The Value of a Holistic Approach to Your Taxes

Written by Matthew J. Ardrey, B.A., CFP, FMA, CIM | Consultant & Manager, Financial Planning
April 25, 2014

Here at T.E. Wealth, we strive to be a one-stop shop for our clients’ financial planning and wealth management needs. To us, this means going beyond traditional financial and investment planning and moving into the world of taxes. Understanding our clients’ tax situation in detail is a very important part of understanding their whole financial lives, and being able to improve the overall quality and effectiveness of the services that we provide. Below, I’ve highlighted a few of the tax management and filing challenges facing many of my clients today.

T1135 – Foreign Income Verification Statement

This year, the Canada Revenue Agency (CRA) made massive changes to its requirements for form T1135. They now require additional information like cost base, income and gains/losses and want this information to be reported on an individual security basis. For the average person, this is an administrative nightmare and many people get it wrong. If you do, be prepared to pay penalties of up to $2,500.

Even if you employ an accountant to do this work for you, be prepared to see a sharp uptick in the bill you receive at the end of tax season. Due to the time it takes to consolidate this information from all your investment providers, you’ll want to make sure that the information is complete and recorded correctly.

To further compound matters, many investment advisors, not being well versed on taxes, do not send the right information the first time. This results in more delays.

One of the more onerous parts of this task is getting the cost base in Canadian dollars (CAD). To get the cost in CAD, one must convert the foreign purchases on the date of the transaction. The more purchases and sales, the more time it takes.

This is where the value of a one-stop shop comes in. We know our clients’ investments as well as their taxes. To get that information, means just taking a short walk down the hallway. Our investment counselors and financial planners are all part of one team who work in partnership to serve our clients’ interests. Also, our total wealth management approach to advising clients means there are no surprises with our fees.

Income Splitting

In Canada, aside from the pension splitting made available by the federal government a few years back, it is not a simple matter to split income with your spouse. There are attribution rules that state any income and/or capital gains from money given to your spouse to invest will attribute back to the contributor.

One of the main ways to legally circumvent this attribution is through an interest bearing loan to your spouse. The interest rate on the loan must be at a minimum of CRA’s prescribed rate of interest. This rate is 1% at the time this was written.

The lower income spouse receives all of the income and capital gains earned on these investments, and pays the higher income spouse interest of 1%. The difference between the rate of return and the interest payment is where the tax savings occur.

We’re able to guide our clients through this process in two ways. First, we implement the loan using a legal document which we specifically drafted for this purpose, and move the funds over for our clients to create the loan. Second, we provide ongoing assistance by monitoring and reporting on the loan throughout its lifespan. We ensure that interest is paid on time every year, often through intra-account transfers. We report the appropriate income and deductions on the clients’ tax returns. We also create a paper trail of documentation for our clients, ensuring that full back-up is in place in the event of a CRA audit.

By understanding the full range of options for our clients and the intricacies of their overall situations, we can create tax planning opportunities that ensure the overall financial planning and wealth-building processes are optimized.

But I Thought Taxes End in April

For many of our clients, April 30 is only one of many points in the year where we discuss their taxes as part of their overall financial plan.

Paying tax installments is a painful factor for many of our clients. CRA requests quarter prepayments of taxes. If you underpay, they charge penalties and interest. If you overpay, they do not pay interest. This opportunity cost makes it very important to get the installment payment amount right. By having a full understanding of our clients’ situation, we can make more accurate estimates.

Sheltering investment income from taxes through registered accounts like the RRSP or TFSA increases the return on investments that our clients receive in their pockets. With the knowledge of their tax situation, we can maximize these savings while ensuring they do not over-contribute.

Where investments cannot be sheltered from tax, we employ a strategy of tax-efficient investing. My colleague, Brent Soucie, has discussed many of the “must-haves” of tax efficient investing in a recent series of articles.

We consider the tax impact on every investment decision we make for our clients. Though I do not want to let the tax tail wag the investment dog, we would be remiss if we did not recognize the impact taxes have on our clients’ lives.

This impact feeds through not only every investment decision we make for our clients, but every financial planning recommendation. Taxes permeate every aspect of our daily lives and in the case of our clients, their higher marginal tax rates make saving taxes all that more valuable and important for wealth accumulation.

Taxes are an integral part of understanding our clients’ entire situation and not just a slice of the pie. Please contact me to understand how T.E. Wealth’s holistic approach to taxes can add value to your financial life.

Matthew Ardrey is a dedicated provider of creative and comprehensive solutions for his high-net-worth private clients. Specializing in financial planning, tax planning and investment management, his proactive approach and big-picture thinking are signature to his style. A strategic thinker and clear communicator, Matthew is often sought by major media sources for his financial expertise.

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These articles are for general informational purposes only. Please obtain professional advice before taking any action based on this information. No endorsement or approval of any third parties or their advice, information, products or services should be implied by any references to third parties contained in any article. Trademarks cited in these articles are the respective properties of their owners.

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