TAX EFFICIENT WEALTH
MANAGEMENT
INTRODUCTION TO REAL WEALTH
MANAGEMENT
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Course Content ‐ Instructions for use:
Step 1: Watch the Online Lecture
View the audio-visual presentation for this course by logging in online. The online lecture will open in a new window (or tab). It may take up a minute for the presentation to load, depending on your connection speed, so please be patient.
Step 2: Read the Knowledge E‐Journal
Review the online E-Journal for this course.
Step 3: Take the CE Quiz
Take the CE Quiz online. A mark of 60% is required to pass the course. A make-up Quiz is available for this course, if required.
On successful completion of the course:
Print your certificates
Knowledge Bureau CE Certificate Alberta Insurance Council Certificate
Insurance Council of Manitoba Continuing Education Certificate Chambre de la sécurité financière Attendance Certificate
YOUR INSTRUCTOR
EVELYN JACKS, President, Knowledge Bureau
Evelyn is the Founder and President of Knowledge Bureau, a virtual campus focused on professional development of tax and financial advisors.
Evelyn was recently named one of Canada's Top 25 Women of Influence. She is one of Canada's most prolific and best-selling authors of 48 personal tax and wealth management books, and a highly respected financial commentator and speaker.
She writes in numerous regional, national and online publications including the Toronto Star and the Toronto Stock Exchange, and appears regularly on CBC Newsworld, BNN, as well as provincial media to discuss current tax and economic issues. She blogs at http://www.evelynjacks.com/, and tweets @evelynjacks.
Evelyn was appointed by the Minister of Finance, Jim Flaherty to serve on the Federal Task Force on Financial Literacy, and provincially, by the premier of Manitoba to the Lower Tax Commission. Recently she was appointed First Vice President of the Manitoba Club. She will become the 77th President of the club in 2013; the 2nd woman in the history of the Club to do so. She has participated on numerous boards, including the United Way and the Associates at the University of Manitoba.
She is also a multiple-award-winning entrepreneur. Evelyn has been awarded the prestigious Rotman School of Business Canadian Woman Entrepreneur of the Year Award, recognized internationally with a Business Leadership Award by the Canadian Embassy and Business Women's Network in Washington, D.C., has twice been recognized as Manitoba's Woman Entrepreneur of the Year, and the YM-YWCA "Business Woman of the Year."
Reminder: Listen to the online lecture from the instructor before reviewing the Knowledge E-Journal.
I N T R O D U C T I O N T O R E A L W E A L T H
M A N A G E M E N T
Online Lecture 30 minutes
Knowledge Journal Reading Time 30 minutes
CE Quiz 10 minutes
“Great Transitions Require Stewardship for Real Wealth Management.” The Knowledge Bureau
KEY CONCEPTS AND ISSUES - WHAT YOU WILL LEARN:
The student will learn about a framework for accumulating, growing, preserving and transitioning sustainable family wealth, with purchasing power, by developing an understanding of how to create family net worth by making tax astute investment choices. While we are taxed on income as individuals in Canada, economic decisions are made within the family unit. The use of tax strategies in investment planning builds both individual and family net worth.
NEW SKILLS TO BE MASTERED:
Become familiar with various tax-efficient investment strategies that can be used amongst family members to reduce tax on income. Further, individual asset bases— financial and non-financial—can be transferred between family members during lifetime and at death to get the most advantageous tax results. The student will learn how opportunities to reduce tax on individual income, split income between family members and move assets at the right time to equalize wealth holdings within the hands of each family member, the family unit is powerfully positioned to build significant net worth.
LEARNING ACTIVITIES: To test the learning process, the student will answer
THREE multiple-choice questions and contemplate the role of the advisor and insurance solutions, as required.
