about your items)

4. Be persistent – for bucket list items that may note be easy to accomplish, be persistent, you may be surprised what you can accomplish - no may mean not now

5. Be audacious – have some items that are not mainstream and go for them

6. Help others – Ben and his friends have done some incredible things for others (as noted in the Ted Talk).

While on YouTube you can find many other great talks on bucket lists, buried lists, life lists etc. Many of these talks are ways for you to reconnect with your true values and what you are enthusiastic about and to live life as your “true self”. So, whatever you want to call it, a bucket list is a wonderful way to not only create a list about things you want to do and accomplish, but it may be a means to self exploration. Anyways, I will get off my soap box/bucket and let you decide for yourself whether creating and/or acting on a bucket list is a worthwhile New Year's resolution for you.

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.

Tax Gain/Loss Selling 2021 Version

In keeping with my annual tradition, I am today posting a blog on tax-loss selling, except this year, I changed the title to tax gain/loss selling (to include some planning for stocks with capital gains). I am posting on this topic again because every year around this time, people get busy with holiday shopping (or at least online shopping these days) and forget to sell the “dogs” in their portfolio and consequently, they pay unnecessary income tax on their capital gains in April. Alternatively, selling stocks with unrealized gains may be beneficial for tax purposes in certain situations.

Hopefully, based on the strong stock markets of both 2020 and 2021, you do not have many unrealized capital losses. However, the last half of 2021 has been very sector oriented and you may have stocks that were hit on the sector rotation. In fact, in a November 22nd Globe and Mail article by Tim Shufelt, he noted that 17% of S&P/TSX composite stocks were down by at least 10% year to date. That was before the large market drop on Black Friday.

In any event, if you have an advisor, ensure you are in contact to discuss your realized capital gain/loss situation and other planning options by next week and if you are a DIY investor set aside some time this weekend or next to review your 2021 capital gain/loss situation in a calm, methodical manner. You can then execute your trades on a timely basis knowing you have considered all the variables associated with your tax gain/loss selling.

I am going to exclude the detailed step by step capital gain/loss methodology I usually include in this post. If you wish the detail, just refer to last year's post and update the years (i.e., use 2021, 2020 & 2019 in lieu of 2020, 2019 and 2018). 

You have three options in respect of capital losses realized in 2021:

1. You can use your 2021 capital losses to offset your 2021 realized capital gains

2. You can carry back your 2021 net capital loss to offset any net taxable capital gains incurred in any of the three preceding years

3. If you cannot fully utilize the losses in either of the two above ways, your can carry your remaining capital loss forward indefinitely to use against future capital gains (or in the year of death, possibly against other income)

Tax-Loss Selling

I would like to provide one caution about tax-loss selling. You should be very careful if you plan to repurchase the stocks you sell (see superficial loss discussion below). The reason for this is that you are subject to market vagaries for 30 days. I have seen people sell stocks for tax-loss purposes with the intention of re-purchasing those stocks, and one or two of the stocks take off during the 30-day wait period—raising the cost to repurchase far in excess of their tax savings.

Thus, you should first and foremost consider selling your "dog stocks" that you or your advisor no longer wish to own. If you then need to crystallize additional losses on stocks you still wish to own, be wary if you are planning to sell and buy back the same stock. Your advisor may be able to "mimic" the stocks you sold with similar securities for the 30-day period or longer or utilize other strategies, but that should be part of your tax loss-selling conversation with your advisor.

Identical Shares

Many people buy the same company's shares (say Bell Canada for this example) in different non-registered accounts or have employer stock purchase plans. I often see people claim a gain or loss on the sale of their Bell Canada shares from one of their non-registered accounts but ignore the shares they own of Bell Canada in another account. Be aware, you must calculate your adjusted cost base over on all the identical shares you own in all your non-registered accounts and average the total cost of your Bell Canada shares over the shares in all your accounts. If the cost of your shares in Bell is higher in one of your accounts, you cannot pick and choose to realize a gain or loss on that account; you must report the gain or loss based on the average adjusted cost base of all your Bell shares.

