Confessions of a Tax Accountant- Week 9- The Cranky Accountant Edition

My confession today is that I am sick and tired of income tax season and specifically, I have had enough of dealing with late received T5013 and T3 forms. I have a sore back from sitting too many hours at my desk, and my finger tips are going numb from pounding the computer too much. How is that for an accountant’s rant? I bet you never thought of accounting as such a physically demanding job. J

Anyways, enough of my whining. I hope the prior eight confession blogs have provided you with some interesting income tax tidbits.

How could my topic for Friday April 29th be anything other than clients who submit their income tax information late? I have no complaints regarding my own clients - the last return I received for a client who does not have the extended June 15th deadline (for those with self-employment income) was April 21st.

However, the same cannot be said for all my partners, and I have had last second “Charlies” in the past. If you are one of those people who brings in your income tax materials to your accountant and thinks it is amusing that you are always the last person of the year, know this: you will not be on your accountant’s Christmas card list, your fee is most likely higher than if you brought in your return earlier, and the quality of work cannot be as good as for those who brought in their returns earlier. Think of a Doctor working a 24 hour shift... When do you want him to work on you?

So Charlie, for you and for the procrastinators out there, here is my last tip of this tax season: send your return by registered mail, and keep the registered receipt. Or, if mailing, get a photocopy of the postmarked envelope. The Canada Revenue Agency occasionally imposes late filing penalties for returns that are filed on time, but arrive after the deadline, which is May 2nd this year. When there is a dispute, the CRA will actually go back and check the envelope, but you should have your own evidence of timely filing.

Whatever happened to personal service?

In keeping with my cranky disposition, I will also throw in a rant today about the poor customer service I received last weekend. I don’t know about you, but how many times do you walk into a store to find two employees talking, and they don’t even acknowledge your presence until they finish their conversation? Last weekend there was not even an employee to not acknowledge me!

Anyways, last Saturday after working until 5:00, I rushed over to one of the large chain stores for Men's Suits, to pick up two suits for my son (he is out of town finishing the school year) before the store closed at 6:00. To preface my rant, I am categorized as a “red” behavioural style, whenever I take personality tests. This means I have limited patience. The last time we took these tests, I was given a little Lego block to put on my desk that says “Be prepared, Be brief, Be Gone” (as an aside, to reflect my softer side during this rant: the coaching provided by Excel Group Development (http://www.growingcoaches.com/) who are consultants to our firm, has actually taught me to understand that because of my behavioural style, I must be more patient and understand not everyone works in the same manner as myself and I actually now work better with my partners and staff who have more social personality styles). Anyways, I digress. So here I am rushing to the store, an accountant who has worked every day for many weeks and a person of limited patience at the best of times.

So, I arrive at the store and three people are waiting in line to pick up their suits. However, there is nobody at the front cashier where we are all waiting. After 5 minutes and a lot of mumbling and complaining amongst the four of us, the cashier comes back. She has been in the back looking unsuccessfully for a suit promised to a customer. So now I at least understand why there is no service person, which does not make it right, but I understand the situation. However, after speaking to the person whose suit she can’t find, she makes an abrupt turn and goes directly to the back of the store to look for his suit yet again and leaves the rest of us waiting.

The line is now increasing in size with customers who have purchased goods. Finally, after a couple more minutes, one of the salesmen comes to the front to start serving. As he is serving the next customer, the cashier returns to explain to the first customer his suit is not ready as promised because the tailor was sick or something like that. He leaves the store less than pleased. At the same time the salesman prepares to serve me, but I inform him I was fourth in line and the person beside me is next (the line got sort of semi-circleish as we all waited). This person thanked me for my consideration (I may have no patience, but I have a strong sense of right and wrong) and he was then served. Finally, the cashier also starts to serve, but what does she do? She starts to serve the last person in line (who because of the semi-circle waiting line is first in front of her). I, in less than a pleasant tone, let her know they are last in line, I have waited ten minutes and I am next to be served. The salesperson and the cashier start apologizing over each other, but I just get my son’s suits and leave mumbling and grumbling.

This rant is not directed at this chain store specifically; the person who served my son when purchasing the suits was excellent. They are just one example of poor customer service; I could have picked ten stores for this rant. 

My issue is service in general. The larger chain stores employees typically do not respect customers, and/or the staff is not properly trained or supervised. I find this issue far less prevalent in US stores, where they seem to be much more customer oriented in general.

Thus ends the cranky accountant edition. I will return on Monday (the last day of tax season) happy as a lark.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

Part 3- Is a Corporate Executor the Right Choice?

