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Tax concerns are often an important component of financial planning, affecting areas from portfolio structure to charitable donations or retirement forecasts. But how comprehensive should the tax portion of an advisor’s practice be?
For some advisors, the relationship they’ve built with clients can open the door for broader conversations around tax planning, which can sometimes include taking a deeper dive into their tax returns, often in co-operation with accountants. In some cases, they can even provide a valuable perspective by filling in knowledge gaps or taking an approach that’s more holistic and focused on the long term.
As Aaron Hector, certified financial planner and vice-president with Doherty & Bryant Financial Strategists at T.E. Wealth in Calgary explains, tax permeates every area of practice and it’s often difficult to have a conversation with clients without touching on the topic in one way or another.
“There are so many tax-related things that you can help clients with throughout the course of a working relationship with them,” he says. “In any given year, it might be one thing or the next – but tax is almost the glue that seems to hold a lot of things together.”
For Mr. Hector, tax discussions involve everything from addressing clients’ short-term planning goals around specific tax items, such as an irregular capital gain event, to year-end conversations around charitable donations, strategies for couples around income splitting, or longer-term tax planning for retirement.
But beyond tax planning, can an advisor’s role extend to tasks such as reviewing annual tax returns?
Mr. Hector says he is occasionally asked to review returns that clients or other tax specialists prepare on their behalf before filing, often to look at whether all data sources have been captured, or in situations in which there has been a significant charitable donation or medical event.
Ultimately, it is important for advisors to act within their comfort level and technical capability in the tax space, he adds.
However, one of the reasons to be involved with tax planning is that, in many cases, advisors are looking at this information from a different angle.
For example, this past tax year Mr. Hector saved a client $2,000 after reallocating medical expenses between spouses resulted in a lower tax bill. Originally, the tax preparer had put significant medical expenses on one spouse’s return, which he says is usually good practice.
However, upon review, Mr. Hector could see that the medical claim was no longer providing any benefit as a non-refundable tax credit, as tax had already been reduced to zero on one spouse’s tax return.
“You say, ‘Okay, this is no longer providing any advantage here, is there an ability to split that in a way that you can provide a better outcome for the family?’” he says.
Finding ‘gaps’ in the information
Generally, Kathy Waite, a fee-for-service retirement income specialist and founder of Your Net Worth Manager in Regina, refers to her role as the “middle of the wheel,” focusing on the bigger picture for the client and bringing the accountant into the conversation for input on tax-specific questions.
“We can do some of this buildup and the soft stuff and let [accountants] do the technical [work],” says Ms. Waite. “I actually find I get a really good reception from the accountants. I haven’t had any be awkward or feel like I’m stepping on their toes.”
She also says reviewing the draft of a client’s tax return is a value-added service that can further build the relationship. What she’s checking is not technical – but she occasionally finds gaps in information that the client hasn’t told the accountant.
“I find omissions and it’s because we know people so well, and clients don’t know what the accountant needs to know sometimes,” she says.
“You’ll have clients do things like ask the company they work for to put their bonus into their [registered retirement savings plan (RRSP)] and then the accountant just immediately uses [the contribution for that taxation year].”
In contrast, it would be more efficient if the client used the contribution amount over a couple of years, Ms. Waite adds.
“The accountant’s job is very [much focused on] ‘this year’ and it’s kind of a done deal, it’s reactive,” she says.
“My job is to be more proactive, and so when they prepare that return, I’m looking through it thinking about the future – ‘If we do that this year, what does it look like down the road?’”
While most financial planners are not accountants, they still have to have a fundamental understanding of taxation and how it affects a client’s life, says Matthew Ardrey, vice-president, wealth advisor and portfolio manager with TriDelta Financial in Toronto.
“Tax is not everything – but it’s so interwoven into what we do here as financial planners that it’s a consideration that we all have to undertake,” he says.
When to involve a tax specialist
It’s crucial to understand how a client’s tax return has changed over the years, as that helps advisors implement strategies – whether structuring the portfolio tax efficiently or year-round tax planning issues involving charitable donations or RRSP contributions.
Mr. Ardrey focuses on higher-level strategy and planning, leaving the details of tax return filing to those who focus on this area.
“I don’t get into the nitty-gritty of things, but certainly anything that I’m talking about and recommending, I can talk to the implications on a tax return,” he says. “I’m always happy to work with people’s accountants in putting these strategies in place and making sure they work down to the fine details.”
Tax returns aside, there are several other tax-related issues that advisors say are generally best referred out to a specialist, namely the details of cross-border or corporate tax concerns.
For example, Mr. Ardrey says a client once asked about the tax implications of collapsing a New Zealand trust managed out of Singapore, held by his father who lived in South Africa at the time but was also a Canadian resident.
“That’s an example that I had to find somebody for that person, to get that question answered because it obviously entails a specific level of expertise that even the average, well-versed financial planner is not going to have,” he says.
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