Superficial Losses

One must always be cognizant of the superficial loss rules. Essentially, if you or your spouse (either directly or through an RRSP) purchases an identical share 30 calendar days before or 30 days after a sale of shares, the capital loss is denied and is added to the cost base of the new shares acquired.

Tax-Gain Selling 

While typically most people are looking at tax-loss selling at this time of year, you may also want to consider selling stocks with gains for the reasons discussed below.

Donation of Marketable Securities

If you wish to make a charitable donation, a great way to be altruistic and save tax is to donate a marketable security that has gone up in value. As discussed in this blog post, when you donate qualifying securities, the capital gain is not taxable and you get the charitable tax credit. Please read the blog post for more details. 

2022 Budget

While I don’t comment on rumours and conjecture, there are many tax commentators who feel there is a good chance the capital gains inclusion rate will increase from 50% to a higher rate in a future budget. If you are in that camp, you may wish to lock in capital gains at the lower rate. As no-one knows if the capital gains rate will change, you need to review this with your advisor as the sale will be taxable immediately, even if you buy-back the same security (there are no superficial gain rules).

Settlement Date

It is important any 2021 tax planning trade be made by the settlement date, which my understanding is  the trade date plus two days (U.S. exchanges may be different). See this excellent summary for a discussion of the difference between what is the trade date and what is the settlement date. The summary also includes the 2021 settlement dates for Canada and the U.S.

Corporations - Passive Income Rules

If you intend to tax gain/loss sell in your corporation, keep in mind the passive income rules. This will likely require you to speak to your accountant to determine whether a realized gain or loss would be more effective in a future year (to reduce the potential small business deduction clawback) than in the current year.

Summary

As discussed above, there are a multitude of factors to consider when tax gain/loss selling. It would therefore be prudent to start planning now with your advisors, so that you can consider all your options rather than frantically selling at the last minute.

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.

Some People are so Poor, all they have is Money

The quote “Some people are so poor, all they have is money” has been attributed to Patrick Meagher (a Canadian journalist and author), Bob Marley (the famous reggae singer) and others. I cannot confirm who first uttered these insightful words, however, for purposes of today’s blog post, it is the words that matter, not who said it and the attribution. 

When I first read this quote, it reminded me of two blog posts I wrote in 2012, “Are Money and Success the Same Thing” and “Are Money and Success the Same Thing – Part 2”.

In Part 2, I looked at money and success and how they impacted five key aspects of all our lives: family, career, health, spiritualism, and impact on society. My conclusion was that money and success are not one and the same but do impact one another. Meaning in certain circumstances, money can influence success, and success can determine how much money you have. These 5 key aspects can also be applied to understand why “some people are so poor” even when they have money. 

During my personal and professional life, I have met many people who have made substantial fortunes and are also rich in many non-monetary ways. But unfortunately, I have also met many people who in my opinion have only money and yet are very poor in other aspects of their lives. Today I will delve into how this can be (for some readers, entitled children of wealthy individuals often come to mind when considering this quote, however, for today's post, I am only considering those who worked to create the wealth, not their children).

How can you have Money and be Poor?

In searching the internet for comments on this quote, some commentators assumed being poor meant being spiritually poor. My interpretation is that they think such a person is spiritually poor if they are lacking in religious, human and societal values. Others focused on the concept money does not buy happiness and that there are things money cannot buy such as values and relationships. Finally, some people took for granted many people want money and/or success. Yet, they felt it was important people chasing the almighty dollar also attempted to find happiness in day to day living as chasing wealth without chasing happiness would leave you empty and only with money.

Monetarily Successful People

While some successful people may sacrifice spiritualism, in my experience, spiritualism is typically not present or strong to begin with in those who sacrifice that aspect of their life. 

There are people who in the name of money that have impacted society negatively, either environmentally or in other nefarious ways. But those are typically a small minority. Societal values are one area where successful people can sometimes just use their money to improve society, by just signing their name to a cheque. This can be done by funding projects for those less fortunate or giving generously to charitable causes even if they have limited personal involvement or are just donating for image purposes. 

