WHAT THE….

THE BLOG HAS MOVED, WE ARE NOW “THE”BLUNT BEAN COUNTER

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TFSA's- I Opened The Account, Now What?

I think by now, most Canadians are familiar with Tax-Free Savings Accounts (“TFSA’s”).  In today’s blog, I will provide a quick summary of TFSA’s, but I also want to veer off  into a discussion of the growth potential of TFSA’s and how the actual deployment of your TFSA funds will affect you from an income tax and investment perspective.

TFSA’s have been in existence since 2009. You can contribute up to $5,000 a year into a TFSA and you can carryforward unused contribution room. There is no income tax deduction for contributing to a TFSA; however, the income earned inside a TFSA is tax-free. In addition, you can withdraw monies from a TFSA tax-free at any time and can re-contribute the amounts you withdrew anytime after the year of withdrawal (i.e. if you withdraw money in 2009, you can re-contribute beginning in 2010).

Initially, I found my clients were indifferent to TFSA’s, however, with the banks and investment houses pushing these accounts, most clients now have TFSA’s.  I think the fact you are investing only $5,000 a year in a low interest rate environment has caused many to look at the account as small potatoes. However, they seem to snap to attention when I inform them that if they contribute $5,000 a year for 20 years at a return of approximately 4% they will end up with around $150,000, and if their return is closer to 6% they could end up with around $200,000.

Once you realize the potential growth power of a TFSA, I think you then need to get a handle on what the TFSA means to you. Is it solely a rainy day fund? A tax-free replacement to your regular trading account? Something in the middle?

After answering the above question, you or your advisor must then address how you invest your TFSA funds. If your TFSA is a rainy day fund, clearly you and your advisor should ensure you hold risk-free investments such a GIC’s, money markets, etc.

But what if you, like many of my clients, are a higher net worth individual and are essentially just moving money from your trading accounts to your TFSA? As a Chartered Accountant I cannot advise you on what to invest in, but I will tell you what I have seen.  Many clients have just “thrown” their TFSA funds into GIC’s or Money Markets. Others have placed the funds in ETF’s, mutual funds, etc. looking at the TFSA as a long term growth investment. Some of my more sophisticated clients have been stock pickers and purchased higher growth stocks to try and maximize the tax-free aspect of the TFSA. The result is that some clients have $20,000 to $30,000 in their TFSA’s today, while other clients have picked incorrectly and have only 30% to 40% of their original investment remaining.

Whether you are the ETF-type, Mutual Fund-type, or stock picker, what you have to understand is that the tax-free aspect of the TFSA may come at a cost for equity investments. If your investments increase in value, at the high rate in Ontario you have saved 23% in income tax on your realized capital gains within your TFSA. However, if your investments decrease in value and are sold in your TFSA, you will have forgone the capital loss you could carryforward outside your TFSA. Very clearly, you are playing off a potential tax-free capital gain against the risk of incurring a capital loss which is forgone.

In conclusion, once you invest in a TFSA, you need to consider the significant growth potential as the years march by and discuss with your investment advisor your investment strategy on the funds accumulated.

For the Love of Football?

I am a casual football fan. I usually only watch when there is a specific game of interest or nothing else on TV. However, the last few years I have been in a suicide football pool (initially created by my son’s hockey coach to raise money for the team) where you pick a winner each week and are eliminated if you select a losing team. It is incredible how much my level of interest and awareness of all things NFL has increased since I joined the pool. I now follow ESPN’s top picks, watch the NFL Network previews of games, etc. to get all the facts for my weekly pick.

I know my friends have had the same experience. However, except for diehard NFL fans, we all have the same response once our teams are eliminated - complete indifference to the NFL. Whereas the week before I was eliminated I could tell you the injury list for each team, two weeks after I am eliminated I cannot even tell you which teams are playing.

It just makes one realize how intertwined the NFL’s success is with legal and illegal betting and football pools.

Estate Tax: Social Equality or a Terrible Idea

As I started reading a recent article by Linda McQuaig of the Toronto Star titled “Tax Exempt Fortunes Feed Inequality” I knew I my views would be widely divergent.