RESOURCES: Online Lecture, Knowledge Bureau E-Journal, Knowledge Bureau
I N T R O D U C T I O N T O R E A L W E A L T H
M A N A G E M E N T
Introduction
Tax strategies for financial advisors, the focus of this course, are an integral part of Real Wealth Management. In this chapter, we will define this important framework for developing both a strategy and a process for joint-decision-making between a family and their financial advisors—including tax, investment, retirement and estate planners.
RWM™: What Is Real Wealth Management?
Real Wealth Management is a client-centric, inter-advisory approach to the Accumulation, Growth, Preservation and Transition of wealth, with purchasing power; that is, after tax, inflation and fees. It supports financial planning on an intergenerational basis through a strategic collaboration of stakeholders --all working under the same Real Wealth Management plan to get desired results: sustainable family wealth.
Because the approach is client-centric, strategies developed for tax, investment, retirement and estate planning, are based on the decisions that need to be made throughout the lifecycle of the members of the family, as a result of changing circumstances, including external events.
The strategy focuses on improving individual and family net worth over time, by improving the use of money through tax and cost efficiency. This focus provides a path to a purposeful selection of income-producing assets that result in a variety of income sources, taxed at the lowest marginal tax rates, because the tax is generated over time and at the right time.
This strategic process requires that three financial documents are prepared to plan for and measure accountable results: the Personal Net Worth Statement, the Tax Return and the Financial Plan(s).
Five Steps in a Real Wealth Management Process
Understand Client Triggers: Do Financial Assessment
Take a Deeper Dive: Analyze Use Of Money, Income & Capital Project Forward: Do Pre- And Post-Retirement Planning
Prepare The Strategy: Create the Principles for Building & Managing Real Wealth all stakeholders will work towards
Make Joint Decisions: Using the Strategy, Select the Right Solutions
Why Tax Strategies are so Important
Remember, tax strategies for advisors, under a Real Wealth Management framework focuses on four elements in developing tax efficient income and capital to build sustainable family wealth:
Accumulation, Growth,
Preservation and
Transition of Sustainable Wealth to Other Family Members
Integrating tax strategies into the four elements of Real Wealth Management is an integral part of the strategy and the process. Here are a few examples:
Understanding how to reduce withholding taxes on income, for example, will free up more money for investment purposes.
Reducing net income with an RRSP deduction can increase monthly income from Child Tax Benefits and other refundable credits, such as provincial tax credits. Reducing net income with the right mix of investment income sources, together
with pension income splitting, can reduce the clawback of the Old Age Security benefits.
Understanding when to transfer assets—during lifetime or at death—can significantly reduce capital gains taxes on family assets.
How a Client-Centric Process Helps
Tax is a trigger for most clients. It’s complicated, time consuming and requires the meeting of a deadline. It’s also very expensive: it is the family’s largest lifetime expense. It erodes the purchasing power of the money you make today; and erodes the
value of your capital left to help you meet future needs and wants. Therefore it is an integral part of the Real Wealth Management process.
Real Wealth Management begins with listening for client trigger questions. Clients will seek answers to various trigger events that require action—from the need to pay rent, to the need to file a tax return to the need to protect investments saved to fund retirement from key wealth eroders.
The advisor’s role is to understand where the client stands, financially today, and how to help him or her accomplish their short, medium and long term financial goals, using tax strategies to build purchasing power along the way.
Where do we stand today?
Client triggers will often include responses to life, financial and economic events that cause your client to want to take action with his or her money. Those concerns need to be identified; together with the professionals who may already be working with the client.
Sample Tax Trigger Questions:
Life: How do I save for my baby’s education on a tax efficient basis?
Financial: Should I take my CPP early or late and how much will be taxed away?
Economic: My portfolio is losing money: why should I contribute more to my RRSP or
make a TFSA contribution instead?
The interview technique outlined within the Knowledge Bureau’s Financial Assessment Calculator will lead you to some significant opportunities to develop tax efficient investment strategies and to deliver them in the most tax-advantageous order in the future.