Based on the above, it is therefore my perception that those who are “poor because all they have is money” typically sacrificed family and health to achieve their monetary wealth.

Sacrificing Family and Health

Health

The health topic is unfortunately often clear-cut. Many people work so hard to make money that they do some or all of the following: don’t exercise, don’t eat properly, drink to much or take time to deal with their mental health, which often leads to poor health or even death.

Family

For me, family is the largest casualty of those who are so poor, all they have is money. These people are just so busy chasing money and/or their dreams that they have no time left for their family. I personally do not think most people have any intention to “sacrifice” their family in their chase for financial success. It just incrementally occurs as they excuse themselves to meet a client, work all weekend to meet a deadline, go to business dinners or travel to that extra convention to drum up more business. The energy spent trying to earn every last dollar and workaholic behaviour leads to missing a child’s birthday party, play/recital/teacher parent meeting and Valentine’s dinner with your spouse and the trip you promised your family after you closed that “big deal”. Suddenly, you are not there as a parent, spouse or friend and you compensate by buying gifts and material things, rather than giving your time. 

This is the cost I have seen over the years. Marriages dissolved and children estranged and spouses and/or children with personal, mental or health issues. In the end, the parent becomes solely a bank with little to no actual familial involvement. That is my interpretation of “Some people are so poor, all they have is money.”

Life Balance

At the risk of being simplistic (I am sure some psychologists have 100 page papers on this topic) and/or “preachy,” in my experience, the difference between those who had money and were not poor versus those that were poor was life balance. They did not need to make that last dollar by sacrificing their family time for every deal. Yes, they did occasionally or more than occasionally work too hard or too late and yes, they did sacrifice family time where the business or job demanded it, but overall, they ensured they had their date night with their spouse, attended as many children functions as possible, showed their children charitable actions both financially and by personal actions and just made family time a priority.

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.

Gifting or Loaning Money to your Children to buy a Home

Last week, CIBC Economics released a report titled “Gifting for a down payment -perspective” by its Deputy Chief Economist, Benjamin Tal. The report provides a wide range of statistical data in relation to the value and type of gifts parents are providing to their children to purchase houses.

Some of the key statistics in the CIBC report include the following:

1. Over the last year, CIBC estimates gifting totaled just over $10 billion for family member house purchases, which accounts for 10% of total down payments in the market as a whole for that period

2. Almost 30% of first-time home buyers received assistance from family members 

3. The average gift is now approximately $82,000 

4. Where the gift is the primary source of the down-payment, the gifts average $104,000 for first-time home buyers no less than $157,000 for mover uppers 

5. CIBC reports that only 5.5% of the gifting parents used debt to finance the gifts (that percentage rises substantially for gifts for homes in Vancouver and Toronto) and therefore it appears parents are using their savings to make these gifts

Whether a gift is $50,000 or $200,000, the amounts are substantial and many parents never planned or conceived of gifting such large amounts of their savings. Whether parents are encroaching upon their retirement savings for these gifts is an interesting topic for another day.

However, what I want to discuss today is; whether some parents should be making loans in lieu of gifts, to protect their family money under the various provincial family law acts (in the case of a marital breakdown), where the child will use the gift to buy a home.

Before I go any further, I want to note that I am not a family lawyer. This blog post is general in nature and should not in any manner be considered as legal advice. This blog is being posted to caution parents who are considering making a housing gift to seek family law advice before doing such. I say this because not only is the family law complicated in regard to monies used to purchase a matrimonial home, but the question of whether the monies are better made as a loan versus a gift is a legal minefield of its own. I humbly suggest the legal costs will be worth the piece of mind and/or the potential financial savings to the family.

Gifts vs Loans

Where there is a marital breakdown, one of the key issues in respect of money given to a child to purchase a home is whether the money was a gift or loan. That characterization can be the difference between a family keeping or losing thousands of dollars. I will assume for purposes of this discussion, there is no pre-marital agreement dealing with this issue, which is often a suggested option by lawyers, but very rarely acted upon.