The article proposed that removing the Estate Tax in 1972 deprived Ottawa of much needed revenue and put Canadians on a path toward greater inequality. Estate tax, which is/has been a huge issue in the United States, is essentially a tax levied at death on the deceased’s accumulated wealth.

Ms. McQuaig suggests restoring an Estate Tax based on a plan by Neil Brooks an Osgoode Hall tax professor. She argues restoring the Estate Tax would remove or partially address income inequality. Mr. Brooks’ plan would be to tax estates greater than $1.5 million which Ms. McQuaig says, would be enough to set up a $16,000 education trust for each Canadian child on their 16^th birthday.

Ms. McQuaig suggests some may protest this as a tax on the wealthy; I protest estate tax as a double tax. One accumulates wealth with after-tax dollars so to tax your estate on death is double tax. The United States has at least justified estate tax with substantially lower income taxes while one is alive.

For example, take hypothetical Guy, a successful business owner who risks his house and all his assets to start a business. He and his spouse make, on average, $250,000 a year for say 25 years. Each year they pay income tax of approximately $100,000 on their income. Say they keep $75,000 after living expenses and use that to buy a house for $500,000 and a cottage for $300,000 over time. Upon death the house is worth $1,000,000, the cottage $700,000 and the remaining cash around $1,200,000.

Upon the death of the last surviving spouse, their executor would have to pay income taxes on the inherent gain in the cottage of approximately $100,000 on their final terminal tax return. There would be no income tax on their principal residence.

The estate would be worth in total $2,800,000 after paying the $100,000 in taxes. Applying Mr. Brooks’ proposed $1,500,000 exemption, there would still be estate tax on $1,300,000. Say the rate is 40%; the US has an even higher rate, that would be an additional double tax of $520,000.

You can argue as Ms. McQuaig that this is just social policy; I argue it is a blatant double tax.

I recently ate at the Hy’s steakhouse location in Toronto with some friends. We had an excellent meal, including caesar salad, black and blue ahi tuna ,filet mignon and Cajun rib steak. We were well taken care of by the General Manager and Director of Eastern Operations Michael Shatz. The Toronto location is a beautiful restaurant and we were all dressed in a style you would describe these days as “casual smart” (dress pants and shirt) or, in the case of the girls, nicer.

Which brings me to my point of discussion: What is the proper dress attire for a fine restaurant? While I think most people are somewhat “old school” and dress differently depending on the restaurant, I often see people in jeans and t-shirts. Casual is appropriate for many restaurants, and while I have no problem wearing jeans to those type of restaurants, I would never wear a t-shirt.

I think what bothers me is the lack of respect for the restaurant and the other diners. It is like these casual dressers are saying “I don’t care if I am spending $200 or more, I will wear what I feel like.” It just seems to smack of disrespect for the other diners who reserve that restaurant for special occasions, or even those who just expect a minimum dress code. Maybe I have just hit the age where I have now become my parents.

The CRA and the PGA, Some Strange Rules

I recently read that Toronto Police Association president Mike McCormack said the Canada Revenue Agency (“CRA”) has decided that allowing the police to park at police stations is a taxable benefit. Mr. McCormack says the taxman is looking for three years back taxes and that could amount to “thousands of dollars” for each officer.

I have never understood CRA’s position on parking where a company has its own parking lot. You are driving to your place of employment to work, how is that a personal benefit?

The CRA’s position on parking is set forth in the following links:

T4130 Employers’Guide Taxable Benefits and Allowances

Parking Questions and Answers

Parking Definitions

In general, the CRA considers there to be a taxable benefit for parking whether the employer owns the parking lot or not. The most common exceptions are for scramble parking and parking provided for business reasons.

Business reasons relates to situations when an employee regularly uses his/her automobile to perform employment duties such as travelling off-site to meetings or service calls.

The CRA defines regularly as:

We consider "regularly" to be an average of three or more days per week. If the employee requires the use of a vehicle for business purposes less frequently, we will accept a pro-ration of the benefit. For example, if the employee uses a vehicle in the course of his or her duties 1 day per week, the value of the parking may be reduced by 20%, since the employee required a spot for business purposes 20% of the time.”

Employers often overlook the potential taxable benefit for parking which can result in a surprise income addition, and taxes payable, for their employees. Employers should review this issue with their advisors.

