My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. My posts are blunt, opinionated and even have a twist of humour/sarcasm. You've been warned. Please note the blog posts are time sensitive and subject to changes in legislation or law.

Tuesday, September 20, 2011

Holy Black Sheep Batman

There are sheep all over the Globe and Mail today. Thanks to Roma Luciw for referencing me in her column today, Baa baa black sheep, are you in the will? Roma’s insightful column discusses estate planning for the Black Sheep child. This is often a very sensitive issue within families and requires one to navigate the family dynamic, estate and tax planning.

Roma the web editor of the Globe Investor personal finance site, also writes a weekly column on personal finance issues in the Globe and Mail. In addition, she is also one of the contributors to Home Cents which provides expert tips on how to make money and save money.

I will have a blogs on Estate Planning for the Black Sheep Child and How your Family Dynamic can affect your Estate Planning next 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.

Monday, September 19, 2011

20 Things I Don’t Understand About Income Tax

Rob Carrick recently wrote a great column in The Globe & Mail entitled, “20 things I don’t understand about personal finance”. The article caused me to smirk and chuckle several times. As they say, imitation is the sincerest form of flattery, so here are the top 20 things I do not understand about income tax:

1. Why can’t spouses file joint income tax returns as is permitted in the United States? It would equalize income tax rates, simplify our tax system, reduce the administrative time required to prepare and process personal income taxes and reduce the amount of paper the Canada Revenue Agency ("CRA") receives each year.
2. Why are parents only allowed a transfer of $5,000 of their child’s unused tuition, education and book credits? The parent is often the one who paid the costs of tuition, why is the credit transfer restricted. At a minimum, this cap should be re-evaluated in the wake of rising tuition costs.

3. Why people are so consumed with saving income tax that they buy tax shelters of dubious nature? There are numerous shelters or schemes out there that purport to reduce income taxes significantly. People are so hungry to reduce their taxes that they forgot their common sense – if it sounds too good to be true, it probably is.

4. Why child care expenses must be claimed by the lower income spouse? The motivation behind the child care deduction is to get people with children back to work to help drive the economy. Who’s to say which spouse was the spouse that was enabled to head back into the work force by hiring child care?

5. Why so many people ask for their RESP tax deduction receipt? Receipts aren’t necessary since the contributions are not tax deductible.

6. Why when one spouse has a tax refund and the other owes money, you can’t net the refund and tax payment against each other? Again, this would simplify our tax system and reduce the administration and paper work for the CRA.

7. Why people are loathe to realize a capital gain on an investment because they will have to pay income tax on the gain (which by the way, will be subject to tax at maximum rate of 23%)? Often individuals wait too long before selling and end up converting what would have been a capital gain into a capital loss (case in point: individuals who held shares of Nortel too long because they did not want to pay the income tax on the inherent gain). I have a whole blog on this topic upcoming.

8. Why do so many people think they can contribute the maximum RRSP limit to both their spousal RRSP and their own RRSP? It is one RRSP limit per person, regardless of the number of RRSPs contributed to.

9. Why people complain about income tax preparation fees, which help reduce the risk of costly potential future re-assessments, yet they are willing to "blow" thousands of dollars on investments in ridiculous companies or options trading they heard about on the radio without blinking an eye? 

10. Why don’t people who can deduct their car expenses, not note their odometer reading on January 1st and December 31st of each year. This would provide them with at least the total km driven in a given year, even if they are not willing to keep log books? The CRA has relaxed their administrative position concerning log books recently, but I still think there is no substitution for a log book and at minimum, noting your odometer readings at the beginning and end of each year.

11. Why the withholding taxes on RRSPs are graduated? Withdrawals up to $5,000 are subject to a 10% withholding tax; withdrawals between $5,001 and $15,000 are subject to a 20% withholding tax; and withdrawals of $15,001 or greater are subject to a 30% withholding tax. These graduated rates often cause significant income tax owing in April since the size of the withdrawal has no correlation to the taxpayer’s marginal income tax rate. All withdrawals should be subject to higher withholding rates (or withholding at the highest marginal tax rate) to prevent this issue.