But to begin, it’s important to assess financial stability: net worth. Net worth reflects the family’s financial position as of today. It is a great tool for analysis as well as evaluation of prior plans. The objective is to increase net worth from one period to the next.
The Important Personal Net Worth Statement
The Personal Net Worth Statement, is so important in setting the stage for the right tax strategies, as it provides a list of assets and liabilities before tax. You’ll understand what assets are held and their value—pension accounts, non-registered accounts, insurance, real estate and business—together with offsetting liabilities.
The financial health of the individual/family can then be assessed through ratio analysis: assets to liabilities, debt to disposable income, etc. When you understand how solvent
the client is, and how family wealth is growing from one period of accountability to the next, you’ll make better decisions about when and where to invest along the way.
The right tax strategies can influence financial health in a positive and often immediate manner.
You’ll be able to account for the costs of capital acquisitions, deductible and non-deductible debt, and plan for capital encroachment for specific life events: like planning for education, job loss, divorce, illness or retirement and succession. All of this information is necessary to file an accurate tax return to the family’s best benefit.
Armed with the Personal Net Worth Statement and all the tax returns, financial plans can be more accurate and timely. You will be able to make better decisions about selecting investment products and which accounts to deposit money into first.
You will be able to retain more earnings and therefore create “redundant” income to be used for savings.
You will be in a position to assess liabilities and how to better deal with non-deductible and non-deductible debt. You may even find that the client is in a position to leverage assets to build wealth.
In short, you will be able to make recommendations for a tax-efficient order of investing for each family member, and create budget and investment plans according to the specific goals your clients want to accomplish with their money.
What do you wish to accomplish?
Once we have a good understanding of the “current state of affairs” it’s time to look to the future with a focus on your client’s financial “wishlist”. Financial stability is something to work towards, and tax strategies make that purposeful.
Tax efficient financial planning takes the client from the present into the future to meet specific investment, retirement and succession goals and objectives. This is, of course, where most of the number crunching takes place, in analyzing the best way to allocate a dollar of income across multiple objectives. This process is greatly enhanced with tax efficiency.
The objective is to keep more of the first and last dollars in your possession, so you have more purchasing power to build income-producing assets, or capital. Well preserved capital is what provides the largest after-tax income over time, resulting in freedom of choice and peace of mind, no matter what life; financial or economic changes come your way.
The Components:
A thorough financial plan considers the client’s action triggers, financial behaviors, and current net worth; taking into account after-tax income, liabilities and capital accumulations. It will project the needs for income and capital into the future, to manage:
Non-Discretionary Spending for non-discretionary and discretionary needs to fund
o Basic Needs (food, clothing, shelter, utilities, transportation, etc.) o Taxes
o Debt
o Incapacity (medical, home care, etc.) o Death (ongoing care of people and assets)
Tax strategies begin here: by increasing disposable income with tax efficiency, more will be left for discretionary spending opportunities:
Discretionary Spending Leading to the Building of Capital for Life Milestones: o Education & Career
o Marriage and Family o Retirement and Disability o Estate & Succession Planning o The Building of a Business
Lifecycle Specific
Tax efficient financial plans should be lifecycle-specific at the outset: for example, the following plans should always contain a view to the most advantageous tax position:
Career Development Plan Business Plan
Investment Plan Education Plan Pre-Retirement Plan Retirement Income Plan Estate Plan
The Evaluation Criteria
Because the financial plan positions us for results in the future, the evaluation criteria used to measure the plan’s effectiveness is a link back to the strategy and objectives set by the Client Trigger Checklist. The outcomes must ensure that every dollar of available income and capital is spread across all four elements of Real Wealth Management:
Accumulation, Growth, Preservation and Transition of wealth, in the most balanced manner. The criteria to be tested are:
Answered Client Triggers and Met Objectives Accounted for Lifecycle Needs
Improved Use of Money
Identified Redundant Income for investment Reduced Taxes
Reduced Costs
Inflation Adjusted: Reviewed Portfolio Performance and Order of Investing Improved Net Worth and Financial Stability
The Tax Efficient Estate Plan:
Finally, it’s important to understand what the current accrued values in assets are to develop a “deemed disposition review” for each family member and the family as a whole. Here’s what you need to know: If death occurred tomorrow, what would be the adjusted cost base of each asset, what would be the tax liability of the estate and how much insurance is required to cover that liability to preserve the estate?
