How to deal with Budget 2013 tax proposals: Cestnick

Tax filing season may be over, but you should offer to help clients review their assessments.

Start by determining whether their tax evaluations were fair and accurate. If not, taxpayers can dispute them with the CRA. Read: Dispute an unfavourable tax assessment

Then encourage them to start planning for 2013. Early preparation is especially crucial since the release of Budget 2013, which showed the government will continue to target tax loopholes, said Tim Cestnick, president of WaterStreet Family Offices, at the CFA Annual Wealth Management Conference yesterday.

Read: Budget 2013: Bonus coverage

Further, he finds many Canadians aren’t leveraging available credits. Case in point: Cestnick kicked off his presentation by saying a neighbour recently came to him before filing his 2012 tax return. The man asked whether he’d missed any savings opportunities since he was going to owe a substantial amount.

Cestnick says the main problem is this neighbour files his own returns each year without getting proper advice. Though he was able to glance at the man’s assessment, this backyard chat was far from the in-depth analysis many Canadians should be seeking throughout the year.

Read: Many Canadians file own tax returns

As Cestnick points out, strategic tax planning will become increasingly crucial over the next few years.

He quipped, “The Department of Finance says, ‘You can structure your affairs to pay the least amount of tax under law as long as we’re comfortable with it.’ Otherwise, they’ll change the laws. In its view, there’s a fine line between a loophole and a clever strategy.”

Cestnick outlined how clients can deal with some of the recent tax law changes:

Proposal 1: The first-time donor’s credit offers an additional 25% return on up to $1000 of donations until 2018. It’s a one-time credit, however.

Strategy: If clients haven’t donated since 2007 or have never done so at all, they can take advantage of the credit. If they use up their credit, suggest they gift money to children and have them donate the funds.

Read: 70% of Canadians support new charity credit

Proposal 2: The lifetime capital gains exemption will be increased to $800,000 from $750,000 starting in 2014. People at the highest marginal tax rate in Ontario can save up to approximately $185,000.

Strategy: If you’ve only claimed $750,000 so far, make sure to claim the extra $50,000 allowable. Cestnick also reveals some publicly traded securities traded on the TSX Venture Exchange may qualify for this exemption. To help clients shelter gains or any allowable business investment losses, review their holdings and call companies they’re invested in directly to ask if they qualify.

Read: Help clients avoid tax surprises

Proposal 3: Character conversion transactions used to reduce taxes by converting investment returns to capital taxable gains that were only taxed at 50%. This was possible through derivative contracts. However, derivatives components will now be treated separately from the dispositions of properties bought or sold under forward agreements as income.

Strategy: Cestnick says advisors and tax experts have to reduce the tax liabilities of clients’ portfolios. Focus on controlling both the type and timing of the income they’re receiving, and get back to the basics of portfolio construction. This is often better than trying to take advantage of complex products with sophisticated structures.

Read: Another tax loophole closed for income investors

Proposal 4: Testamentary trusts may be next on the chopping block. Though they’re still taxed at graduated rates like an individual taxpayer—and they also allow for income splitting—officials are consulting on how to best eliminate unintended tax benefits.

Strategy: Follow this consultation process if your clients have these. Overall, Cestnick says, “If any [tax-advantaged] strategies or products become too mainstream, they could be at risk.”

Read: How to use testamentary trusts

As the Canadian tax environment changes, Cestnick says to show clients—especially aging retirees—how their estate and portfolios would be taxed if they were to pass away today. They need to avoid risky strategies and protect their wealth.

Also check out:

Trusts are essential to estate planning

Tax cheats beware

Taxpayers hit by floods get CRA relief