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Taking it Easy at Your Own Cottage Starts with Smart Planning

062316_Thinkstock_482345735_lores_KKThe living seems so easy on the lake, at the beach or in the mountains.

If you’ve been renting a vacation retreat each year, you may think it’s finally time to dive in and buy one of your own. It can be the right choice, but be sure you go in with your eyes wide open.

Cottages can be pricey, not just because of the cost of purchasing a place but also because of ongoing maintenance, unexpected repairs and perhaps renovations. Don’t forget that what you spend on your cottage can have a significant effect on taxes when you sell it.

Before you sign the mortgage or withdraw from your savings, ask yourself if owning a cottage makes financial sense for you. Do you want to tie up a chunk of your savings in real estate?

Once you’ve mulled over these issues, you’re ready to start.

Choosing a Property.

To ensure your cottage both fulfills your getaway dreams and is a financially smart choice, you need to find the right property in the right location for the right price. Two major possibilities will dictate what you buy and where:

1. Using the place as a retreat and a place to retire. A cottage for the family needs sleeping, cooking, dining and congregation areas adequate for family and guests. A potential place to retire should also have easy access to shopping, gas stations, hospitals and entertainment. If you’re planning to retire there, the place obviously needs to be winterized.

2. Earning extra money by renting out the house. A cottage can be easier to rent out when it’s located in a high-demand, and more expensive, area such as on a lake or near a ski resort. In general, the more isolated and quiet the location, and the further away from the water or other attractions, the lower the rent you can ask.
You also need to consider all of the costs involved. In addition to the down payment, any monthly mortgage payment and interest, you’ll incur costs such as:

Property taxes, insurance Maintenance, repairs
Utilities, propane refills Travel, gasoline
Condo, marina fees Garbage, trash removal

Finally, if you need financing, that also should factor into the type of property you choose. Cottages often fall into one of two categories when it comes to getting a mortgage:

1. All-year winterized properties. These have features similar to residential homes such as insulation, running water all year, central heating and sometimes basements. These are good candidates for mortgages.

2. Rustic properties. These may have wood stoves or fireplaces and sit on blocks or piers. These may be more difficult to finance and may require heftier down payments to avoid mortgage insurance. The worst case scenario: You may have to tap into your savings.

Tax Planning

Once you’ve sorted out these issues, it’s time to turn to tax planning. That’ll involve keeping track of the following:

Capital improvements. At some point, you’ll inevitably give up the cottage, either by transferring ownership (succession, gifting and inheritance) or selling it. Document any capital expenditures you make over time so you’ll be able to calculate an accurate adjusted cost base (ACB). The higher your ACB, the lower any taxable capital gain you’ll have to report.

Your adjusted ACB is the sum of the initial cost of the property plus qualifying capital outlays such as:

  • Making changes to upgrade a property (you’ll have to demonstrate that the original purchase price would have been higher if the repairs hadn’t been necessary),
  • Renovating to winterize a property or add new elements to the structure such as additional bedrooms or new bathrooms,
  • Building a new deck,
  • Installing new windows or a roof that are better than the originals, and
  • Putting in a new well or pump.

General repairs don’t count as capital improvements and you can’t value any work you personally perform on the home.

The excess of the proceeds of disposition deemed or realized over the ACB (and any selling costs) is generally a capital gain for income tax purposes.

As you can see, keeping accurate documentation of outlays is critical, particularly if Canada Revenue Agency (CRA) wants documents to support the ACB. Capital losses. You generally can’t deduct a capital loss on your cottage when you calculate your income for the year. You also can’t use a loss to decrease capital gains on other personal-use property. When property depreciates through general use, the loss on its disposition is a personal expense.

If you’re primarily renting out the cottage, however, you may be able to claim a capital loss. But keep in mind that you may lose the personal-use exemption if you rent it out for most of the year. That exemption can come in handy to help shelter any gain from the disposition if the cottage appreciates in value.

If you rent it out only occasionally to help defray some costs of ownership, talk with your tax adviser about how to report income and expenses on your tax return.