Remember, tax strategies for advisors, under a Real Wealth Management framework focuses on four elements in developing tax efficient income and capital to build sustainable family wealth:
Accumulation, Growth,
Preservation and
Transition of sustainable wealth to Other Family Members.
Enabling Confident, Joint Decision-making:
The ultimate objective is to facilitate confident decision-making between the client and the advisory team focused on maximizing the purchasing power of both income and capital through multiple generations. This requires that each stakeholder follow one strategic Real Wealth Management plan in making decisions for actions to be taken, when to do so and what product solutions are required.
An inter-generational approach to the accumulation, growth, preservation and transition of wealth will spread tax liabilities over multiple years and family members to minimize tax erosion. This keeps purchasing power intact, and therefore builds sustainable wealth. The advisor’s role is to develop strategies that reduce taxes, costs and maximize performance and timing decisions to hedge against inflation erosion.
Tax Filing Processes:
To enable maximum effectiveness from a taxation point of view, understand the latest tax changes for individuals and businesses and then link those rules to the preparation of individual and family tax returns, and investment plans.
Comprehension Self-Test #1
DIG OUT YOUR OWN T1 General; then circle Line 150 Total Income, Line 236 Net Income (used to calculate clawbacks of tax credits and social benefits) and Line 260 Taxable Income (tax brackets and rates are applied to this number)
On Schedule 1: Find the federal tax rates and brackets and circle each line that contains a tax change for the current tax year, based on your reading of the budget changes.
Basic Tax Primer
Professional tax and wealth advisors must always update themselves on the most recent tax changes and the proposed legislation that will affect employment, self-employment, investment and retirement income planning for the future. Tax efficient estate planning ensures adequate income streams for future generations, as well.
There are eight things you need to know about the progressive and marginal tax rate system in Canada, as it relates to individuals:
1. Canadian residents are taxed on world income, in Canadian funds.
2. Canadians pay taxes to both the Federal and Provincial Governments, and separate tax forms are available for those purposes.
3. Your province of residence is where you and your family resided on December 31 of the tax year.
4. Every individual has a Tax Free Zone: the Basic Personal Amount.
a. The Federal Basic Personal Amount is indexed annually. The BPA is different for each province, however, and may or may not be indexed for inflation.
b. Tax free zones can be increased by other tax deductions and credits the taxpayer may be entitled to.
c. See the EverGreen Explanatory Notes for the current amounts, tax brackets and rates for federal and provincial rates.
5. Moving Matters. Because the Provincial tax brackets are different for each province, it’s important to take this into account in planning, so that you make no assumptions about a taxpayer’s tax burden if / when they move to another
province. In fact, astute planning will ensure such a move happens before the end of the year if the tax rates in the new province are much lower than the old (and vice versa). That’s because income for the whole year is taxed at your province of residence on December 31. Moves out of the country invoke a “deemed disposition” and for those with taxable assets, a departure tax.
6. Different income sources attract marginal tax rates. For example, the highest marginal rates will apply to ordinary employment income, interest income, rental income as well as public and private pension sources, such as RRIF withdrawals. Other income sources, such as: dividend income, and capital gains income resulting from increases in value of capital assets upon disposition, attracts lower marginal tax rates. Tax strategies employed to earn income from different sources will help to average down taxes over time. Time and tax consequences are also significant in withdrawing taxable income from various capital pools.