The first blog in my executor series, discussed the concerns the Globe and Mail had in respect of the estate tax system and in particular, some of the issues surrounding the Paul Penna estate. The problems associated with Mr. Penna’s estate, highlight the importance of considering a corporate executor in certain circumstances. 

In my second blog, I discussed the duties and responsibilities of an executor. These responsibilities can often overwhelm the appointed executor(s); which again leads back to today’s guest blog on whether a corporate executor is the best choice for estates that will have unsophisticated executors?

Today, in the final installment of this series, I have a guest blog by Heni Ashley. Heni is a lawyer with over 20 years experience in the estate and trust industry, who brings a unique perspective to this issue. I thank Heni for her contribution and her advice and guidance on the prior two blogs.

Is a Corporate Executor the Right Choice? (By Heni Ashley)

I have read Mark’s two prior blogs and the Penna estate article with great interest. The Penna estate, in my opinion, was just the type of situation where a corporate executor should have been considered.

What exactly is a corporate executor?  Corporate executor services in Canada are available through incorporated trust companies, which are typically subsidiaries of our national banks.

Had Mr. Penna appointed a corporate executor, his bequests would have been carried out and the estate’s finances would have been tracked diligently and accurately.

In my opinion, a corporate executor provides an estate with the following:

1)    Professionalism, knowledge, expertise.  Knowledge in the area of estate, trust and tax law is invaluable, as is expertise in asset gathering and valuation, property management, investing and accounting.

2)    Impartiality.  A corporate executor can manage conflicting interests (i.e. second marriages), difficult personalities and bring an objective, unemotional approach to the estate administration.

3)    Availability.  The corporate executor is always there.  There is no need to worry about an out of town executor, or an executor dying or becoming incapacitated or physically unable to carry out the task. 

4)     Ease of administration.  There is no worry about unduly burdening a family member, friend or associate as the job of an executor can be difficult (depending on the size of the estate and the personalities of the beneficiaries) and time-consuming (depending on the nature of the assets).

5)    Continuity/permanence. A corporate executor can provide the continuity needed for certain family situations such as an ill or incapacitated spouse or minor or disabled children where there is a need for long term trusts and financial care.

6)    Cost efficiency.  The personal executor can charge the same fee as a corporate executor.  Often a fee agreement can be negotiated with a corporate executor at the time that the will is drawn.  Also, a corporate executor often eliminates the need to hire additional outside experts, which results in a cost savings to the estate.

Notwithstanding the above, had the deceased in the Penna case given thought to using a corporate executor, there are a few reasons why he might have decided against it:

1)          Impartiality (which can sometimes be viewed as indifference to family):  Some people are concerned that a corporate executor will be indifferent to the needs of the beneficiaries. This objection, however, can be overcome by jointly appointing a corporate executor together with a personal executor who can shed some light on the personal circumstances of a deceased’s family.  The two executors can then act as a check and balance against each other.  Another way to deal with this is to leave a detailed memo together with the will, explaining to all executors the reasons for certain bequests and discretionary powers (i.e. to help a child get established in business, to see a particular charity get off the ground, to provide the best of care for a sick spouse, etc.)

2)          Knowledge: A testator (the person making a will) may have a knowledgeable professional relative, friend or colleague who is willing to act as an executor (although Mr. Penna thought he had such a person).

3)          Cost: While a personal executor can take the same fee as a corporate executor, in many cases he/she will not take the maximum fee because he/she feels it is excessive (the fee can be as high as 2.5% of the assets coming in and 2.5% of the assets going out as well as a fee on income earned by the estate and a care & management fee).

I would suggest it does not make sense to engage a corporate executor in the following circumstances:

1.     Where the estate is very small,

2.     Where there are only a few well defined beneficiaries,

3.     Where the gifts are all outright (i.e. no long term trusts to be administered), and

4.     Where the assets are all very straightforward (e.g. one or two bank accounts or brokerage accounts, no real estate).

In summary, each situation is as unique as the individual parties involved.  Some beneficiaries are never happy no matter what, whether it is with their bequest, with someone else’s bequest, with the choice of executor, the manner in which the estate is administered …  Often childhood jealousies surface to complicate matters – families can be difficult and the job of an executor is rarely an easy one!

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

Confessions of a Tax Accountant- Week 8-T5013 ACB & Medical expenses

Today, I will discuss an income tax issue that arose during this week, make a recommendation on a very good medical expense article, discuss a dysfunctional income tax filing situation amongst spouses or common-law partners and put forth an interesting point made by a reader.