Changing use of property.

Before turning your personal-use property into an income-producer by renting it out, discuss the tax consequences with your accountant. Rental income will be taxable, but you can claim some expenses to offset the income, including:

  • A reasonable portion of the operating expenses, and
  • Costs directly associated with renting the property (such as cleaning, advertising, commissions or fees paid to rental agents, and property management fees).

Estate Planning and Other Financial Implications

There are many other tax implications related to owning a vacation property, including estate planning issues. A cottage is often viewed as common property within generations. If you hope to leave the cottage to your heirs, you’ll need to determine whether you plan to pass it on with a will, a sale or a trust. If you’ve inherited a cottage, there are other tax and financial issues to consider.

Consult with your adviser, who can help you sort through all the tax, financial and estate-planning implications.

How to Deal Sensibly with Boomerang Kids

061716_Thinkstock_475209512-flipped_lores_KKDid your twenty-something kids return to the roost? You’re not alone.

Millennials are the largest cohort in the Canadian workforce, according to 2014 data from Statistics Canada. And in ordinary times, the fact that 36.8% of our employees are between the ages of 18 to 34 would suggest that many of those young adults have moved away from home to live on their own, with roommates or with a spouse.

But these aren’t ordinary times. According to the most recent Statistics Canada census, 42.3% of people in their twenties lived at their parents’ homes in 2011. That’s well up from 32.1% in 1991 and 26.9% in 1981.

And data from a recent Pew Research Center survey, reflecting the earlier Canadian data, suggests that the trend is continuing. For the first time in at least 130 years, young people in the United States between the ages of 18 and 34 are more likely to be living at home with their parents than in any other living arrangement. The study found that 32.1% of Americans in that age bracket were living with their parents.

This isn’t just a North American trend: It’s evident across much of the developed world. Pew Research notes that according to Eurostat, the European Union’s (EU) statistical agency, nearly half (48.1%) of 18- to 34-year-olds in the EU’s 28 member nations were living with their parents in 2014.

They’re sometimes called boomerang kids. The trajectory of a child’s life used to be set in stone — grow up, fall in love, leave home and either get married or move in with a roommate or romantic partner. But that tide has turned and Millennials are more apt to leave, go to college or try their luck in the working world — and then return.

The question is, why? Millennials choose to go back home for many reasons, including:

  • A weak job market,
  • Low earnings,
  • Staying in school longer to compete effectively in the job market,
  • Large college debt,
  • Escalating housing costs, and
  • Postponing marriage.

“Helicopter parenting,” where parents hover over their children and micromanage their lives, may also be a factor in the Millennials’ decision to linger longer at home.

One serious downside for the parents of many Millennials is that they wind up in a sandwich, emotionally and financially supporting both their children and their own parents. One or both of these situations can take a chunk out of retirement savings and delay or tarnish their golden years.

A 2015 survey1 commissioned by CIBC found that one in four Canadian parents surveyed said they spent more than $500 a month to help cover expenses of their adult children, including:

  • Free room and board (71%),
  • Groceries and other household expenses (47%),
  • Cell phone bills (35%),
  • Monthly car payments and other vehicle-related expenses (23%),
  • Subsidized rent so adult kids can live elsewhere (17%), and
  • Help repay loans and other debts (12%).

It is probably no surprise, then, that two-thirds of respondents said their resources were being depleted by their boomerang Millennials.

For many young people, living with their parents is a fiscally-responsible decision that can be an ideal way to save for a house or start a business. However, some observers have questioned whether enough parents are discussing finances and budgeting with their adult children — for example, perhaps they should find a job that may be less than ideal in order to contribute to the household expenses.

If you have one or more adult child who wants to move back, here are some steps to consider taking to help ensure they eventually step out on their own:

1. Share your concerns. What worries you about sharing a house with your child? Do you want your child to pay rent, or cover his or her own cell phone and car expenses? What chores do you expect your child to do? And what does your child want? Vegan meals, sleepovers? Once you come up with a plan, review it every so often to see if everyone’s concerns are being met.