7. Income Splitting: What tax bracket are other family members in? If a spouse is taxed at a lower tax rate today, or will be in the future, family income splitting makes sense. Whenever income can be shifted to income, within the framework of the law so as to pay the least amount of tax, there is a significant tax benefit. 8. Observe Attribution Rules. This can be accomplished if the Attribution Rules
(applied to spouses and minor children) are observed. These rules generally prohibit the transfer of income or capital from a higher earner in the family to a lower, with certain exceptions. For example, a bona fide loan can be drawn up between spouses to transfer capital with commercial terms and prescribed interest rates. In other cases, one spouse can hire the other to earn income from the family business. The tax advantages can be significant.
What taxable income source should be earned next and by whom?
If you were to receive another source of income, what would be the tax impact be? Who in the family should receive this income so as to minimize tax? If someone close to retirement lost their job and had a choice as to where to draw the next dollar of income from, which would be the most tax efficient source? These are very important questions when cash flow requirements are being discussed.
Family Tax Filing/Investment Planning Methodology
An intergenerational approach to Real Wealth Management is very important, because multiple family members will facilitate the use of tax strategies like income splitting and the transfer of tax deductions and credits. All family tax returns are therefore completed at the same time, starting from the lowest earning family member to the highest:
Filing for Minors:
There are many reasons to file a tax return for minors. If your minor child has earned income from employment (working at a local restaurant) or self-employment (babysitting and lawn care services), you’ll need to report that of course, if the child is taxable. But even in the case of lower incomes, filing a return to create RRSP contribution room, is important. Over time, 18% of earned income will accumulate to create a nice RRSP deduction that can reduce income and taxes later, when your child is taxable. This can also help you transfer more tuition, education and textbook credits to your return when the child attends university or other post-secondary school.
The child will need to include in income any survivor and disability benefits from the Canada Pension Plan. This will affect net income levels; important if you are single and claiming the child as an “Eligible Dependent” or spousal equivalent for tax purposes. It may also be beneficial to transfer taxable Universal Child Care Benefits (UCCB) to be reported by the child, a special provision available only to single parents.
All parents need to remember to claim the lucrative child care expense deduction, which reduces net income, and this, in turn, can help increase refundable tax credits like the Canada Child Tax Benefit (CCTB). So it really pays to keep those receipts.
When it comes to non-refundable tax credits, claim the Child Amount for each eligible child under 18; the $2131 claim is not income tested and either parent can claim it; in fact unused amounts can be transferred from one parent to the other.
Next, check private activity receipts to see if you’ll be able to claim the Children’s Fitness Amount and/ or the new Children’s Arts Amount. For disabled children, you’ll also want to have a Disability Tax Credit Certificate, form T2201, completed by a doctor to take advantage of that $7341 amount; enhanced by an additional $4282 if the child is a minor. However, this supplementary amount can be reduced, depending on how much you claim as a child care deduction. Finally, be sure to tell the young ones to keep all public transit passes for a possible claim on your return for the Public Transit Amount.
Investing Tips for Minors
Establish in-trust accounts to keep eligible earnings taxable in the child’s hands. This can include interest, dividends earned on “untainted accounts”; that is, you’ll want to be sure only own-source deposits are included—for example, from children’s part-time jobs, CCTB amounts received for the child, or the capital gains earned on principal transferred from adults. Be aware that interest or dividends earned on principal transferred is attributed back to the adult. These tax strategies can build assets and income splitting benefits over time.
Tax Returns for Adult Children
File a return to recover overpaid taxes withdrawn from full or part-time earnings, but also to create unused RRSP contribution room.
Young adults with several part-time jobs also often find they over contribute to the Canada Pension Plan or the Employment Insurance. If that’s the case, a refund is possible when you file a tax return. Check it out!