Stupid Golf Rules

As I get older, the injuries I ignored in my youth are coming back to haunt me. My knees now prevent me from playing basketball and my back keeps me from hockey. The one sport I seem to be able to handle physically is golf. I have a set game with my friends and we are all pretty good golfers (12-15 handicaps) and more importantly, we all have the same philosophy; we play golf for fun.

We play to be outdoors. We play for the challenge of the game. We play teams for lunch and we play to make fun of each other. We allow gimme’s and just take penalties from where we go out of bounds. We let one another move balls from divots.

Now I know anyone reading this who is a golf purist is offended by our lack of adherence to the rules and is already saying “You are not a 12 handicap if you play the way you do.” You know what, I agree, and our handicaps hurt us in any regulated tournament or club-like championship as they are understated due to the way we play. But we would rather play the way we play and we don’t care what our true handicaps really are. But, different strokes for different folks, and I understand those who are strict play-by-the-rules types, it is just not how we want to play the game as a recreational golfers.

After this year’s PGA when Dustin Johnston was penalized for grounding his club in a trap which did not look like a trap, some of golf’s archaic rules were revisited by many journalists and bloggers.

The following are some rules that just seem stupid in my opinion.

Balls in divots- You cannot take a free drop from a divot on a ball that lands in the fairway. How crazy? Someone else creates a divot and you hit a good shot and you are penalized by playing the ball from a large hole? How does this make sense when you get a free drop from ground under repair or a drain?

Padrig Harrington was penalized in a tournament when the wind blew his ball as he set up. He was penalized not because the ball moved, but because he had addressed the ball. How crazy is that? Mother Nature affected the ball, not the player.

Michelle Wie had a famous disqualification because she failed to sign her scorecard before leaving the scoring area. Everyone watching the tournament knows the score with all the electronic scorekeeping, so who cares when she signs?

You cannot fix a spike mark made on the green. Again, someone else created the impediment, but you suffer.

Golf is the most challenging game I have ever played and it can be enjoyed by playing strictly by the rules or using modified rules for weekend hackers.

Where Did My Money Go?

A common issue I have uncovered over the years is that many people have little or no idea how they spend their money. Having a finger on the pulse of your spending is important for two planning reasons. Firstly, on a month to month and year to year basis, if you have the numbers in front of you, you can revise your spending habits or reallocate your spending. Secondly, when doing financial planning or estate planning, it is important to have a grip on current spending to extrapolate those costs going forward.

When I ask people why they don’t track their costs they often cite a lack of time or say they just don’t have an accounting inclination. While these are both valid reasons, with the advent of online banking and simple software like Quicken, both those reasons for not tracking spending are somewhat muted.

I use Quicken Cash Manager (which retails for $45) rather then Excel, since I can reconcile my bank accounts and track my expenses. Quicken Home and Business, which retails for around $100, provides some additional investing and accounting tools. If someone has an incorporated business I suggest they purchase QuickBooks or QuickBooks Pro.

I use Quicken to reconcile to my bank accounts to make sure I don’t bounce any cheques or prepayments. I find the most valuable tool is the monthly and yearly spending summary, which is created automatically if you are tracking your bank accounts. The yearly report is eye opening and often leads me to fits of nausea when I review how much I spent during the year.

I will admit that many people, including myself, have trouble keeping track of every cheque they write. I either post any cheque over $200 immediately in Quicken or I note the cheque amount and who it is for on a piece of paper and post it when I have a minute. Then on the weekend I go to my online bank account and post all the entries for the week, including smaller amounts I have not posted, which allows me to reconcile my account to my Quicken. Quicken even has a function to connect to your bank account.

The final step to keep things timely is to input all the pre-authorized amounts (e.g. car payments, insurance payments and realty taxes) at the beginning of the month. This is fairly easy to do since they are the same each month and the transaction can be set up once on a recurring basis.

Once you get in the habit, tracking your finances is easy and allows you to budget your costs and set goals for monthly savings. Keeping track of expenses and your bank account may not be fun, and may require half an hour to an hour a week, but the return is substantial for the time invested.