Gifts

Family lawyers (in Ontario) have told me, that in general, gifts or inheritances received during a marriage that are kept separate from the family property will typically be excluded property and not be considered family property subject to division (I am not aware if all the provinces have the same general rule, you will have to check with a family lawyer in your province). Thus, children are often told by their lawyer or their parent’s lawyer to keep a gift or inheritance invested only in their name and not to co-mingle these funds in a joint spousal bank/investment account or pay joint expenses. I have also been told however, that if a gift is used to buy a matrimonial home, it will no longer be excluded property. Again, confirm this all with a family lawyer.

Loans

A loan would typically be secured by a promissory note, which lawyers have told me in general should be deducted as a liability as net family property. Sounds simple, but as per this article "Promissory Notes Between Parents and Their Married Children" by Nathalie Boutet, Managing Partner, Boutet Family Law & Mediation, properly documenting and executing a promissory note is far from just writing a note out on a piece of paper. The importance of legal advice is further strengthened when you read in Ms. Boutet’s article that a debt can be discounted even if a promissory note is valid and has not been forgiven, if there is a low probability that the parents will collect it. Ms. Boutet notes the discount can be as high as 90%-100% making the promissory note effectively a gift.

Legal Interpretation of a Gift vs Loan

But what constitutes a gift vs a loan? This is far beyond the scope of this post, but the case of Barber v. Magee, 2015 ONSC 8054 (Ont. S.C.J.) provides some clarity of the documentation required for a family transfer to be categorized as a loan. The characterization of whether funds advanced are a gift or loan are detailed in this law firm’s summary, "Inter Family Gifts vs. Inter Family Loans". As I understand this as a layperson, in this case the husband received $157,000 or so from his father which was used to purchase the matrimonial home and pay for other costs. The husband argued the $157k was a loan he still had to repay, and it would still form a liability and be deducted from his net family property. 

The wife argued the funds were a gift and since the funds were used to purchase the matrimonial home, the husband had to record the house as an asset to be split as part of the family property. The courts held the funds were a gift.

It was my intention in writing this post to:

1. Reflect the complexity of family law and the jurisprudence in respect of whether funds given to a child are a loan or gift 

2. Urge you to consult a family lawyer before making a gift or loan to your child/ren to help in buying a house, since as the CIBC report reflects, 30% (likely rising even higher) intend or will be asked to assist our children in buying a starter or mover upper.

I hope I accomplished these objectives.

Bloggers Note: On my @bluntbeancountr Twitter account, a tax expert tweeted that the last couple times their clients wanted to reflect monies from the parents as loans for house down payments, the banks instead requested a written parental declaration that the funds transferred were a gift (this is related to the payment tests for CMHC and mortgaging) and they were unable to use a promissory note loan backed by a 2nd mortgage. You should discuss this upfront with your real estate and family lawyer and bank to see if this is problematic in your case.

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.

Considerations in selecting an executor and accepting the executor appointment!

Last week, Rob Carrick the personal finance columnist for The Globe and Mail, in his Carrick on Money Newsletter (the newsletter is generally only available to Globe subscribers) asked David Edey a Certified Executor Advisor questions on his experience as an executor. These experiences and frustrations are detailed in Mr. Edey's book Executor Help: How to Settle an Estate Pick an Executor and Avoid Family Fights.

The book summary states “The grief, frustration, and stress of that experience were life-altering for David. He was determined to write this book in order to help others successfully navigate the difficult tasks of estate planning and executorship—so that their families could stay together”. 

I have not yet read the book, but as an accountant on numerous estates and a multi-time executor, I understand what drove David to author the book. Rob’s discussion of the topic in his newsletter provided me the impetus to offer a few comments of my own on the topic. So today, I discuss some considerations in selecting an executor and some of the less pleasant tasks that may be part and parcel of being appointed an executor.

Who Makes a Good Executor?