2. Set clear goals, rules and timelines. When your child moves back in, be sure to clarify expectations. Is there an age when you expect the child to leave or an event — such as finding a job — that would trigger a move? Setting these goals and guidelines will help keep your child from overstaying the welcome.

3. Put your financial future first. Decide ahead of time how much money you want to contribute — and can afford — to help out your boomerang kid. You may be close to retirement, or already in it, so don’t back away from requiring the child to help with expenses. The child must be told there are limits on your finances and that your financial security comes first.

4. Keep it short-term. Many adult children may try to hold out for the right job and want to live with you indefinitely. You may want to make it clear that moving back is a temporary fix and set a time limit that you can revisit if necessary.

While your Millennial is still living at home, discuss any of these topics that may apply:

  • Paying off debt. Encourage the child to get rid of bills, particularly high-interest debt, so it won’t compete with future rent or mortgage payments.
  • Establishing a good credit history. The child should get a credit card for small purchases and pay the full balance by the due date.
  • Building an emergency fund. This will help in the case of minor setbacks such as car repairs. The child should build a larger fund when possible to use in the case of losing a job. This can help avoid a return to your doorstep.

Talk with your financial adviser to come up with strategies to help avoid hefty debt and bring your fiscal lives into focus.

New Study Confirms the Prevalence and Cost of White Collar Crime

052716_Thinkstock_514938071_lores_KKDespite our best efforts to combat white-collar crime, dishonest people continue to find novel ways — often exploiting technology — to steal from businesses and not-for-profit organizations.

And honest people continue to report suspected fraudulent activity, also using technology. In a new development, fraud reporting was more common through the Internet than by telephone at companies that have hotlines or reporting systems. Email accounted for 34.1% of tips, while Web-based or online forms accounted for 23.5%. This suggests that if your company has only a telephone hotline, it should consider adding more electronic channels.

These insights are pulled from the 2016 Report to the Nations on Occupational Fraud and Abuse. This survey is published every two years by the Association of Certified Fraud Examiners (ACFE). This year’s report covers more than 2,400 cases of white-collar crime, occurring in 114 countries.

Annual Costs

Consistent with previous studies, the 2016 report estimates that the typical organization loses 5% of its revenues each year to fraud. The total loss from cases in the study exceeded $8 billion, with an average loss per case of $3.5 million. In Canada, the median loss was $190,000 from 86 cases of reported fraud, compared to $155,000 for just over 1,000 reported cases in the United States.

That calculation can be sobering for many small business owners who think they’re immune to fraud — it happens to organizations of all sizes and in all types of industries.

The ACFE study exposes only the tip of the iceberg, however. Many frauds go undetected or unmeasured. Plus, there are additional indirect costs, including lost productivity, damage to a company’s reputation and loss of stakeholder relationships. As well, fraud investigations can be costly. Some organizations simply opt to cut their losses by terminating — but not fully prosecuting — white-collar criminals.

Small versus Large Organizations

The median loss for all for-profit companies, regardless of whether they’re publicly traded or privately held, was roughly $180,000. By comparison, the median losses for government and not-for-profit entities were approximately $109,000 and $100,000, respectively.

The median loss for the smallest organizations was the same as the median loss for the largest organizations ($150,000). But there are some subtle distinctions between the types of fraud schemes and the anti-fraud controls employed at small and large organizations.

Top 5 Fraud Schemes by Size in All Countries

Rank Less than 100 Employees 100+ Employees
1 Corruption (29.9%) Corruption (40.2%)
2 Billing (27.1%) Billing (20.9%)
3 Check tampering (20.1%) Non-cash schemes (19.3%)
4 Skimming (19.9%) Expense reimbursement (13.9%)
5 Non-cash schemes (18.8%) Cash on hand (10.3%)

Although corruption is listed as the top fraud scheme for both small and large organizations, it’s more common outside North America. Corruption includes bribery, illegal gratuities and economic extortion. In Canada, billing schemes outnumber corruption schemes. Billing frauds were reported in 29.1% of Canada cases while corruption was reported in 26.7% of the U.S. cases.

