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David A. Townsend, CPA, Professional Corporation

"What we have here is a failure to communicate!!"
an article by David A. Townsend

Communication between financial advisors and accountants is generally good but when it breaks down, it can cost the client money! The above title definitely overstates the case but hopefully it got people's attention. And I couldn't resist the reference to one of my all-time favourite movies… "Cool Hand Luke".

For anyone who remembers the movie, you're probably a baby-boomer like me. Dealing with retirements, wind-ups, consolidations, and estate issues is challenging stuff. How do you preserve the value of assets and pass them on most cost-effectively? What information and procedures will help successors carry on effectively when you're not around? How do you best provide a good trail for others to follow?

I find clients sometimes get caught up in technical details and forget the obvious, i.e. most problems can be avoided with good communication and organization. Miscommunication will not only result in additional tax in many situations, it also will increase professional fees and stress for everyone involved. It is vital that the client, investment advisor and accountant take time to communicate and ensure that they are on the same page.

I have worked with many different financial advisors over thirty plus years. The good news is that the communication has improved tremendously in that time. Of course, technology helps but that can be a problem too… more about that later.

Most financial advisors are a pleasure to work with — organised, accessible and eager to help serve our mutual clients. I rarely encounter the response I used to hear fifteen years ago…."You're the accountant, you figure it out"…

Of course, to be fair, that response was probably triggered by my overly demanding approach. It may be stereotypical but in my experience, financial advisors and accountants have different mind-sets — the two professions attract different personalities.

Most financial advisors are wired to be positive and upbeat… they talk to people and draw them out. Accountants, on the other hand, usually just want the facts without the side issues. Both approaches have merit and the synergies can be helpful; but the different personalities can also create friction. I'll leave the psychology to someone with more experience in those matters but the client should be aware of this.

It is after all the client's assets at risk and it will be he or she who suffers. If there is not a good working relationship between the accountant and investment advisor, the client may have to make a tough call and replace one or the other.

Enough preamble. The following are examples of problems I have encountered in my time… makes me wonder how often they slip through the cracks.

(1) An elderly client set up a sizeable investment portfolio with a new investment advisor. Investment statements show "book value" (Note 1) and market value of investments… pretty standard stuff. However, the book value is based on the cost at the time the investments are transferred into the account. Capital gain statements are then produced annually based on these "book values", not the original costs of investments. The client passes away, leaving the spouse executor to deal with this.

Risk: Many clients (and some accountants) will accept a computerized investment company statement as gospel. Also CRA will undoubtedly reference it during an audit (Note 2). The investment companies do have fine print to the effect that the client is ultimately responsible for determining his or her original cost. But how many clients read the fine print?

Recommendation: Clients, accountants and investment advisors should work together when a new investment account is opened. I understand that an investment company wants to show information from the time they took over the account. However, from an accounting/tax view, it is more important to provide a trail for the original cost of an investment. Therefore the investment statement should reflect this.

(2) Client has large investment portfolio consisting of many diverse investments including trust units and mutual funds. Mutual fund companies provide capital gains/losses for dispositions of their funds and client depends on this for tax purposes. Although income trusts show book values on the investment statement, these figures cannot be relied on for income tax purposes. These investments require more detailed tracking because some distributions are taxable and others are returns of capital (nontaxable).

Risk: As mentioned earlier, the investment companies stipulate that the client is ultimately responsible for tracking the cost of their investment. Most clients do not want to pay their accountant to do this and they don't have the time or expertise to do it themselves. As investments become more complex, there is disconnect between who is tracking what. When investment companies/advisors change, tracking investment costs becomes even more difficult and time-consuming.

Recommendation: Clients, investment advisors and accountants should all be aware of these issues and communicate regularly to be sure that they are addressed as needed.

(3) Taxpayer with a large portfolio passes on. As most are aware, unless investments are transferred to spouse (not in this case), client is deemed to sell investments at fair market value at date of death. Capital gains and losses are recorded on the deceased's final tax return. During the next year, the Estate liquidates the investments. Capital gains statements are produced for the Estate showing gains based on the original cost (not the value at date of death).