A topic related to personal budgets is ensuring monthly costs are reasonable and the services we are paying for meet our current needs. Many of us do some due diligence when signing up for telephone, internet, insurance, etc. However, once that diligence is done, if you are like me you no longer pay attention and just pay the monthly bills unless something looks out of “whack”.

Last week my wife decided we need to change our telephone long distance plan to include more long distance time in Ontario. She called Bell Canada and was told from the outset that our plan was way out of date, we were paying $5 too much, and we could have two additional features for free. When she started discussing our long distance needs, the reason for the call in the first place, my wife was told we already pay $4.95 for long distance that we are not using.

Once the dust had settled, we had the exact same monthly charge, two additional services and hundreds of minutes more long distance. The moral of the story, maybe once every year or two, call up your service providers to review what you are paying for to ensure you are getting the best bang for your buck.

Along the same vein, if your children are driving, have good marks, and are moving up their various levels of licensing and/or go off to University (and not driving while at University), there are various reductions to your car insurance bill that are not necessarily clearly known or voiced by the insurance companies.

I am waiting for my free ticket from Brazil for 2014

I have been in Europe twice during World Cup years. The first time I was in Italy in 1982 and this year I was in Spain during World Cup 2010. Both times, the country I was visiting won the World Cup.

I only remember bedlam in Italy.  In 1982 I was not even aware the World Cup was on because at that time I thought soccer was a sport for sissies. However, after enduring hundreds of games and tournaments for my son, who played rep soccer, I have come to appreciate the game and follow it to a small degree. Thus, I was quite aware that I would be in Madrid during the World Cup final.

Spain made it to the finals and we ended up watching the final game with a hundred thousand of our best friends. Actually, we tried to watch with a hundred thousand of our friends, but the street was blocked off by a huge TV screen so we watched the game in a hotel with the Spanish employees. As you know, Spain won in overtime. We were treated to free Champagne at the hotel before wandering outside. It was a mass of partying humanity. The celebrations were fun and joyous and a great outlet for many Spaniards suffering from a tough economic climate. It was a great experience and one that I will never forget.

Rock On

I will start today off with a prediction. Many Ontario businesses will be haunted by the introduction of the HST (“Harmonized Sales Tax”) over the next couple years when government HST audits are in full force. I say this because the HST does not appear to be well thought out. It was changing by the minute as the July 2010 deadline approached and most Ontario businesses look at the HST solely as an 8% increase in the GST (“Goods and Sales Tax”) from 5% to 13%.

The truth is, HST is a meshing of the GST, which was fairly well understood by most businesses, with Retail Sales Tax, which was never well understood by most businesses and many accountants. In my opinion, there will be havoc down the road with Sales Tax rules becoming embedded in the HST. I predict that place of supply and delivery rules, transitional billing rules and input tax credit restrictions will rear their ugly heads. The above is just a prediction based on my gut feeling, but I would be willing to bet that I will be proven correct.

Switching gears, I was listening to a rebroadcast of Casey Kasem’s American Top 40 (some FM stations & Sirus stations rebroadcast the original shows where Casey counted down the weekly top 40 – I personally enjoy the shows from the 70’s) and there was some talk about Tommy James. Tommy James performed, either solo, or with the Shondells, such hits as Draggin' the Line, Crimson and Clover, Crystal Blue Persuasion, Mony Mony and I Think We’re Alone Now. I was a little surprised by the number of hits he had produced so I Googled him. There are several sites on the net saying he should be in the Rock and Roll Hall of Fame. That got me interested in finding out which artists are not in the Rock and Roll Hall of fame so I did some more surfing and some of those not in the Hall of Fame, in no particular order, are:

• Tommy James
• Deep Purple
• Heart
• Stevie Ray Vaughan
• Procol Harum
• Ohio Players
• Rush
• Chicago
• Rufus and Chaka Khan
• Moody Blues
• Hall and Oates
• Jethro Tull
• Alice Cooper
• Kiss
• Linda Ronstadt
• Steve Miller
• Emerson Lake and Palmer
• Boston
• Rick James
• Yes

I am a Contractor, Unless CRA Says Otherwise

While we may be uncomfortable with a little bit of gray in our business relationships, the Canada Revenue Agency (CRA) is not. One issue that has fuzzy boundaries, but must be defined for tax purposes, is the issue of employee versus contractor.