The Cracker Jack T5013 Surprise

Many clients purchase flow-through limited partnerships each year. See my blog Are you a flow-through junkie? for more details.

These partnerships are one of the last standing tax shelters condoned by the Canada Revenue Agency ("CRA"). This week a few clients received an unpleasant surprise. The surprise at the bottom of the box (box 70 of the T5013 slip) was a capital gain and not a toy surprise.

As background, in 2009, these clients purchased a flow-through limited partnership for $25,000 a unit. For each unit, they received approximately $25,000 in oil and gas exploration income tax deductions last year. Thus, they saved approximately $11,500 in income tax at the high rate in 2009, making their out of pocket cost per unit around $13,500. The adjusted cost base of each unit was also ground down to zero.

Back to the surprise...my clients were less than pleased to note their 2010 T5013 for their 2009 flow-through partnership reflected a capital gain of approximately $15,000 per unit. As consequence, they now have to pay income tax on a $15,000 gain per unit, for which they have not received any proceeds. This 2010 taxation allocation is sort of ironic, as most flow-through investments are bought, at least partly, for an income tax deferral and these clients are being forced to pay income tax upfront on monies they have not received.

Ignoring the income tax cash flow issues, these capital gains are actually indicative that many of the 2009 flow-through funds have increased in value from the original purchase price, as many of these funds were purchased when oil was in the $40 to $50 range. Although counter intuitive for a tax shelter, this is actually a good thing, buying a fund and having it increase in value.

These capital gains arise because the partnership investment managers actually sold the underlying stocks within the flow-through partnership (due to the robust market for resources in 2010) and these realized gains are allocated to each limited partnership partner. This is very similar to the mutual fund issue where holders are allocated capital gains each year, but not the cash to pay the tax on these gains.

The moral of the story is simple; most investors in flow-through investments are sold by their advisors on the tax deferral\savings and the downside protection afforded by these investments, but they do not take the time to understand exactly what they purchased or more accurately, their advisors do not take the time to explain what they have sold in many cases. This is not to say I don’t think there is a place for these type investments, just that many people do not fully understand the income tax implications.

The Cracker Jack box does contain one more surprise, that being the capital gain that must be reported actually increases the cost base of the flow-through back to $15,000 from nil (i.e.: original cost is $25,000, which is reduced to nil by claiming $25,000 in resource deductions in 2009, but the $15,000 capital gain allocation then is added back to the cost base).

Medical Expenses

I was quoted last week in an excellent article by Larry MacDonald entitled Medical expenses can pay off at tax time. Notwithstanding the fact I was quoted, I think this is an excellent article on medical expenses and should be read, especially if you or someone you know, incurs costs caring for a disabled person. In addition, Dianne Nice this week also had an informative article on tax programs for the disabled.

Spouses or Common-law Partners Using Different Accountants

We have a few clients for whom we prepare one spouse or common-law partner’s income tax return and the other spouse or partner uses another accountant. I don’t usually ask the client for the reason why we are preparing only one spouses return; however, I assume it is because they wish to keep their finances separate, have secrecy issues or each person may just really like their accountant.

If you are one of these people, I would suggest this is dysfunctional from an income tax perspective, and  you should reconsider using the same accountant. If secrecy is the issue, you can institute a Chinese wall of secrecy so that there is no passing of information between spouses or partners.

Where spouses or partners use different accountants, they may not maximize medical and donation credits, they may incorrectly file child care claims and may miss a multitude of child related credits or worse yet, may claim them twice. Just as importantly, family income tax planning is neglected.

In conclusion, if you use a separate accountant then your spouse or partner, you should reconsider this practice for the reasons noted above.

Readers Point

A reader sent me an email this week asking "why does the CRA not issue T5s for interest income?". That is an interesting question. Many people get those little notes on their notice of assessments or reassessments that "your refund includes refund interest of $x. Since this interest is taxable in the year your receive it, you must include it as income on your 2010 tax return." Who the heck ever remembers to include this unless your accountant picks it up? It would sure make more sense for the CRA to issue a T5.

[Bloggers Note: In my Confessions of a Tax Accountant blogs, I will discuss real income tax issues that arise, but embellish or slightly change facts to protect the innocent, as the saying goes.]

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

Transferring the Family Cottage-There is no Panacea-Part 3

In the final blog of my guest three blog series for the Canadian Capitalist; I discuss some of the alternative strategies available to mitigate or defer income taxes that may arise upon the transfer of the cottage to your children.