12. Why does the CRA constantly send information requests for documentation to support child care claims in relation to nannies? Taxpayers are required to report the nannies social insurance number when claiming a child care expense. All that is required by the CRA is to match the social insurance number to the T4 filed by the employer for the nanny. The CRA has other programs which match items in a person’s tax return to a T-slip, why can’t they include this?

13. Why do people pay no attention to the RRSP contribution limit information on their income tax assessments when planning their RRSP contributions for the year? An individual’s RRSP contribution limit for the upcoming year is printed right on the Notice of Assessment for the prior year. It is also available on-line assuming that you register for on-line access on the Canada Revenue Agency’s website.

14. Why don’t people create a file folder for charitable donations they make during the year? If a donation is made online, they can print out the confirmation at the same time and replace the confirmation with the actual online receipt when received. Alternativey, if a cheque or pledge is made, make a copy and replace that copy when the actual receipt is received in the mail. By doing such, at year end it will be clear which donation receipts are missing and have to be chased down.

15. Why do people have money in non-registered accounts but yet they have not fully funded their TFSAs? Just transfer $5,000 each year, non-taxable is always better than taxable.

16. What do post-secondary aged children have against printing out their T2202A tuition receipts for their parents without being admonished? They are now at the age where they are supposed to be considered responsible adults – they should act like one.

17. Why do people who buy stocks not create a spreadsheet to track the cost (adjusted cost base) of the stocks purchased? In addition, when stocks are inherited from parents or grandparents, why not note the value reported on the parent’s or grandparent’s terminal income tax return so the cost base is not lost. You wouldn’t believe the number of times that shares have been passed down from one generation to the next where the recipient has no idea of the actual cost base.

18. Why do people transfer assets to try and save probate taxes without understanding the consequences for income tax. See my blog on probate taxes for a discussion of some of the possible detrimental income tax consequences when tranfers are made blindly for probate purposes.

19. Does the public transit credit or the children’s fitness/activity credit really incentivize anyone to use public transit or put their child in a sports/activity program? The tax benefit from these credits is so small. If the government really wanted to advocate these behaviours or activities there are better ways to do this than offer petty tax credits.

20. Should the labour sponsored funds tax credit be more appropriately called the convert $5,000 and turn it into a $1,000 credit? Enough said.

I am sure I could come up with another list of 20 plus things I don’t understand about income tax, but I will leave that for another blog for a rainy day.

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.

Wednesday, September 14, 2011

Income Tax on Inheritances

I often field calls from clients asking about the income tax consequences of an inheritance they are receiving or will receive in the future. The answer to the question is always the same; there are no income tax consequences in Canada to the recipient of an inheritance (save the obscure situation noted below). This statement holds true whether the inheritance comes from within Canada, the United States, Europe or anywhere else in the world.

I could end my blog right here, but as my readers know, I tend to write more rather than less, so I will take this subject down one level. Lynne Butler also has a very good blog on this topic and discusses the obscure situation where you may owe income tax on an inheritance.

Where income tax really rears its ugly head in respect of inheritances, is in the taxation of the deceased person. For income tax purposes, a deceased person is deemed to dispose of his or her assets at their fair market value on the date of death. These deemed dispositions can result in an income tax liability for the estate of the deceased, which will reduce the value of the estate and ultimately the inheritance.

It should be noted, that there is no deemed disposition of cash. Where the deceased owned capital property such as stocks, the stocks are deemed disposed of on the date of death, at their fair market value. The gain is measured from the initial purchase price of the asset. For example, if the deceased had purchased Bell Canada several years ago for $15 and the stock price on their date of death is $32, they will have a deemed capital gain of $17, even though they never sold the shares.

Where you have a depreciable asset such as real estate, the deceased may have “recapture” of prior depreciation claimed and a deemed capital gain. However, in cases where the principal residence was the only real estate property of the deceased, there will be no income tax exigible.

