Confessions of a Tax Accountant -2013- Week 4

This is my last confession for this income tax season. I am now deep in the tax trenches and really looking forward to May 1st. A final reminder, please file your income tax return on time to avoid the 5% late-filing penalty.

This week I discuss the following:

Do as I Say, Not as I Do

It is funny how we often ignore the advice we provide to others. I have been thinking about this the last couple weeks as I have been inundated with personal tax returns and the related emails, phone calls, couriers etc. My failure to heed my own advice can be traced back to my November, 2012 blog post on

The Income Tax Cost of Working Overtime.

In that post I stated that you have no reason to decline new clients or new work based on not wanting to enter a higher tax bracket. However, I went on to say that there are times when work should be turned down.

Those times may include the following:

  1. You have so much work that you are overwhelmed and if you take on the new client/customer your service or product will be sub-par and your reputation will suffer.
  2. You are working so hard that your family life or health is suffering. In this case the extra dollars may cost you something more important than money.

As I thought about this blog post, I realized I have not listened to my own advice. The nature of tax return preparation has changed in the last 5 years. The late issuance of T3’s and T5013’s have condensed income tax season into a hellish 3-4 week period, instead of a 6-8 week period. As I contemplated this change, it hit me that I am now compromising my own health and/or taking years of my life. So I am making a public vow that I will be making significant changes to my work environment next year.

Disappearing Dividend Income

It is “cool” to be a dividend investor. Whether you are a do it yourself (“DIY”) investor or you are like many of my clients who have investment advisors or private investment firms handling their investments, maximizing dividend income seems to be the “in” thing. The issue is that many of these dividends seem to disappear without a trace and I am often called in to assist in locating the ever elusive dividend.

Inspector Goodfield is called upon when the current year’s dividend income on a 2012 return is less than last year’s dividend income. I am asked, “Where could these dividends have gone?” Well, there are typically three reasons a dividend can go “poof”.

  1. The first reason is one or two of the companies in your investment portfolio have cut their dividend payouts.
  2. The second is you are missing a T5 or T3 slip.
  3. The most common reason for a decrease in dividends is …… take a guess?…. Yes, it is not reporting the sale of the dividend yielding stock. Now I am not saying this is an overt attempt at tax evasion, it is just that many people sell stocks early in the year and forget they sold them or just do not properly track their capital gains and losses.

So if you filed your return with lower dividend income than last year or have not yet filed, you should always confirm that any decrease in dividend income reported year over year is the result of a dividend cut or missing T-slip and if not, review your sale transactions for the year.

Investment Advisor Chasm

In last years

Confession of a Tax Accountant Week 6

I wrote about the varying quality of assistance investment advisors provide in respect of capital gain/loss reporting and the fact that some advisors feel it is the accountant’s responsibility to track the adjusted cost base (“ACB”) of all their clients’ holdings, a contention almost all accountants dispute. Two weeks ago I discussed an offshoot of this topic, the poor reporting of flow through shares. This week I once again pick on investment advisors and their financial institutions for poor capital gain/loss reporting.

In the last couple weeks I have experienced some terrible capital gain/loss reporting by client’s advisors and/or their institutions. I have had up to 75 trades missed, non-reporting on accounts closed during the year, situations where I had to inform the advisor of all the clients accounts for which I expected capital gain/loss reports and huge adjusted cost base variances where advisors moved firms during the year (In these cases I expect the greatest of care and diligence since the cost base of investments often get lost or not carried forward properly on the transition to a new firm).

Being the BBC and not having the greatest patience even at the best of times, I have been less than subtle when expressing my displeasure in respect of this misreporting. However, to my surprise, my client’s have been unfazed, they just say “aren’t all investment advisors pretty much the same?” I confidently answer no.

For example, an advisor who works for several of my clients reconciles each clients expected interest, dividend, capital gain income and their expected interest expense and management fees. Others are constantly asking if there is anything they can do to help. So the answer is definitely no, all investment advisors are not the same.

Obviously an advisor can be administratively strong but very weak from an investment advice perspective or visa versa. But I would suggest that they very often go hand in hand and if your advisor is not providing the proper level of service either administratively or investment advice wise, you should put them notice or consider finding an advisor who will make you a priority.

U.S. Donations

With our close proximity to the United States, many Canadians make donations to U.S. charitable organizations. While I always applaud charity, you may want to consider that for income tax purposes, U.S donations (except for certain Universities and specific exceptions) are not included together with your Canadian donations, but are treated separately and are subject to separate rules. Like Canadian donations, U.S. donations are subject to an overall limitation of 75% of your net income, however, that limitation is based on U.S. source income.

In plain English, if you made a $200 donation to a U.S. organization, you must have $266 in U.S. source income to claim the $200 ($266 x.75). If you have no U.S. source income the donation is wasted, although it can be carried forward for five years.

Thus, before you donate to a U.S. cause, you may want to consider whether you are willing to forgo the income tax credit you would receive on a donation to a similar Canadian organization. If not, consider making the donation to the Canadian organization.

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2013 Federal Budget

The Federal Minister of Finance, Jim Flaherty, today presented the 2013 Federal Budget. While there are no changes to corporate income tax rates, there is an increase to the personal income tax rate on non-eligible dividends paid by most private corporations out of active business income. There is no change to the taxation of eligible dividends paid by most public corporations.