Risk: The capital gains can easily be reported twice for tax purposes and both the deceased taxpayer and the Estate could pay tax on same gains. The capital gains statements produced by the investment company could raise questions with CRA (Note 2).

Recommendation: When capital gains are recorded on deceased's final return, Estate portfolio should be updated to show revised investment costs. Capital gains statements provided for Estates should reflect gains from date of death.

(4) As most are aware, when a taxpayer passes away, RRIF's can be rolled over to a surviving spouse tax-free. Investment company issues T4RIF for the withdrawal on death, but offsetting deduction form for the rollover goes missing. I have seen this happen more than once in my practice. The client usually blames the investment company, but I suspect sometimes in the stress of dealing with loss of spouse, things are mislaid.

Risk: If the rollover is not recorded, the taxpayer will pay tax on the RRIF withdrawals twice. Once when it is transferred out and again when regular withdrawals made.

Recommendations: Client should first of all consolidate RRIF's. Paperwork can be more problematic if client has multiple RRIF's with different investment companies. Investment companies could indicate on T4RIF that transfer is being made to the spouse under Section 60(L). I do see this sometimes but unfortunately, not consistently.

(5) Client transfers funds from registered pension plan into an RRSP. T4A is prepared to show pension plan withdrawal but regular RRSP contribution receipt is given to client. Two years later, when CRA questions, advisor who handled transaction is no longer in business and investment company says it does not have sufficient information to amend RRSP receipt.

Risk: CRA will assess on basis of documentation available. If investment company slip does not support taxpayer position, return will be reassessed. Client's RRSP contribution will be disallowed if he or she does not have sufficient RRSP room. Client may be charged penalty on "excess RRSP contribution".

Recommendations: Documentation errors should be followed up on timely basis. The only option (as far as CRA is concerned) is getting an amended slip. Transfers between registered plans should be clearly identified as such on both the withdrawal slip and supporting receipt.

(6) Client asks for capital gains statements for dispositions during the year. Investment staff prepares these for all accounts including RRSP's.

Risk: Of course, RRSP capital gains are not taxable until withdrawn. If client statements do not clearly identify RRSP accounts, the accountant can easily record taxable capital gains on these accounts also and tax is paid twice.

Recommendation: Investment advisors should be aware of this and ensure that RRSP accounts are clearly identified. This is not always the case.

(7) Client has diversified investment portfolio and receives a T3 investment slip showing significant foreign income. Tax return is filed showing that client has over $100K in foreign investments and that T1135 will be filed. It is later determined that these particular investment holdings are not subject to T1135 reporting.

Risk: The complications of filing T1135 are too detailed to discuss here. However, CRA wants details on foreign holdings (even those reported on investment slips). Failure not to report can result in significant penalties.

Recommendations: The investment and tax communities for the most part agree that the T1135 creates unnecessary work — the clients filing this form are not the ones taking their money offshore in suitcases. Hopefully CRA will eventually grasp this and adjust accordingly. At this time however, the T1135 is required and we have to deal with it. It is an opportunity for accountants and investment advisors to work together to come up with procedures that work efficiently for all parties.

The above is not to criticize anyone. The onus for good communication has to be shared equally by all parties. In this day of tweeting, texting and e-mail, a face to face discussion often provides the best opportunity for the client to move this forward. A working lunch with your investment advisor and accountant might be worthwhile….maybe one of them will even buy… Urge your investment advisor and accountant to collaborate! This will be in your best interests.

Note 1 — Most investment company statements provide a comparative figure to measure against the current market value of an investment. In my experience, this is most commonly called "book value" but is also referred to as "cost" or "adjusted cost base" (or some other term) depending on the investment company. The method of calculation of this "book value" is sometimes described in footnotes to the statement, but not always.

Note 2 — As a practical matter, in my experience, the CRA rarely questions capital gains or losses (other than active business investment losses). However, file a claim for $10,000 in medical and it almost guaranteed that you will be asked to produce receipts. But that is another story.

Contributing Editor to Canadian Money Saver Magazine