Business owners need to be concerned about the distinction because they must remit payroll taxes on behalf of employees and provide employees with reasonable notice of termination. However, these rules do not apply to contractors (although there are some cases of reasonable notice for contractors). Individuals need to be concerned about the distinction because there are certain tax write-offs that are permitted for contractors (self-employed individuals) that are not permitted for employees.

In a perfect world, without CRA, (how utopian is that?), both the employer and employee would have a predilection to achieve monetary savings by ensuring work agreements are structured as independent contractor agreements. In fact, especially in the computer consultant world, many companies require the worker to incorporate a company to further insulate the payer company from CRA.

Many employers however ignore other factors that come into play. Since they are not withholding income taxes, Workers Compensation and Employee Health Tax, the contractor (or their corporation) is liable for these taxes. I have seen many cases where the contractor does not deal with these taxes and instead comes back to the employer asking for help in paying these liabilities.

In addition, I have seen cases where the “employee” requests to be a contractor for tax purposes, but when the company no longer requires their services and their request for Employment Insurance (“EI”) is turned down (since they are self employed) they often make a claim against the employer saying they did not understand they would not be covered for EI and they really were employees. A recent case involving the Royal Winnipeg Ballet focussed on the expressed intention of the arrangement and maybe helpful in this regard in future cases.

I generally advise my clients to treat workers as employer/employee relationships when the individual is working for them several days a week. I also generally advise my contractor clients to avoid the use of corporations due to Personal Service Business (“PSB”) concerns. If CRA considers a PSB to be in place a punitive income tax is applied to the corporation. Where a contractor agreement comes under CRA’s scrutiny, the first thing CRA does is examine the agreement between the payer and the employee/self-employed contractor to determine the intent of the relationship; but intent alone is not enough. The CRA then applies 4 tests to determine if the relationship is a business relationship or an employer-employee relationship. CRA has issued RC 4110 to communicate their position.

It should be noted that much of CRA’s position is drawn from two notable cases Weibe Doors and 671122 Ontario Ltd. vs Sagaz Industries.

The tests are as follows:

Control test: A lack of control over how work is done is evidence that there is an employer-employee relationship – e.g. the payer determines how the work should be done, what work should be done and provides training. In a business relationship, the contractor would work independently and accept or refuse work at his/her own discretion.

Tool test: Generally contractors supply their own tools. “Tools” is not limited to hammers – it includes instruments, computers, vehicles and any other items that the worker uses to perform his/her job. 

Subcontractor test: The ability to hire assistants or contract work out is evidence that there is a business relationship.

Risk/Opportunity test: Risk of loss and opportunity for profit are indicators that there is a business relationship.

Integration test: This test examines whether the payer’s activities are incorporated into the worker’s business or whether the worker is integrated into the payer’s activities.

The employee versus contractor issue is a minefield and employers and employees alike should consult their advisors before entering into a new agreement.

FORD VS TORONTO STAR

The Toronto Star has been consistently and vigorously attacking Toronto mayoral candidate Rob Ford in an attempt to get anyone other than Ford elected. In an article called “Waking up on October 26 with Mayor Rob Ford”, Heather Mallick likens voting for Ford to “sleeping with someone to get revenge on your spouse” and when you wake up the next day (after election day), you regret it.

I have never met Mr. Ford, although I heard him  a couple of months ago when he was having a fundraising dinner at a restaurant where I was eating. His group was not the quietest group of diners, but that appears to be consistent with what we know about Ford: he will be heard and noticed for good or bad.

Based on the above, you may think I would be sympathetic to Mallick’s cause, however, that is not the case. You see, I am in the group Mallick refers to as Ford’s “monstrous regiment of angry, old white male voters,” although the old part certainly doesn’t apply to me. In my opinion, this group of Ford supporters includes many middle-aged voters of all colours who are sick and tired of leftist leaning Toronto politicians with no backbone, no vision and a history of overseeing a mess of a Toronto council.

Like many, I am not sure if Ford if up for the job or not. But unlike Ms. Mallick, many Torontonians are not happy with the status quo where Toronto panders to every civil servant and union, while taxing its residents to death and allowing the city to deteriorate.