Advisors with clients who are staring at a large tax bill need to step back and determine how that will affect their longer-term financial goals and retirement plans.Osarieme Eweka/iStockPhoto / Getty Images
Financial advisors are bracing for the fallout from an unprecedented taxation year and preparing for calls from clients who may be facing hefty tax bills or the prospect of an audit.
According to data from the federal government, the Canada Revenue Agency (CRA) processed 26.4-million individual tax returns as of May 10, with more than 6.4-million people owing a total of more than $32.6-billion, or an average of $5,062 each.
The big concern is that some of those people who received federal benefits during COVID-19, without taxes being withheld at source, might be facing big tax bills at a time when they still may be dealing with the financial repercussions of the pandemic, says Jamie Golombek, managing director of tax and estate planning at Canadian Imperial Bank of Commerce in Toronto.
Advisors can offer guidance on how to repay those bills and, in the months to come, offer support for those who hear from CRA auditors.
“If I had a client who couldn’t afford to pay the tax bill, I would ask them to look at their finances, their budgets, and see if there’s a way they can make payments over time. In many cases there will be,” says Kim Moody, chief executive officer and director, Canadian tax advisory, at Moodys Tax Law LLP in Calgary.
“It’s always better to be proactive with the CRA rather than reactive,” he adds. “Make some payments and be upfront with them. If you can finagle your way to a collections officer at the CRA, in many cases you can offer to make payments [over the course of] six months.”
Advisors can also point out to their clients that this year, the CRA is giving interest relief on outstanding balances to Canadians who filed on time, had a taxable income of less than $75,000, and who have received income from at least one of several employment-income replacement plans triggered by the pandemic.
Furthermore, advisors with clients who are staring at a large tax bill need to step back and determine how that will affect their longer-term financial goals and retirement plans, Mr. Golombek says.
“Have the clients look at the big picture and [tell them], ‘You know what we have is a hiccup here. You have an unexpected expense, but just like a leaky roof or a plumber repair that comes out of nowhere, we can adjust for that in the plan, and maybe there are things we can do going forward like reducing discretionary spending or being more aggressive in the portfolio for the years ahead,’” he adds.
Jason Pereira, partner and senior financial consultant at Woodgate Financial Inc., a financial planning firm under the IPC Securities Corp. umbrella in Toronto, says advisors can help Canadians figure out their options for how to pay a tax bill, whether through cash in hand, investment accounts, or through debt.
For example, he says paying the bill immediately, even if means taking on personal debt, could be better than paying the CRA over time because of the high interest rate the CRA charges on overdue taxes.
Another issue advisors need to prepare their clients for is the potential for questions from the CRA and an audit. Mr. Moody says auditors have three years from the date of the notice of assessment to launch a review, but typically an audit will happen between one and two years from the filing.
Unless the questions are routine, an advisor should involve the client’s accountant as well as a lawyer on audits who can ensure clients’ rights are protected and that clients don’t give auditors information that could compromise their ability to mount a legal argument.
On that note, Mr. Golombek says he expects there will be a heightened level of enforcement this year.
“Most of the claims of [the Canada Emergency Response Benefit] and some of the other [pandemic-related] benefits were just paid automatically with no type of verification. Now is an opportunity for them to go back and look at your income,” he says. “They could have some questions and come back and say, ‘It appears you didn’t meet the qualifications. Could you send us the documentation?’”
Another area that may prompt questions from the tax authorities this year is something with which many taxpayers aren’t too familiar – claiming expenses related to their home workspace. While many people took the option made available to taxpayers this year to claim a flat rate for those expenses, some did the longer-form calculation.
If those expenses are out of the ordinary, taxpayers may hear from the CRA, Mr. Golombek says, adding that an advisor can jump in if the question is something the client hasn’t considered.
Given the challenges of the past year, advisors stress that now is the time to help clients start planning for their 2021 tax return, which is due next April, and any related expenses that may arise from continued benefit payments.
Mr. Pereira says every client’s situation has to be looked at depending on their circumstances and which government benefits they may be receiving and need to claim to determine what percentage of income they should be putting away.
“The reality is if you get to [next year], most of the opportunities to do anything about taxes is already gone,” he says.