Where a deceased person owned multiple real estate properties, such as a home, cottage, vacation property or rental property, the principal residence exemption may be allocated partially to the other properties and thus, the deceased’s principal residence could be partially or wholly taxable.

In addition to the income tax owing on death, the deceased may owe income tax on any income earned from January 1st of the year of death to the actual date of death. This is known as the terminal income tax return. The estate may also owe income tax from the date of death until the assets are distributed to the beneficiaries.
The deceased's estate may also be liable for probate tax; see my blog on probate taxes for more details.

In the United States there is estate tax that can potentially reduce the amount of an inheritance from a US person or a Canadian person with US situs assets.

So in summary, there are no inheritance taxes in Canada, however, there are several taxes that may affect the ultimate inheritance received.

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.

Monday, September 12, 2011

Income Tax problems and Voluntary Disclosure - Should you hire a lawyer or an accountant?


I am often amused, if not slightly irritated, by the radio advertising wars between lawyers and accountants over taxpayers with income tax evasion or non-reporting issues. The lawyers argue that they can provide you with solicitor-client privilege and the accountants say they have previously worked with the Canada Revenue Agency (“CRA”) and/or deal with the CRA on a consistent basis and thus know their way around the system.

The lawyers who specialize in this market niche appear to have clearly won the marketing wars, as they seemingly have convinced people that legal protection and briefing for future court battles is the only way to protect yourself from prosecution. I even had a former client with a very simple issue of non-reported income who was convinced by a lawyer that he would be making a huge mistake in using me and that a lawyer was the only way to go for his voluntary disclosure (I was just about to abbreviate voluntary disclosure, but thought better of it :). Even though I had no desire to undertake the voluntary disclosure work, on principle, I told the client if he used the lawyer I would be his ex-accountant as there was absolutely no need for a lawyer in his situation. This client however had drunk the legal kool-aid and was so convinced that I was not a practical alternative that he decided to move forward with the lawyer anyways. I must give credit where credit is due; certain lawyers have marketed this issue so well that the general public believes they are the only viable alternative.

On a practical basis, I have been involved with multiple voluntary disclosures over the years. The conversation with the CRA always starts on a no-name basis and the CRA has always been true to their word once my clients have provided full disclosure. In general, I have found the voluntary disclosure agents very fair.

So how do the lawyers create this fear of the CRA and the urgent need for their assistance? Three words: solicitor-client privilege. Lawyers who deal with people with income tax problems market this privilege as a hugely important tool in dealing with the CRA on voluntary disclosure matters. However, a voluntary disclosure is essentially just a financial disclosure exercise and privilege is a total red herring in almost all cases in my opinion. Where your client is a former contract killer who found god and wishes to catch-up on his taxes, then solicitor-client privilege would be a good thing.

If you have evaded income tax or mistakenly not reported income and have no criminal activity attached to such, I would suggest that if you have an accountant who has been through the voluntary disclosure process he or she is more than capable of helping you. Where you have a criminal issue attached to your disclosure, or information you want privileged, I would definitely recommend using a lawyer.

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.

Friday, September 9, 2011

Blog Roll Additions

I currently have nine blogs on my blog roll listing that I review or read fairly regulary. They include:

Boomer & Echo
Canadian Capitalist
Canadian Finance Blog
Divestor
Hull & Hull
Larry MacDonald
Michael James on Money
Money Smarts
Retire Happy Blog
Rob Carrick's The Reader (I also read his columns)
Seeking Alpha (multiple blogs are attached to the site)
The Canadian Couch Potato.

However, I have numerous other blogs I read when I can. I have thus decided to update my blog roll and the blogs listed below will be added. Many are well known blogs, some less well known, but all are excellent blogs. 

Andrew Hallam

Canadian Personal Finance Blog

Estate Law Canada

Investment Talk with SPBrunner

Million Dollar Journey

Moneyville
My Own Advisor

Off the Clock Confessions of a Corporate Lawyer

The Wealthy Canadian

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.

