Tax planning for your practice

(November 2009) It’s every advisor’s November ritual: taking a fine-tooth comb to clients’ financial plans. Reviewing portfolios, revisiting risk and reminding clients about their tax obligations are things every good planner does. But being diligent with clients doesn’t mean you can take care of yourself.

“Advisors need to take their own advice,” says Michelle Munro, Fidelity’s director of tax planning. “They spend so much time helping out clients, they forget about themselves. It’s like the old saying — the cobbler’s kids never have any shoes.”

Year-end tax planning is especially important for advisors since many of them run their own practice. That means writing off expenses, understanding incorporation and investing in the right products. These are things advisors should know, but many don’t.

Fortunately, it’s not too time-consuming to figure out, says Carol Bezaire, vice-president of tax and estate planning at Mackenzie, but the amount of work depends on whether you’re an employee at a firm, a self-employed advisor or the overseer of an incorporated practice.

Employees

Tax planning for employees is simple. As with every Canadian who heads into the office — someone else’s office — the government takes taxes off each paycheque.

Normally, employees can’t deduct expenses, but Bezaire says that a number of companies require their advisors to have a home office so they can commute more easily to client meetings — plus this cuts down on the company’s office costs. Advisors with home offices can deduct car and mortgage payments, computer purchases and other office-related expenses. But, Bezaire points out, employers have to sign off on form 2200 before any costs can be claimed. “Advisors can’t just decide to do that,” she says. “They have to get permission.”

Another way employees can potentially reduce the tax burden is to open a tax-free savings account for themselves and their family, says Bezaire. “If they have a low-income spouse or children 18 and over, they might want to set aside some funds. You can give money to them with no attribution,” she explains.

Self-employed

Being self-employed can be ideal — you set your own hours, have no boss to report to — but when tax time comes, some planning is needed. Self-employed advisors can write things off: their office (or a portion of the mortgage if it’s a home office), car payments, phone, meals with clients. Claiming as much as you can will reduce how much you’ll owe the government in April.

Mathieu Paradis, an Orleans, Ont.-based CFP and co-founder of Advisorpractice.com, says he updates his expenses every two weeks. “It takes five minutes,” he reveals. He inputs revenues and costs into tax software program Quicken, and that’s it. “When it comes to tax return time, I hit Print Report, and it tells me how much I spent on everything,” he says.

Advisors can, of course, work with an accountant, but Paradis says he likes to do this on his own so when clients come to him with tax questions he’s able to answer them.

Incorporation

Incorporating is the most complex way for advisors to reduce their own tax hit, but it also yields the best results.

The main benefit is that business income can be kept inside the corporation and taxed at a much lower rate. In Ontario the top marginal rate is 46.4% — businesses with $500,000 or less in them will be taxed between 16% and 22%.

Of course, you still need to get paid. Bezaire says the top marginal tax rate kicks in at $116,667, so just pay yourself less than that. If you need more money, make use of dividends. “You’re trying to keep the taxed money low,” says Bezaire. “Dividend yourself if you need more for living purposes.”

Bonuses are another payment option. They’re taxed at the TK rate, but you can decide when to take the lump sum. “If you’re going to take a bonus of $30,000, you may wait to pay it out until January of a new tax year.”

Another way to keep taxes low is to employ a spouse or child. You pay him or her a salary, which is then taxed at that person’s, presumably, lower marginal rate.

While this is a great way to get more money out of the company, your family members actually have to do some work and be paid accordingly. “You have to pay them a fair and reasonable wage,” says Munro. “You can’t pay a child or a spouse something outlandish.”

Munro says advisors can “take this one step further” by having the spouse invest all his or her income, while the advisor’s money goes toward the household expenses. “The lower-income spouse will earn investment income and be taxed at a lower rate,” she explains. “The same strategy works for a child.”

Incorporating might sound like a good way to structure a practice, but it doesn’t work for everyone — IIROC members aren’t allowed to do it.

When to plan

As is the case for your clients, tax time for many advisors is April. Corporations, however, have to file 60 days from their year-end (which doesn’t have to be December 31), while the self-employed have until June 30 to send in their tax forms.

No matter when your filing date is, though, it’s never a good idea to wait until the last minute. To avoid this, Paradis, who’s self-employed, starts his tax planning every October for the year coming up.

“When you do your business planning for the year, that’s a great time to do a quick tax projection,” he says. Essentially, Paradis estimates what he’ll make in a year, figures out how much tax he’ll need to pay and then starts paying it.

“I remit on a monthly basis,” he says. “And I usually pay more than I need to. I know it might not make any sense, but the alternative is I have to pay $20,000 in April. The worst thing that can happen is that I don’t owe any taxes in April. I don’t want to have to micromanage and worry about a huge tax bill.”

Get help

If you don’t have time to work on your taxes or remit on a regular schedule, get help. “Call a tax specialist,” says Bezaire. “No one knows everything.”

Proper tax planning is worth the money, time and attention — after all, it’s your bottom line that’s at stake. Bezaire implores advisors to start working on their taxes now. “Take the time as we get toward the end of the year,” she says. “Don’t wait.”

(11/17/09)

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