I have noted in blog posts over the years that a potential executor should have the following characteristics:

(1) Financial acumen and investing experience
(2) Be detailed oriented
(3) Handle stress well
(4) Be able to deal with people, including those acting irrationally (inheriting money does funny things to people)
(5) Be results driven

I have been involved with a couple of executors who did not have the above characteristics, especially the financial acumen and ability to handle stress. Those estates went off the rails and took years to settle. So carefully consider the above characteristics in selecting an executor.

Should you name your children as executors?

This is the $64,000 question. Assuming there are no “black sheep” in the family and all the siblings get along, you would think naming all your children would be a good idea. Sometimes the answer is yes, as they can share the burdensome and time-consuming duties as co-executors and utilize their individual strengths. Other times, being named co-executors can adversely affect your children’s relationship as the stress of settling the estate and distributing money creates discontent amongst the children.

So, should you select only one or two children who meet the above characteristics? Again, the answer can sometimes be yes, where the other children trust they are competent and even-handed. On other occasions, children may feel resentment that the parent did not name them as an executor and their siblings are favoured or given preferential treatment by their parents.

You may be saying to yourself, Mark has not answered whether I should name my children as executors, he has just given me a maybe yes and maybe no answer. But that is the reality. You need to look at your children with a cold realistic view and not your rose-colored glasses to decide if they have one of more of the characteristics to be an executor. You also need to speak to them and ask them if they feel they can work together (see discussion below). If you are not satisfied on all accounts, you may want to consider a professional corporate executor so that your children will only have to deal with an independent third party.

Do you think the executor would like to know they are being named?

Many years ago, I wrote a blog post titled "Speak to your Executor – Surprise only works for Birthday Parties, not death". You would be shocked at how many people are named an executor without prior notice. You always want to inform your executor they are being named and confirm they are comfortable with being named an executor. The last thing you want is to die and have your executor renounce their executorship. As noted above, where you have more than one executor, you want to ensure they are willing to work together, whether they are your children, friends, professional advisors, or any combination of the above.

Does an executor have to do all the work?

A well-run estate utilizes accountants for tax preparation and estate planning advice and a lawyer for estate and legal advice. You may also have to hire a specialist to prepare the passing of accounts (a summary for the court of the estate). While these costs can add up, the expression penny wise pound foolish has applied to many executors. The accountants and lawyers can also act as buffers for the family, as they act as independent advisors and can deflect some of the pressure put on the executor(s) by the beneficiaries. I have heard many an executor say, "it was the accountant's/lawyer's suggestion".

There is typically a significant amount of mundane work in settling an estate. Writing and dealing with financial institutions, games of hide and seek to find assets etc. An executor may consider asking for the assistance of their family members who are not executors to help with some of these administrative tasks; assuming they are willing and the other family members are fine with their assistance.

Sadly, I must inform you, even where you delegate and use professionals, you are likely in for a very time consuming task as an executor.

I want my Money!

In my experience, an executor will be asked to distribute money sooner than later by one or more of the beneficiaries. This is one of the most stressful aspects of being an executor, since in many cases you are unsure of what will be left of the estate following the sale of the estate's assets and the income taxes on the estate. 

It is important you do not make an interim or final distribution (see this blog post on obtaining a clearance certificate) of money until you consult with your accountants and lawyers. The last thing you ever want to have to do, is go back to the beneficiaries and tell them they were overpaid, and they must return money. This is very messy, and you could end up having personal liability for the estate. So always ensure you review any distributions with your professionals before distributing any money or assets to the beneficiaries.

An executor’s job is arduous, time consuming (it can take years to settle some estates), stressful and a messy estate can fracture family relationships. You therefore need to consider the selection of your executor(s) very carefully (especially when you will involve your children), ensure you advise them and confirm that they are willing to accept the appointment. If you are asked to become an executor, consider carefully whether you wish to accept the appointment; you may also want to consider buying David's book.

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.

The Implications of Receiving an Inheritance

There is a large wealth transfer occurring in Canada, with estimates as high as $750 billion dollars.

While I have written on issues and concepts related to inheritances (with a bit of a caustic tone, based on my actual experiences), I have written very little on receiving an inheritance. Thus, today, I will discuss the income tax implications of receiving an inheritance and some of the issues to consider upon receiving an inheritance.