Tomorrow, I return to the regular scheduled programming, with Confessions of a Tax Accountant-Week 8.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

Transferring the Family Cottage-There is no Panacea-Part 2

In the second blog, of my three blog guest post for the Canadian Capitalist; I discuss the income tax implications of transferring or gifting a cottage to your children. Many people are unaware these gifts or sales, often create an immediate income tax liability.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

Transferring the Family Cottage-There is no Panacea-Part 1

The final blog in my three part series on Executors; ”Is a Corporate Executor the Right Choice?" will be posted next week.

This week I am going to post links to a three part blog I wrote on transferring the family cottage, which the Canadian Capitalist has kindly posted. For anyone who does not know the Canadian Capitalist, it is one of the preeminent financial blogs in Canada.

The cottage blog series will be broken into three blogs. The first blog will discuss the historical nature of the income tax rules, while the second blog will discuss the income tax implications of transferring or gifting a cottage and finally in the third blog, I will discuss alternative income tax planning opportunities that may mitigate or defer income tax upon the transfer of a family cottage.

I hope you find the cottage series informative. I will post my week 8 Confessions of a Tax Accountant later in the week.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

Confessions of a Tax Accountant-Week 7-Late T3 slips & T2202A slips

Those Straggler T3 slips

This week, a few clients for whom we had already filed income tax returns, received additional T3 slips in the mail.  The receipt of these forms will necessitate the preparation of T1 Adjustment requests in May to account for these missed slips. This is a huge waste of time and energy for our firm and for the Canada Revenue Agency to process these forms, and frustrates our clients to no end.

The receipt of these additional T3 forms raises two questions: the first is “why do clients not realize they have additional slips outstanding”, and the second is, “do they have too many accounts to start with"?

In regards to question one, we find the confusion typically relates to income trusts. If a client has one or two income trusts, it is not very hard to track which T3s are outstanding. But many of our clients have multiple income trust units and it becomes extremely difficult to track what has been received.

The major investment firms attempt to do their part in tracking T3 slips, as they typically include a listing of income trusts for which information is still outstanding. However, as this listing arrives with several pages of administrative papers, many clients do not even keep the list. Even when you have this list, the T3s seem to come in batches, so one T3 may have three income trusts reported, but not include four others. Then you receive another T3 and it includes only one income trust and finally you receive a final T3 that has the final three income trusts reported. In the end, it is very hard for clients, the client’s investment advisors and their accountants to track whether all the income trusts have been accounted for in the tax return. This problem thankfully, should subside next year as many income trusts have converted to corporations.

In respect to the second question, many clients just have too many accounts and deal with too many institutions and/or advisors. This leads to dysfunctional investing and portfolio management. This issue will be a topic for a future blog.

Cyberspace and T2202A tax slips

This week, much like every week prior, I had several clients provide their university/college-aged child’s income tax materials without their T2202A tuition form. In the “old days” this form was mailed, however, these days, the institutions do not mail the receipt, but rather place them on their website and thus the form must be accessed by the student. I would suggest the percentage of students who ever notice or pay attention to this comes in around 10%. Thus, without the parent or accountant requesting this information, it is forgotten and potentially missed as a credit.

The tuition information is important for two reasons. The first reason is that in most cases, the child can transfer up to $5,000 of the tuition, education amount and textbook amount to their parents or grandparents (federally) if these amounts are not required to reduce the child’s taxable income. The second reason is that excess balances of these credits that are not transferred or utilized can be carried forward by the student to be used once they become taxable (i.e. commence full-time employment).

So for example, assume a typical student who pays $6,000 in tuition and attends school for eight months full time. This student will have tuition credits of $9,720 ($6,000 tuition plus $3,720 ($400 +$65 a month x 8), for full time education and text book credits respectively. Assuming $5,000 of this credit is transferred to their parent or grandparent, the student has a tuition credit carryover of $4,720 ($9,720-$5,000). There are  also provincial credits, but they pretty much mirror the federal credit. It should be noted a student can make approximately $11,000 of employment income before the tuition credit is impacted.

Thus, after four years, the tuition credit carryforward  could approach $20,000. When your child files their first income tax return reporting full time employment income, they will potentially have a credit worth approximately $4,000 (being $20,000 tuition carryover times 15% federal credit plus 5.05% Ontario tax credit).

If your son or daughter is in a specialty business school or similar professional school and pays say $20,000 a year in tuition, the federal tuition credit carryover could potentially be $18,720 ($23,720 less $5,000). This size credit could potentially lead to a refund of almost $19,000 in their first year or two of full-time employment.

[Bloggers Note: In my Confessions of a Tax Accountant blogs, I will discuss real income tax issues that arise, but embellish or slightly change facts to protect the innocent, as the saying goes.]

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.