Thursday, September 8, 2011

Pebble Beach Golf- A worthy bucket list item

In my July 20th blog “One-item to shortly be crossed off my bucket list-Pebble Beach” I mentioned that I would be golfing at the famed Pebble Beach and Spanish Bay golf courses. This blog details these games, so if you are not into golf you may want to hit the escape button.

The first decision I needed to make in regard to this golf outing, was whether to stay at Pebble Beach, Spanish Bay, or a local hotel. Both these resorts are beautiful, but extremely pricey. However, if you stay, you are guaranteed a tee time. My friend Harvey and I decided we would splurge and stay at Spanish Bay, as the last thing we wanted was to arrive and not get a tee time.

Our second decision was whether to hire a caddy. We decided on a caddy as Harvey and I wanted to get the true feel of the course by walking and we wanted to have time to take pictures. We were provided one caddy for both of us. To our distress, he took our clubs from our bags, placed them in lighter Pebble Beach golf bags, and left most of our golf balls behind. We figured we would need many balls, however Michael, our caddy, said we wouldn’t; this was just the first of many correct calls Michael made that day. Michael’s reads and calls on many putts Harvey and I initially misread proved invaluable and saved us several strokes.

As a 12 handicap golfer (or at least a 12 handicap under my weekend rules), my goal for Pebble Beach was to shoot below 90 and birdie one hole. We decided to play the gold golf tees, which are 6450 yards. Harvey and I figured between the wind and the difficulty of the course, the gold tees would be challenge enough.

Harvey hit a great first drive, but I was so amped up to play that I had first hole jitters and mis-hit my first tee shot. Luckily I hit a great second shot and was able to scramble to a bogey on the first hole. I calmed down on the second hole; a short 460 yard par 5. I am a long hitter and I hit two long shots, such that I was just off the green in two. I then two putted to achieve my first goal, a birdie at Pebble Beach. To my amazement, I then birdied the 3rd hole, thanks to a great putt read by Michael. By the end of the fifth hole I was even par. I could not believe it. Michael, however, put me in my place quickly when he noted that Bing Crosby always said you better score very well on the first 5 holes, because after that the course will get you.

Holes 6 through 10 are the reason I have always wanted to play Pebble Beach. They run along the Pacific, with the surf crashing against the rocky outcroppings. They also have cliffs, which are what really drew me to Pebble. I always remember watching Tiger Woods with the TV camera behind him looking up this huge cliff on the sixth hole and having to hit over it. That cliff will now give me nightmares forever.

The 6th hole is a par 5 and I hit a very long drive down the right side. When I approached my ball I realized I was now facing the same shot Tiger had faced. Michael, who at this point had a feel for my game, said “take a 3 wood and hit it over the cliff to the right and you will probably hit the green.” I only saw cliff. I said no way because I did not trust my 3 wood to hit over the cliff and I wanted to play it safe and keep my score intact. I decided to hit my five iron, hopefully to within 50-70 yards of the green. However, that cliff just kept staring back at me and I was psyched out. I tried to take a nice easy swing and not be fazed by the cliff, however, I stopped my swing and watched in horror as my shot bounced off the cliff and dropped what seemed like 500 yards into the Pacific Ocean. I was dejected and Michael gave me a “you should have listened to me look,” however, I saved a double bogey.
The dreaded cliff

The next hole is the famous 7th hole. It is only a 100 yard par 3. I am told it often plays at 100 yards even for the US Open. From an elevated tee you hit straight out toward the Pacific Ocean, with nothing in the background, trying to account for the wind. I took out my 56 degree wedge and swung easily hitting a nice high arcing shot I expected to land in the middle of the green. However, the wind had other ideas and it rolled over the back of the green clinging to life in the rough on a downhill slope. With another double bogey, I was quickly four over.