Small corporate business owners planning to sell their business got a pleasant surprise in the budget when Mr. Flaherty increased the capital gains exemption for qualified share sales to $800,000 from $750,000 effective for 2014.

The Finance Minister seemed somewhat preoccupied with closing tax loopholes and stopping international tax evasion and ensuring compliance with the filing of the Foreign Verification Form T1135. To that end, the CRA will launch the Stop International Tax Evasion Program, or the more appropriately named “International Snitch Program”. Under this program, the CRA will pay rewards to individuals with knowledge of major international tax non-compliance when they provide information to the CRA that leads to the collection of outstanding taxes due. The CRA will require the outstanding tax liability to be in excess of $100,000 before entering into such a contract. The reward will provide for payment of up to 15% of the federal tax collected.

Therefore, please be advised, I will not be writing my blog anymore as I will be compiling my snitch list and retiring to Barbados on my 15% reward earnings (Just joking CRA, I have never met or heard of an international tax evader).

I provide a link to my firm, Cunningham LLP’s budget summary (which I helped write) for those who want details of the budget.

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Newspaper Paywalls – The Future or the Last News Stand?

This is my last official blog post of 2012, (I will announce the winners of the book giveaway on Wednesday) so I would like to wish my readers a Merry Christmas and /or Happy Holidays and a Happy New Year. See you in January.

Newspaper Paywalls

Over the last few years, there has been a growing trend amongst newspapers to implement paywalls. Papers moving forward with paywall initiatives include such prestigious papers as the New York Times and Wall Street Journal. As described in this Wikipedia

link

, a paywall is a system that prevents Internet users from accessing webpage content, most notably news content, without a paid subscription.

I find this transition fascinating. The change falls somewhere in the middle of being a sustaining technology and a disruptive technology – if one could apply technological jargon to this situation. There are alarming similarities between the transformations the newspaper industry and music industry have been forced to undergo in the last 5 years or so. While the revolution in the music industry may have been more radical and accelerated, it is still similar in many ways to the changes newspapers have had to make in order to survive.

I see the following similarities between these two industries:

Music in many forms became freely accessible to the public (whether legal or not is another discussion). Many newspapers and other Internet sources have been providing free access to news, sports, and entertainment etc. for several years now.

The music industry could not stop/or unwillingly let the genie out of the bottle and Apple, via iTunes, capitalized by providing a low cost music option in the legal download world. Newspapers are now trying to shove their genie back into its bottle by creating paywalls and charging for access to online news.

The entire newspaper industry seemingly overnight is battling a societal shift, in which consumers expect free online content and are very hesitant to pay for such information. It is interesting to note that in Toronto, two popular free newspapers, The Metro and 24 Hours, are owned at least in part, by the owners of the Toronto Star and Toronto Sun respectively.

The Globe and Mail (“G&M”) recently went to a paywall when it launched its Globe Unlimited digital subscription service for its Globeandmail.com website and apps. The other three Toronto papers have also announced paywall intentions for 2013.

While paywalls result in extra revenue for newspaper companies (charging for online content or creating demand for hard copy subscriptions), that revenue is often negated at least in part, by a decrease in advertising revenue. According to this article in the International Business Times , the New York Times increased subscription revenue by 8% in its second quarter of 2012 including paywall revenue, but had offsetting advertising revenue losses of 7%.

This July, 2011 article reflects how the implementation of a paywall can radically decrease online traffic once it goes up (it is my personal uneducated opinion that these numbers are understated as many papers offer some free online content or allow for a certain level of free visits that distort the true loss of readership). I would have liked to have been a fly on the wall when the NY Times held their initial meetings discussing the business case of implementing a paywall. You can imagine a boardroom filled with marketing, accounting and newspaper people, all with different agendas and ideas, sitting around a table trying to figure out if they will lose 10% or 40% of their online readers and how many readers the paper will require to become paid online or newspaper subscribers to compensate for the immense loss they will incur in online and hard copy advertising revenue. The revenue discussion does not even account for the issue of whether the people who stop visiting your site once the paywall is established, will ever return to your site for any free online content.

As noted above, the G&M recently implemented a paywall. They used the following pay structure: G&M newspaper subscribers were granted free online access. Casual online visitors are allowed up to 10 pieces of G&M content per month for free, after which they need to subscribe to Globe Unlimited or they will not be able to access anymore articles for that month. A Globe Unlimited trial is available for 99¢ for the first month, after which the cost is $19.99 per month.

As a G&M newspaper subscriber, I have free online access. If I decided to stop my newspaper subscription, I would pay the $19.99 per month. However, I am an avid newspaper reader for both personal enjoyment and because I need to stay abreast of what is happening financially because of my blog and profession. However, I am not sure in this day and age of free content that everyone feels the same. It will be interesting to see how the various Toronto papers’ paywall implementations are accepted or rejected by their readers. Their reaction will shape those newspapers and the Canadian newspaper industry for a long-time to come; or possibly a short-time to come, for those with less than compelling online content.

P.S. For those visually inclined, check out this interesting infographic on paywall trends.

Paywall Trends
Image source: www.bestcollegesonline.org

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