The following occurred more than twice as frequently in small businesses as in larger organizations:

  • Cheque tampering (including the manipulation of paper cheques and electronic payments),
  • Skimming,
  • Payroll, and
  • Cash larceny schemes, where an employee steals cash and checks from daily receipts before they can be deposited in the bank.

Additionally, the 2016 study showed that larger organizations generally dedicate more resources toward deterring fraud.

Frequency of Anti-fraud Controls by Size

Rank Less than 100 Employees 100+ Employees
1 External financial statement audit (56.2%) External financial statement audit (94.2%)
2 Code of conduct (53.8%) Code of conduct (91.3%)
3 Management certification (43.2%) Internal audit (88.3%)
4 Management review (40.4%) Management certification (83.7%)
5 Internal audit (38.6%) External audit of internal controls (79.9%)

The ways fraudsters were caught varied by region. In Canada, tips accounted for 32.6% of cases, followed by management review (20.9%) and internal audits (16.3%). Small and large organizations also differ in how they catch fraudsters. Globally, tips were the detection method in 29.6% of the cases involving small entities compared to 43.5% of the cases involving large ones. This could be because reporting hotlines are more common at larger companies than small ones with more limited resources.

Preventive Measures

Honest employees are an organization’s first line of defense against white-collar crime, so it makes sense that you consider some of these ways to encourage employees to join the fight:

Invest in training. Educate staff on the red flags associated with fraud from within and outside the company. This sends a powerful message about your company’s intention to fight fraud no matter where it originates. Employees must perceive a high probability that fraudulent activity will be detected.

Set up a hotline. Fraud reporting hotlines can be an effective method of obtaining tips about unethical behaviors. Unfortunately, many small businesses shy away from hotlines, because they think they’re too expensive and difficult to administer. But as we mentioned above, emails and Internet forms accounted for more than half of reports. If your company already has a website, this is a potentially reasonable solution.

The study found that employers were much more likely to be tipped off if they offer hotlines. The study showed that tips led to the detection of fraud in 47% of the cases involving organizations with reporting hotlines, but only 28% of the cases involving organizations without them.

The fact that more than half of all tips involved parties other than confirmed employees emphasizes the importance of cultivating tips from various sources. So it’s also advantageous to educate vendors, customers and owners on how to report suspicions of fraud.

Highlight management involvement. Managers must be seen and heard reviewing controls and urgently correcting weaknesses. If your organization’s managers are perceived to be unwilling or unable to take the time to review the controls, they may inadvertently be sending a message that it’s safe to commit fraud.

Best Practices in Internal Controls

Weak internal controls often provide dishonest people with the opportunity to steal assets or cook the books. The study cited a lack of internal controls and the ability to override them as the leading contributors to fraud, accounting for nearly half of the cases.

Your accounting and legal advisers can help reinforce your internal controls and investigate suspected fraud. Doing so can potentially save your company thousands, if not millions, of dollars in losses and put everyone on alert that fraud won’t be tolerated.

Help Employees Reach Goals with 360-Degree Feedback

The 360-degree feedback mechanism for evaluating employees has been in use for decades — long enough for a battery of academic studies to highlight its benefits and drawbacks.

051816_Thinkstock_484956744_lores_KKFirst, consider the limitations of the traditional supervisor-only evaluation, particularly for employees who work in teams or who have subordinates of their own. In this environment, direct supervisors:

  • Often find it hard to give critical feedback to employees they’ve become close to over the years,
  • Might have biases that unduly influence their assessments one way or another, and
  • Have a limited means of understanding how colleagues, subordinates and others may perceive the employee.

A 360-degree feedback system can help you overcome those obstacles.

Start Cautiously

Before you jump into it, it might be more prudent to start a 360-degree system in conjunction with an ongoing development process, simply to pinpoint areas where an employee might benefit from additional training. Why? This allows you to gain confidence in your ability to evaluate the feedback you get from the process.

