Are you a professional financial advisor? Register for Globe Advisor and then sign up for the new weekly newsletter on our newsletter sign-up page. Get exclusive investment industry news and insights, the week’s top headlines, and what you and your clients need to know.
More Canadians have been earning a living driving for Uber Technologies Inc. or doing myriad other contract work amid the pandemic, including generating income as social media influencers.
Financial advisors have an opportunity to help clients engaged in this kind of work avoid potential pitfalls and, in turn, build wealth for the long-term – especially with tax season upon us.
“Before the term ‘gig economy,’ we used to call this variable income or lumpy cash flow,” says Kurt Rosentreter, portfolio manager and senior financial advisor with Manulife Securities in Toronto.
“Basically, these individuals are making money in a variety of ways that’s never the same two days in a row, and so that makes not just day-to-day budgeting challenging but longer-term financial goals more difficult to achieve.”
Certainly, more Canadians fit the job description of gig workers than ever before.
A report from Payments Canada last year found gig workers made up about one in 10 people in the workforce. That’s up from a previous 2019 Statistics Canada study that showed contract work grew to 8.2 per cent in 2016 from 5.5 per cent in 2005.
Furthermore, freelance and contract work is only likely to grow in the coming years, according to a recent study by Brodmin. The report from the provider of business services for contract workers forecasts that the gig economy, globally, will grow to US$455-billion by 2023, up 31 per cent from about US$347-billion in 2021. It also notes that in the U.S., the number of freelance workers will rise to 86-million from 57-million by 2027.
While millions of Canadians of all ages are already engaged in gig and contract work, those who are younger are most likely to be involved, an Angus Reid Institute survey finds. The poll, conducted in 2019, showed 40 per cent of survey participants aged 18 to 34 had worked on a contract basis in the past five years.
Yet, these aren’t always typical contract jobs, or ride-sharing or delivery gigs, either.
More Canadians are earning money as social media influencers, leading the Canada Revenue Agency (CRA) to issue a couple of notices this year, including earlier this month, reminding individuals that income from this activity – both monetary and non-monetary, such as merchandise – must be reported on their tax returns.
Beware of the tax ‘double-whammy’
Tax expert Evelyn Jacks, founder and chief executive officer of Knowledge Bureau Inc. in Winnipeg, says many advisors can provide basic guidance for clients engaged in gig work, including earnings from social media, because they’re often familiar with the tax nuances of contract work.
“After all, a lot of advisors are self-employed,” says Ms. Jacks, author of Make Sure It’s Deductible: Little-Known Tax Tips for Your Canadian Small Business.
That said, as a matter of course during regular meetings, advisors should be asking clients about additional income from side hustles, or if most earnings are generated from contract employment.
These issues often come to a head during tax season, Ms. Jacks cautions, because “self-employed clients really face a double-whammy,” especially if they’re new to this type of vocation.
It’s common for some individuals, for example, to be unaware taxes were not deducted at source, possibly leading to taxes owing upon filing. Compounding their trouble is the possibility that they may also need to make Canada Pension Plan (CPP) contributions.
“So, they need cash on hand to pay for those needs, which should be part of their financial planning process well ahead of time,” says John Waters, vice president, director of tax consulting services at BMO Nesbitt Burns Inc. in Toronto. “After all, the mantra for tax planning is that it’s a year-round activity.”
With self-employed workers, advisors should take extra care to encourage clients to keep detailed records of income and incurred expenses to support claims for “all the deductions and credits available to them.”
Mr. Waters further notes this task can be tricky even for advisors because rules around these claims often change from year to year.
Where advisors can gain an advantage
That’s one reason, Mr. Rosentreter explains, why “many dealerships and brokerages don’t let their advisors offer much advice” on tax planning. Still, these advisors have a role to play.
“When getting into more sophisticated tax planning, advisors’ job is, at least, to flag what they recognize as an issue and recommend clients seek the help of an accountant,” he says.
Concerns about gig work, however, extend beyond tax season – although familiarity with clients’ tax picture remains important, Ms. Jacks says.
“If you consider yourself a wealth advisor, you need to know what’s going on with the tax return because you are part of the creation of income throughout the year,” she says.
This applies to all clients, but it is more critical for gig workers, she adds.
“These people need to have a solution for retirement income planning that is managed by an advisor who understands how to help them with cash flow management.”
This task not only entails ensuring they have money set aside for taxes and CPP contributions, but also a budget for financial goals that all clients have, such as retirement, paying off their mortgage, and saving for their children’s education.
“If one thing is harder when self-employed, it’s getting into a financial routine with a lumpy cash flow,” says Mr. Rosentreter, a chartered professional accountant. “A good advisor links together irregular revenue with regular savings and debt elimination in a comprehensive plan.”
With the number of Canadians earning a living through freelance and contract work only expected to increase, this skill set is likely to prove advantageous for advisors seeking to expand their client base among millennials and younger people, Mr. Rosentreter says.
“More people need strategies suitable to this variable cash flow, so advisors who understand that will likely have an advantage,” he says.
For more from Globe Advisor, visit our homepage.