7th hole-Par 3

Wikipedia describes the 8th hole as follows: “The long par 4 runs alongside the 6th hole leaving the peninsula and heading back toward the coastline. A dogleg right, the ocean is a constant companion along the entire right side of the hole. The landing area is extremely generous in width, but a long straight drive could leave the fairway and enter an inlet of the sea. Because the landing area is elevated on a cliff above the green, players have a good view of the small landing target a mid to long iron away. Jack Nicklaus has called this his favourite approach shot in all of golf.”

This hole was as described and the approach shot was as amazing as you’d expect given that it’s Nicklaus’s favourite. I hit a long drive and a seven iron to the left of the green and took a bogey.

I finished with a 42 after nine holes and I was pleased.

The tenth hole is the last along the coast until the 17th and 18th. I managed to par the tenth and the eleventh, but double bogeyed the 12th.hole. My first shot was slightly to the right of the green and Michael told me to use a lob wedge rather than a small bump and run and I ended up hitting a tree branch since my wedge got up so quickly. Michael apologized saying he did not think I could get my wedge so high so quick, but Michael saved me far more strokes than he cost me, so I could live with one piece of bad advice.

Michael told us that Ben Hogan called the 13th “the longest shortest par 4” and that we were playing the US Open tees. The hole is uphill into a vicious wind. Ben knew what he was talking about as I took another double bogey hitting into the hurricane.

I then took my third double bogey in a row on the 14th hole. It’s a 530 yard par 5, the number one handicap hole, and another hole that had me hitting into the wind.



Yes, that is me


I settled down with a couple bogeys and then parred out on the 17th and 18th. The 18th was a great looking hole down the coast line.

I ended up shooting 86, achieving my goal of shooting less than 90 and exceeding my birdie goal by achieving the back to back birdies on the 2nd and 3rd holes.

All in all it was an awesome day and a great experience, which, to me, was worth the cost and a worthy bucket list item.

The next day we played Spanish Bay. In talking to the starter, we were told that the best pro score ever at Spanish Bay was supposedly 68 and that it is considered a far tougher course than Pebble. We were paired with a husband and wife team for this round and quickly realized the wife had no idea how to play golf and should never have been playing on a course of this calibre. When we complained at the conclusion of the round we were told this is the number one complaint at the Pebble Beach courses; however, since they are public courses they cannot do anything about it. Personally, I am not sure why they cannot implement a minimum handicap requirement, but I digress.

I will not go into detail about Spanish Bay other than to say it lived up to the starter’s billing. The fairways were tight, the greens extremely tough to read and, most importantly, the wind at Spanish Bay made the wind at Pebble seem like a breeze.
1st hole at Spanish Bay

I shot 96 at Spanish Bay and actually hit the ball very well most of the round. I only parred the tenth and twelfth holes. I think my experience at the 17th hole par 4 best exemplifies Spanish Bay. I was 150 yards out after my drive on this hole and would usually use a 9 iron. Due to the wind I hit a six iron. I hit the ball as well as I could hit it and it still just made it to the fringe. The wind was a 4 club wind; I should have used a 5 iron instead of a 9 iron. I don’t know how you adjust to such a wind.

Anyways, despite the poor playing partner and my poor score, I really enjoyed playing Spanish Bay.

In the end, it was a golf trip to remember. My next bucket list items are more vacation oriented, but somewhere down the line, I intend to cross my second golf course off my bucket list, that being St. Andrews in Scotland.

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.

Tuesday, September 6, 2011

For Income Tax, “If It Seems Too Good To Be True... It Probably Is.”


Jeff Gray of the Globe and Mail recently wrote an article titled “Lawyers targeted over charity tax schemes”  which reported on a court case in which a tax lawyer who provided a comfort (opinion) letter in connection with a charity tax shelter scheme is being sued. The article noted that this is but one lawsuit levelled against legal firms in relation to charity and other income tax schemes.

In my opinion, this article raises three distinct issues. First, what is the responsibility of the tax accountants and tax lawyers who provide comfort letters? Second, what is the culpability of the financial advisor in recommending the charity scheme? And finally, should an individual be expected to recognize a tax scheme that seems too good to be true?