With some experience, you should be able to weed out comments that amount to complaints from disgruntled subordinates or colleagues. Also, employees are more likely to warm up to the process if they know that you’re giving it a trial run. Keep in mind that ideally people need at least six months of working with a person to be able to make valid evaluations.

If your organization is large enough, you might consider starting off with a 360-degree-feedback performance-rating pilot project in one department or division, before launching the program company-wide.

These programs aren’t always anonymous. One school of thought holds that it’s better for all raters in a 360-degree program to identify themselves in order to:

  • Maintain accountability, thus encouraging constructive and detailed input and helping avoid toxic comments and even conspiracies that damage an employee’s reputation,
  • Encourage a workforce culture of openness, and
  • Make it possible for an employee to engage directly to resolve a specific complaint or concern.

Anonymity Preferred

Still, most 360-degree programs are based on anonymity. That allows those providing the feedback to give more than bland or favorable comments out of fear of negative repercussions. Anonymous or not, a side benefit to a well-managed 360-degree program is that those giving the feedback get the message that their opinions matter.

Advocates of these systems encourage employers to avoid launching a 360-degree program until they’ve identified a specific purpose for it. That way, they can also establish a basis or benchmark for evaluating the success of the program. An example of a valid purpose might be to change an organization that has developed a rigid hierarchy into one with a culture that emphasizes continuous feedback and improvement.

Keep in mind that when you’re identifying a purpose, this type of system shouldn’t be viewed as a way to address poor employee job performance. Employees might become more self aware through the process, but it isn’t a substitute for direct communication between a supervisor and an employee.

Survey Design

If you’re designing your company’s program in-house, a critical element is the outline of the survey, which should include:

  • Questionnaires that aren’t too long (it should be possible to do a review in 15 to 20 minutes),
  • Questions that have one point and are as short as practically possible,
  • Questions that are unbiased and avoid words such as “excellent” or “always,” and
  • Rating scales of at least seven to 10 points that ask to what extent the person being rated exhibits the behaviour, rather than how often,

It’s also a good idea to use a dual-rating scale that includes both quantitative and qualitative performance questions. For example, you could ask:

1. To what extent does this person exhibit a behaviour?

2. Given the person’s role, to what extent should the person exhibit the behaviour?

By comparing the answers, you basically perform a gap analysis that helps interpret the results and reduces a rater’s bias to score consistently high or low.

Best Practices

Here are some pointers for implementing an effective 360-degree program:

  • Tell feedback providers how their input will be used, to assure them their time will be well spent.
  • Train feedback providers on the importance of being objective and avoiding invalid observations that might arise from their own prejudices.
  • Ask feedback providers to comment only on aspects of the subject employee’s performance that they’re in a position to observe.
  • Ensure the performance criteria are job-related and not personal in nature.
  • Require some accountability, even with anonymous feedback systems. Incorporate a mechanism that would enable someone other than the subject of the evaluation, for example, a senior human resource manager, to address any abuse of the system.
  • Ensure adequate participation to assign maximum statistical validity to feedback results.
  • Have a system in place to help the subjects of the feedback process and act on the input they receive.
  • Build in and follow a process to periodically evaluate the overall statistical validity and goal achievement of the program.

No Guarantee

Of course, there’s no guarantee that a 360-degree feedback system will accomplish the goals you set for it. But, as this method of review was pioneered in the 1950s and rose to popularity in the 1990s, its longevity alone suggests it might be worth a try.

Getting Married this Summer? Talk Money


The invitations are sent, the reception hall is booked, the flowers are ordered — and your nerves are probably frayed.

Planning a wedding leaves little time for anything else, but consider this: A prenuptial agreement (also called a domestic contract or a marriage contract) may be as critical a negotiation as the price of food at the reception. Talking about finances may seem pessimistic because it presumes the possibility of a divorce.