Also, file a return to create eligibility for refundable tax credits like the GST Credit, available to those age 19 or older, or in some cases, the Working Income Tax Benefit (however this is not available to those with incomes under $3000 or those who are students for more than 13 weeks in the year, unless the student has an eligible dependant). Young adults will also have access to a variety of provincial tax credits as well.
Be sure that the adult child maximizes his or her non-refundable tax credits, including the tuition, education and textbook amount to reduce taxes to zero. If unabsorbed on the student’s return, these provisions can be transferred to a supporting individual. See Transferrable Provisions below.
The adult child should also save amounts paid for public transit passes, which are claimable on his or her return. Once the tax filings are sorted out, encourage your young adult to invest those social benefits and extra refunds wisely.
Investing Tips for Young Adults
Most important, teach the young adults, age 18 or over to make their TFSA contribution each and every year. That way, they are sure to build a tax free pension for their retirement.
An RRSP contribution is also very important, and it may in fact come first in order of investing, if the child has taxable income. The RRSP deduction will reduce net income (which increases refundable tax credits) and in addition, the reduced taxable income may then enable the transfer of tuition, education and textbook amounts.
Also, putting money away into an RRSP early will help your young adult achieve life financial goals in many ways: to reduce taxes on net and taxable income, but also to create a three-part savings plan: for home ownership, lifelong learning and retirement all within the same RRSP.
In general, parents can loan funds to adult children for investment purposes without invoking the Attribution Rules in Section 74.1 of the Income Tax Act. These rules attribute resulting income from interest and dividends back to the lender.
However, beware of Section 56 (4.1) of the Income Tax Act, which can attribute income back to the lender if it is reasonable to consider that one of the main reasons for making the loan or incurring the indebtedness was to reduce or avoid tax. The rules here are broader than the section 74.1 rules, as they relate to all income earned on the transferred property.
Transferrable Provisions
Parents can claim tax relief for costs they incur on behalf of their adult children. To begin, there are a host of provisions for the disabled. Parents may be eligible to claim an Amount for Infirm Dependant Over 18, for example, if the child is dependent on them because of a mental or physical impairment. The claim is subject to clawback, however, depending on the child’s net income level.
If that adult child is markedly restricted in daily living activities, and a medical practitioner completes form T2201 Disability Tax Credit Certificate, a claim for the Disability Amount may be possible. This amount is not income tested. If the child does not have enough taxable income to absorb it, a supporting individual may claim it. Further, if child care is required to look after an infirm adult child for whom the Disability Amount is being claimed, it’s possible to claim those child care expenses up to a maximum of $10,000 for the year. Medical expenses, too, may be claimed for an adult child.
Students attending qualifying educational institutes must claim tuition, education and textbook credits first to reduce taxes payable on their return; but unused amounts, up to $5000, can be transferred to supporting individuals. Note that Public Transit Amounts incurred by your adult children, age 19 or older at the end of the tax year, may not be claimed by you.
Beware of Pension Reforms
Significant changes are being implemented to the retirement income savings and benefit taxation in Canada today. To maximize tax strategies an understanding of the changes is required.
Tax Efficient Family Investment Strategies: At Every Lifecycle
Tax efficient investment income planning uses available tax rules to shift income amongst family members to equalize the amount reported by each family member so as to reduce taxes for the unit as a whole. That helps families create more “redundant income” in order to save more money for the future. Done well, an effect tax strategy will also temper tax erosion later on accumulated capital pools, now held in several family members’ hands.
The first goal is to create taxable income to the hands of each family member, thereby using the progressive nature of the tax system—that is, all the tax credits and deductions you are entitled to as a family unit--to average down tax burdens for the family as a whole.
Key elements in the creation of a successful and effective tax efficient family investing plan include the following components. Be sure to cover them off with your tax and investment advisors, if you are unsure about your family’s strategic investment plan:
Recover Errors and Omissions. First and foremost always use the Taxpayer Relief Provisions to recover taxes owing to each individual family member as a result of errors or omissions on prior filed returns. This includes the filing of omitted returns, which is critical in order to maximize access to RRSP contribution room and carry forward important investment provisions like capital losses, which will be used to reduce future taxes payable. Errors and omissions that end in recovered tax refunds also provide new capital for investment purposes. However, be audit-proof, as opening prior returns invites a check-up by the taxman.