With respect to the accountants and lawyers, without being self-righteous, our firm has never promoted income tax shelters nor condoned the purchase of such by any clients, with the exception of certain types of flow-through share investments.

I suspect that the comfort letters Gray discussed in his article most likely interpreted the income tax law correctly from a technical perspective; in other words, the lawyer likely concluded that the tax benefits being promoted were in line with the specific relevant provisions of the Income Tax Act, although in this case, they may have been the "shades of grey" provisions. The Canada Revenue Agency (“CRA”), however, felt that the tax shelter was a sham and denied the benefits to the individual participants. The issue (according to the article) before the courts in relation to the lawyer is whether there was negligent misrepresentation on the part of the lawyer issuing the comfort letter. The plantiffs' argue the lawyer breached “the standard of care of a senior tax lawyer” for his legal opinion on the scheme and for allowing “comfort letters” from him to be included with its promotional materials?

I am not aware of the specific facts of this case, and as a non-lawyer I have no idea if any or all five general requirements for negligent misrepresentation have been breached. Thus, I have no intention of commenting on the legalities of the case. In addition, in this situation you can call me the “Wimpy” Bean Counter as I am constrained by professional conduct rules as to what I can say about other professionals. I do however query how income tax shelters such as this can be mass marketed to anyone other than accredited investors if accounting firms such as mine, see red flags immediately?

The second issue is also somewhat concerning. One would hope the advisor in this case clearly communicated the obvious risks of this scheme and the fact that he would receive a commission for selling this tax shelter. Let’s hope the commission for selling the tax shelter investment did not influence or have any effect upon his recommendation. However, when a declaration must be signed stating that the participant is aware the tax shelter scheme may be re-assessed by the CRA, one has to wonder how any advisor could recommend such a tax shelter to the average investor?

In regards to the individual’s responsibility, I wrote about this issue in my June 14th blog titled Income Tax Planning - Tail Wagging the Tax Dodge. In this blog I discussed how I have seen many taxpayers blinded by income tax savings to the detriment of their common sense.

In the Globe and Mail article, Mr. Gray stated that Fern Delarosbil, a project management consultant in 2003 purchased the tax shelter as recommended by his financial advisor. For every $2,500 Mr. Delarosbil gave to a designated charity, he would get a receipt for $10,000. Although I have some sympathy for Mr. Delarosbil and others like him, since they apparently relied on the comfort letter and their financial advisor, when does individual responsibility rear its head?

I grant you Mr. Delarosbil is not an income tax expert and his financial advisor suggested he participate in this charity scheme, but did he not see any red flags? Did he not wonder why in this case he would receive $4 for every dollar contributed, yet if he made a donation to the United Way or his local church that the charity donation receipt would have been on a dollar for dollar basis? Was he not somewhat alarmed that he had to sign a tax risk disclosure document saying he had been clearly warned that the scheme might not work and that he could face a reassessment by the CRA? I mean if that is not a slap in the face to wake up and smell the odour of this deal, then I do not know what is.

Over the years I have seen lots of wacky tax shelters and charity schemes, from comic books, to sports equipment, to movies, to papaya farms in Costa Rica. When clients receive documents recommending these schemes they often remark to me that they seem too good to be true. In most cases I reply that they are too good to be true and unless they find the idea of being reassessed in the future, possibly going to tax court and possibly owing back taxes and interest titillating, they should stay away.

In the end, it keeps coming back to the fact that there is an insatiable appetite for any kind of tax savings vehicle in Canada, regardless of the associated risk. Concurrently, as these tax shelter schemes fall by the wayside or have made their way through the tax courts, several insurance based products have also stepped into the breach to satiate the tax savings appetite. Again, these plans appear to be technically correct, yet they cause one to raise an eyebrow given the tax benefits being touted . I would not be surprised if some of these insurance based strategies are looked at closely by the CRA in the future – in fact, the CRA has already commented that they plan to do so in at least one case.

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.