A Form of Insurance

Look at it this way: People don’t buy a home assuming it’ll fall apart, but they buy homeowners insurance. Safe drivers buy auto insurance and healthy people have health and life insurance. It just makes sense. Prenups protect both spouses.

One way to ease the potential discomfort of broaching the subject is to say that your accountant or legal counsel insists you include the agreement as part of your financial and estate plan.

So what exactly is a prenup? It’s simply a legal agreement that outlines how you’ll divide your assets in the event of a divorce. And it isn’t just for wealthy people. They work for everyone.

Even couples who live together but aren’t married should consider a cohabitation agreement. If you do marry, you can convert it to a prenup. Some couples arrange postnuptial agreements, which accomplish the same thing but are signed after the marriage — in some cases, years later. In order for these agreements to be recognized legally, both sides should have independent counsel.

Blending Your Finances

Financial disagreements are one of the leading causes of marital problems. So, it’s important to consult with your tax adviser, banker and legal counsel before you tie the knot to get a handle on your financial, tax and estate planning strategies as a joint household. Here’s a checklist of important steps to consider:

1. Candidly discuss joint finances. For example, how much debt is each of you bringing to the marriage? What about savings? How is your credit rating? The older you are, the more (good and bad) financial baggage you’re likely to have.

2. Decide on joint or separate bank accounts — or both. Your banker can walk you through what will be needed to combine checking, savings and money market accounts.

Even if you decide to maintain separate accounts, it’s often helpful to have at least one joint account to pay for shared expenses, such as the costs of a mortgage or rent, household expenses and childcare. This account is meant strictly for your combined needs, and it allows you both to keep track of how you’re spending money.

A joint account can also help avoid trouble and delays in case of death. If a spouse or common-law partner dies and there are separate accounts, the survivor could be excluded from the account until the estate goes through probate. That could take months.

3. Coordinate employee benefits. You might save money by eliminating duplicate health care or life insurance coverage. And don’t forget to change beneficiary designations on retirement plans.

4. Update deeds, wills and power of attorney documents. An attorney can also discuss the full array of estate planning tools, such as various trusts, that might be relevant once you’re married.

5. Plan financial goals as a couple. Create an annual budget, as well as a contingency plan in case a spouse gets laid off or becomes disabled. Make sure you have several months’ income saved as an emergency cash reserve. Designate who’ll be responsible for paying the bills and reconciling the checkbook.

Also look beyond your current financial situation. For example, discuss what you envision your retirement will look like, and whether current retirement account contributions are sufficient to achieve your long-term goals.

6. Review beneficiaries and the amount of life insurance policies. As your marriage progresses and if you have children, remember to update the beneficiaries of the policy as well as retirement accounts. These assets will be distributed to your named beneficiaries, regardless of the terms of your estate planning documents. Coordinate designations with your estate plans. Review how much life insurance you hold. Do you need more to ensure that any children are treated fairly and equally?

7. Check property titles. Jointly owned property automatically passes to the co-owner.

Remarriage Issues

People who have been previously married bring additional financial issues to the table, especially if they have children from a previous marriage or are required to pay alimony, child support or insurance premiums under the terms of a divorce settlement agreement. Consider these questions when blending your finances:

  • Do you have business debts or obligations with your former spouse?
  • Are you required to keep a former spouse on your insurance?
  • Does a former spouse have a claim on your employer-sponsored retirement account?
  • If you’re entitled to assets from a former spouse, for example, an inheritance or other financial interest, will your remarriage end that entitlement?
  • Is your former spouse still a beneficiary in your will?

If you already remarried and have no prenup, consider a postnup to accomplish the same goals. Without proper planning, it’s possible that a family home or family business could pass to your new spouse and eventually to his or her children, rather than your own. A properly drafted prenup/postnup — as well as a change in your will — can help ensure your wishes are carried out.

Talk to the Kids

If you or your spouse are stepparents, discuss plans for your estate with one another and your children and stepchildren. You don’t want your children to think that your spouse has unfairly influenced you or that you don’t care about them. Be open and honest about your estate plans to prevent disagreements and misunderstandings after your death.