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Advisors should discuss with the pros and cons of withholding taxes in general, which could result in clients paying more tax after they file.iStock

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With the 2021 tax-filing deadline looming, advisors are fielding several last-minute queries from clients about how to reduce their household tax bills.

The May 2 filing deadline is also an opportunity for advisors to work with clients on tax-saving strategies for the current year.

We asked three experts from The Globe and Mail and SHOOK Research’s inaugural ranking of Canada’s Top Wealth Advisors for tips on how to work together with tax teams for the most efficient filings.

Faisal Karmali, portfolio manager and investment advisor with the Popowich Karmali Advisory Group at CIBC Wood Gundy in Calgary, says many accounting teams are scrambling to get the filing done on time – and advisors can help by getting clients prepared to provide the right paperwork.

Some of these documents include T3 slips, T1135 Foreign Income Verification Statements, and information on benefits such as home office expenses allowed amid the pandemic and charitable donation receipts.

“If advisors can take a load off there, then the tax team can prepare the information as best as possible,” he says. “It just saves everybody headaches and time.”

Many Canadians rush to get their taxes done – sometimes before some of the receipts have been generated, Mr. Karmali adds.

If they file too soon and miss one, the tax return will have to be amended, which can lead to penalties from the Canada Revenue Agency (CRA) if the taxpayer owes money and the change happens after the filing deadline.

There are also penalties for late filing, some of which can be very punitive. For example, failure to file a T1135 on time can cost taxpayers a minimum of $100 and a maximum of $2,500.

“A good idea is to look at last year’s tax return and ask, ‘What tax receipts did I get last year, and am I expecting the same type of receipt this year,’” he says. “Just to make sure you’re not missing anything.”

Once the filing is complete, Mr. Karmali asks clients for a copy of their tax returns and notice of assessments.

“We can look at what happened last year, from a tax perspective … and then look at how to minimize taxes in 2022 and beyond,” he says.

Some of those tax-saving options include income splitting, contributing to a tax-free savings account (TFSA) or registered retirement saving plan (RRSP), and charitable giving options to name a few.

“We look for what I call the three D’s – deduct, divide and defer,” he says.

How tax-efficient are investments?

Laura Barclay, senior portfolio manager at TD Wealth Private Investment Counsel Inc. in Markham, Ont., says tax season is also a good time for advisors to review a client’s asset allocation, including foreign holdings.

“Sometimes, it’s about figuring out whether investments might be in the wrong place, from a tax standpoint,” she says. An example is having U.S. dividend-paying stock in a TFSA because there’s a withholding tax.

Ms. Barclay says now is also time to look at income sources for the current year to ensure they stay below desired tax brackets.

For instance, a retiree may be looking to manage their income from different sources to avoid the Old Age Security clawback threshold, which is $79,054 for July 2021 to June 2022.

Other strategies to consider are borrowing for investments and deducting the interest, where applicable, making charitable donations, and taking advantage of the temporary home office expense tax deduction that is set to expire after the 2022 taxation year.

For instance, Ms. Barclay says now is a good time to figure out whether it’s best to use the temporary flat-rate method or the detailed method and start documenting the information accordingly.

Mr. Karmali of Wood Gundy says advisors should also discuss with clients the pros and cons of withholding taxes in general, which could result in paying more tax after they file.

“Very few Canadians like to pay a big tax bill come the end of April,” he says. “So, understanding how much we should be withholding minimizes the risk of writing a cheque to the CRA.”

Tax bracket mitigation

Rob Tétrault, senior investment advisor and portfolio manager with the Tetrault Wealth Advisory Group at Canaccord Genuity Wealth Management in Winnipeg, says that ideally, the goal – especially for high-net-worth clients with lots of liquidity – is to have no taxes owing or a refund when filing each year.

“That means they’ve used more of their capital during the year, and the government has had less of it, which should increase their net worth,” he says.

It also makes for easier planning and budgeting for tax bills, and provides a much better experience for clients, Mr. Tétrault adds.

“We tend to lean towards tax-bracket mitigation and how best to use them to the client’s advantage,” he says. “Often, this comes through holistic financial planning to ensure the saving strategies are aligned with the client’s goals.”

Mr. Tétrault says he’s a big believer in a proactive approach to tax planning and aims to have conversations with clients about it throughout the year.

“It can sometimes be too late to make any changes once tax time arrives,” he says.

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