Let’s talk about tax

Against the backdrop of the personal wealth lost in the financial crisis and subsequent attempts at recovery, tax and financial planning are more important than ever.

As roughly 24 million Canadian tax filers get ready to file their annual returns, a huge responsibility rests with advisors who help their clients with what is the most significant financial transaction of the year for most Canadians.

Taxes can be the greatest cause of erosion for wealth over the course of a lifetime, according to Evelyn Jacks, president of The Knowledge Bureau, who hosted all-day, all-tax workshop.

The goal of the T1 Tax Update Workshop was to empower tax and wealth advisors to work strategically with their clients, helping them to reduce their tax burden for 2010 and previous years and plan to maximize purchasing power for 2011 and future years.

“Our business is all about minimizing taxes,” said Jacks. “Eighty per cent of people want to talk to you about how to minimize their taxes and want to talk to you about that before they talk about saving for retirement or choosing their investment.”

A national survey conducted for the Canadian Institute of Chartered Accountants (CICA) revealed that many Canadians are in difficult financial circumstances or making faulty financial decisions.

“About 80% said the number one financial literacy skill they want to acquire is how to minimize taxes,” said Jacks. “So if you’re a financial advisor who’s not liaising with the tax side of the industry, you’re missing out.”

“Over a lifetime, the annual tax bill will exceed the amounts spent on food, clothing and shelter,” said Jacks highlighting the gravity of tax implications in her book Essential Tax Facts.

A staunch proponent of financial literacy, she underscores the need for financial advice geared to teaching children money management skills.

“Canadians are worried about this,” she said. Canadians believe parents or guardians should be the primary teachers when it comes to the family money. “But 75% respondents said that advisors have a role to play in financial literacy.

“Think about how important a business opportunity this really is for you, to liaise with family members to teach their children.”

There’s no such thing as a stupid tax question, said Jacks, a member of the Federal Task Force on Financial Literacy. She advised against assuming that families know about various tax-related terminologies that are used in tax talk. “Take extra care to just double check (if clients understand these terms).

“In Canada tax literacy is an important component of financial literacy,” she says. “For average Canadian families, income taxes eat up 20% of household incomes, squeezing out savings room for the future.”

Responsible financial behaviour includes filing a tax return every year, on time and within the framework of the law. This single event is a purposeful cornerstone for making and sticking to both a financial and wealth management plan.

A part of the day long workshop was dedicated to the issue of German pension income. All Canadian taxpayers who receive German pension income are being asked to file tax returns in Germany for tax years 2005 and onward. German authorities will assess these returns to determine if the filer owes taxes.

“There were people living outside of Germany who were not paying taxes (on their pension); so the German government office created a tax office for foreign pensioners in 2008 and started sending letters asking tax returns be filed from 2005 to 2009,” said Siegfried Merten, an expert on German tax legislation, present at the workshop. “Germany is taxing all the pensions, they are charging 25% on half of the pension for the first four years (2005-2008) and have gone down to 15% for 2009.”

The issue has local tax implications as Canadians receiving German pension must declare it to the CRA as world income.

“This is causing a big audit problem here in Canada, because there are some (advisors) who have clients who decided they weren’t going to report these German pensions here in Canada,” said Jacks.

She warned this could trigger a double whammy of taxation and stressed that any income generated outside Canada must be reported by Canadian residents as world income so as to stay within the legal framework.

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