If you are interested, the posts I referenced in the prior paragraph are:"Is it Morbid or Realistic to Plan for an Inheritance?", and “Taking it to the Grave or Leaving it all to your Kids?” and “Inheriting Money – Are you a Loving Child, a Waiter or a Hoverer”.

The Income Tax Implications of Receiving an Inheritance

In Canada, there are generally no direct income tax consequences to receiving an inheritance. I say generally because there are a couple very rare circumstances where you could pay tax. The first is where you are the beneficiary of a deceased’s RRSP/RRIF and the estate does not have enough money to pay the estate taxes. Surprisingly to most people, the CRA has the right to go after the beneficiary of a RRSP as the CRA considers the beneficiary jointly liable with the estate. The second rare situation is where a will makes a beneficiary liable for taxes arising on the transfer of assets from the deceased. However, both these exceptions are highly unusual and in almost all situations, there are no taxes due upon the receipt of an inheritance.

So, to be clear. If your inheritance is in cash, you receive those funds tax-free. If your inheritance is a capital property of some kind such as stocks or real estate, you again receive the capital property tax free.

However, in the case of capital property, you generally inherit the cost base of the property to the deceased, which is typically equal to the deemed proceeds of disposition for the deceased. Usually, this amount is the fair market value ("FMV") of the property right before the person's death.

So for example, if your mother passes away as the last surviving spouse (it is likely when your father passed away he left his estate to your mother – which is typically a tax-free spousal transfer at his passing) and she owned 100 shares of Bell Canada that originally cost $25 a share, but were worth $65 a share at her passing; her estate would file a final (terminal) income tax return reporting a deemed capital gain of $4,000 (FMV at death of $6,500-$2,500 original cost). This deemed capital gain is known as a deemed disposition on death and occurs despite the fact the Bell Canada shares were not sold, because your mother was the last surviving spouse. Your mother’s deemed disposition FMV of $6,500 becomes your new cost base of the inherited shares. So, if you sell the Bell Canada shares in the future, the gain would be equal to your sales proceeds less $6,500.

If you wish to learn more about how your estate is taxed on death if you are the last surviving spouse, see this blog post I wrote a few years ago, The Two Certainties in Life: Death and Taxes - Impact on Your Personal Income Tax Return

Dealing With an Inheritance

Receiving a large inheritance can be overwhelming, especially if you are not financially sophisticated. I wrote a detailed blog on this topic in 2011 if you wish to read it Dealing with Financial Windfalls & how to stave off the Money Leeches

However, today I will give you the Coles notes version.

Practically, it is almost impossible for a large inheritance to go unnoticed. A family member or friend will advise someone of the passing of your parent /sibling/relative etc. and somehow someway it is likely an investment person will be amongst those to find out and you will get a call. If you avoid the above, a large deposit at the bank will likely trigger someone at the bank to speak to you. It is almost unavoidable.

If you already have an investment advisor/manager you work with and trust, selecting an advisor is a non-issue. But if you have not really worked with an investment advisor/manager or their practice is built around smaller net worth clients and your inheritance is substantial, you will want to review your situation. The best advice is often to “park” the money in a GIC for a couple months until you have regained both your emotional and financial equilibrium and have had time to speak to family and friends to get a couple good referrals and absorb your new situation.

The “parking” of the inheritance would also apply to any decision to give money away (as you may receive subtle or less than subtle hints about gifting part of your inheritance to various family members) as well as holding off investing part of your inheritance.

Putting the money in a GIC or similar investment also provides you a built-in excuse to not be able to make any decisions in the near-term, since if anyone has the audacity to ask, you answer, “my money is locked in for 3 or 6 months and I cannot touch it”.

Inheritances typically come on the heels of emotional distress and in many cases, significant changes in your financial situation. The good news is that in almost all circumstances the cash or capital property inherited is tax-paid money and you have no additional tax concerns. However, the “new-found” wealth can be stressful from both an investing and gifting perspective and you need to ensure you have a clear mind before making any decisions on both fronts.

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.