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Tax planning is becoming a bigger part of many advisory practices as more start to specialize in the field, bring in qualified team members, or even partner with outside specialists in an attempt to deliver more holistic services.
From how to invest tax efficiently to tax consequences resulting from life events, clients are also turning to their advisors for more help and guidance.
Here’s a look back at 10 Globe Advisor tax-related articles in 2022 that resonated with readers and also sparked some debate:
About three million Canadians receive a notice from the Canada Revenue Agency (CRA) every year that their income tax returns are being reviewed. In most cases, the review will request supporting documentation for a specific claim, deduction or income amount – but just attracting Ottawa’s attention can set off alarm bells. In most cases, the worst that happens is that the CRA disallows a claim.
The new Tax-Free First Home Savings Account (FHSA) introduced in the federal government’s 2022 budget fills a gap between registered retirement savings plans (RRSPs) and tax-free savings accounts (TFSAs) because it offers the benefits of both of those investment vehicles – a tax deduction and tax-free withdrawals. That, in turn, should result in more accessible cash for first-time homebuyers. But, opening an FHSA could still make sense even if the money isn’t used toward buying a home.
Most advisors never need to worry about tax efficiency for their clients beyond their RRSPs and TFSAs. Only about 10 per cent of tax filers contribute the maximum allowable amounts to these government-registered accounts, according to the CRA. But for high-net-worth clients and those looking for an investment edge, investing in non-registered accounts can open up a world of tax efficiency. Keeping Canadian dividend-paying securities in non-registered accounts also qualifies for the dividend tax credit.
Money is on the move from one generation to the next with almost $700-billion in financial assets set to transfer by 2026, according to a 2021 study. Without appropriate planning, just imagine the tax bill. Damian McGrath, senior trust advisor with Raymond James Trust (Canada) in Saskatoon, says that “thinking about estate planning and tax efficiency is probably one of the areas that many advisors are not considering enough.”
The federal Liberal government introduced the Critical Mineral Exploration Tax Credit in April, a 30-per-cent credit for investors who purchase flow-through shares (FTS) from companies exploring metals and minerals such as copper, nickel and rare earth elements needed to advance clean energy technologies. The government also said it will phase out FTS for companies that explore for fossil fuels by March 31, 2023. Investors may be willing to pay a premium for FTS because they can claim deductions and credits that reduce their taxes.
Advisors are under increased pressure to maximize investor returns amid volatile stock markets and rising consumer prices. The best option for many is tax-efficient investment funds that can help keep more of their capital in their investment accounts. Many are seeking out these options for clients amid expectations that taxes are set to increase as governments look for ways to pay off rising debt and deficits from the stimulus provided to help individuals and businesses cope with the economic impact of the pandemic.
Advisors often have clients who dabble in do-it-yourself (DIY) accounts on the side – but do those clients understand the tax implications of their stock and cryptocurrency trading? A recent Wealthsimple Inc. survey suggests that, more often than not, the answer is no. Not getting this information right can be extremely costly, experts say. The risk of failing to report gains or losses properly could be being assessed interest on taxes that would otherwise have been due, or a 50-per-cent penalty for negligence.
Some Canadians entering their later years are opting for common-law relationships rather than marriage. But this relationship status has financial and tax-related implications that can affect everything from a person’s pension plan to the transfer of assets should a spouse or partner pass away. That’s why it’s important to know the definition of common law under the CRA as it differs from other legal definitions, such as family law, and prepare for how the relationship may affect clients, their finances and future.
While almost 14.4 million Canadians celebrated receiving a tax refund this year, about 6.2 million had a balance owing with an average amount of $6,612, according to the CRA. Reactions to a big tax bill can range from “not very happy at all” to “some degree of panic,” say advisors – but there are ways to help minimize the impact on long-term financial plans. Education is key to avoiding tax bill surprises, and so are accurate projections. Taxpayers also have certain rights they should be aware of.
What are the tax implications when children trade on the stock market? For those under the age of 18, the answer depends on the source of the funds used to invest, says John Waters, vice-president, director of tax consulting services, at BMO Nesbitt Burns Inc. in Toronto. Money that is the child’s – say, from a part-time job or an inheritance – can be invested and taxed in the child’s hands. However, if parents or other close relatives give money to the child to invest as a gift (or lend money at little to no interest), the attribution rules kick in and any interest or dividends are taxed in the giver’s hands.
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