Helping HNW clients at tax time

“Courteous reader”, Benjamin Franklin wrote in his 1758 book, Way to Wealth, “Get what you can and what you get, hold. ‘Tis the stone that will turn all your lead into gold.”

Wealthy Canadians usually have themselves well fortified against Canada Revenue Agency’s attempts to turn their gold back into lead at tax time, but there are still bits of advice and strategic options that advisors can offer to their seven or eight figure clients.

Canada’s HNW growing There are more wealthy Canadians than ever, with some 251,000 millionaires, according to the last Bank of America/Cap Gemini Wealth Survey (2009), that’s up 15 percent from the previous year.

Perhaps not surprisingly, Canada’s HNWs tend to be older and they tend to be business owners, entrepreneurs or professionals. The ultra-wealthy, especially those in the $5-million-plus space, tend to surround themselves with an intensive support system.

“High net worth individuals tend to have a financial advisor, a lawyer and accountant,” says Adam Salahudeen, director of Taxation Advisory Services for Scotiabank’s wealth management division. “The successful high net worth individuals are accustomed to financial planning and used to taking a good look at their affairs with their financial advisors and then bringing in the relevant experts to take advantage of opportunities that present themselves.”

Narinder Gaday is an investment and retirement specialist with RBC in Vancouver, who has been advising high network clients for 12 years. With his client’s permission, he establishes a relationship with the client’s accountant.

“Sometimes the accountant is strictly focused on doing the bookkeeping and the tax return. They overlook how an RRSP contribution or Tax Free Savings Account (TFSA) can benefit my client,” says Gaday. “It is often the advisor that can suggest a strategy to minimize tax and get the maximum benefit from an investment. The client then goes back to their accountant and the accountant agrees.

“Of course, we prefer being more proactive than reactive,” Gaday adds. “We prefer to get the strategy in place. We can then we can start moving money strategically over the course of the year so we are not worried about the deadline.”

“Anything you didn’t catch last year should be front and center for you this year,” says Scotia’s Salahudeen. “If something in your client’s circumstances has changed, maybe a large tax liability, you are looking at how to reduce it throughout the year. You want to leave your client with as much money as possible in their hands.”

Sell the stock, take the loss Sometimes even ultra high net worth clients are reluctant to sell a stock and take a loss, but in fact it might be the best thing that can be done for them.

“Prior to the financial crisis people were holding on to stock forever because they were watching it go up. Suddenly people weren’t talking about gains anymore and they were in a loss position,” says Salahudeen. “I’ve seen people hold on to stock and it fluctuates up and down and so there is an unrealized gain or loss and they are not really taking advantage of it. So if you are making money, take the gain, pay the tax and move on.”

“Retrospective tax planning is not something we encourage,” says John DiNovo from Banwell Financial in Toronto, adding that it is sometimes unavoidable.

“High net worth clients often have a lot of flexibility in structuring their income, especially if they are business owners, and particularly after 65,” he says “One of the things I like to do is to prevent the clawback on OAS. It acts like a tax on high net worth people.

“For example, if a retired person has an investment corporation, we may punch through and pay a big dividend in one year that will finance their needs on top of whatever cash flow they have from pensions on the next 3 to 5 years,” DiNovo explains. “We will keep their income below the clawback threshold which is around $60,000.”

Accidentally wealthy On B.C.’s lower mainland, Gaday sees a lot of millionaires, on paper at least.. The property boom in Vancouver has made many investors very wealthy. “They may not have liquid assets to back themselves up, but they are definitely high net worth.”

Concerns about a housing bubble have people rethinking their strategy if they own a second or third property. “Real estate comes up all the time here in my discussions with investors,” says Gaday. “We have a lot of clients that are looking at selling off rental income property now.”

They are considering taking the capital appreciation and redeploying it into financial assets. “They are looking at moving away from real estate, period, for investment purposes and looking at bringing the funds to us and duplicating that income stream through their portfolio.”

Ultimately, even the HNW are looking for straightforward advice throughout the whole year says Gaday. “I don’t think these kinds of high net worth clients are looking for sophisticated and complex investments. I think they are looking for clean portfolios with simple tax situations.”