Maximize Access to Family Tax Free Zones. Take advantage the tax free zones available to various family members; this begins with the Basic Personal Amount. To do so, inquire about family income splitting opportunities. In addition, by transferring important tax credits from one family member to another, those tax free zones are increased, reducing taxes for everyone. (See last week’s blog). Again, leverage those tax savings by then investing refunds in the right tax exempt or tax deferred investment vehicle.
Put Capital in the Right Hands. Know how to acquire and transfer assets in the hands of various family members. Inter-family investment loans, for example, can be used to shift assets within the family during lifetime and at death. To do so legally however, you’ll need to discuss how to transfer income and capital within the confines of the “Attribution Rules”, which will allocate investment income back to you on certain assets transferred to family members. You can avoid the attribution rules by investing in tax exempt assets for family members—example a TFSA or a principal residence.
Use Tax Deductible Debt. Understand what debt is tax deductible and how to shift losses from one spouse to another. Aside from interest expenses, other carrying charges often missed include the claiming of safety deposit box fees and investment counsel, or the accounting fees for investment income calculations. These topics will be covered throughout this course. It would be helpful for you to do some additional research to sharpen your mastery of the basics for the development of family tax strategies:
Comprehension Self-Test #2
Based on your reading, answer the following question.
How far back can adjustments be made to tax returns to recover refunds for errors and omissions? How is this accomplished?
Now print form T1-ADJ Request for Adjustment and T400A
Objection – Income Tax Act.
KEY CONCEPTS
Various tax-efficient investment strategies that can be used amongst family members to reduce tax on income and build savings that produce future income.
Further, individual asset bases—financial and non-financial—can be transferred between family members during lifetime and at death to get the most advantageous tax results; that is more money remains in the hands of family beneficiaries, rather than the Canada Revenue Agency.
Applying tax strategies to the earning of income and the building of capital makes thousands of dollars of difference over the lifecycle of a family unit. It’s vitally important for tax and financial advisors to present opportunities to reduce tax on individual income, split income between family members and move assets at the right
time to equalize wealth holdings within the hands of each family member, so that the family unit is powerfully positioned to build significant net worth.
A Real Wealth Management™ framework can assist in building sustainable family wealth by applying tax strategies to the accumulation, growth, preservation and transition of both income and capital. This strategy, process and the timeline for achieving desired results is significantly enhanced with tax strategies because avoiding wealth eroders like taxes, fees and inflation, are integral to the wealth management process.
Taxes are a trigger for clients, too, not just because they must meet a tax filing deadline, but also for the following reasons:
Taxes are THE single greatest lifetime expense. The less tax you pay, the more money you have to save. The objective is to minimize taxes, now to more rapidly build capital for the future.
Taxes could increase in the future, given the slow pace of current economic growth and our declining tax base, which consists primarily today of an aging population. Tax strategies can help increase earnings and preserve savings. A Real Wealth Management strategy anticipates the decisions required to adjust income and capital for the potential of rising taxes.
Income could be interrupted. If the economy continues to grow at a below average pace over a longer period, will income sources be interrupted due to job reduction, layoffs or termination? In some families this may mean adjusting from 2 incomes down to 1; while in others this may mean a shift from full time to one or more part time incomes. How do you stay on track with savings goals in that case, or avoid capital encroachment that can be negatively impacted by taxes on income or capital gains?
Income sources may vary. As a result of current demographics and economic realities, many investors, but particularly boomers, may be changing their plans as a result of lifecycle change (illness or caregiving), financial triggers (should I start taking CPP benefits early) or economic triggers (job loss). By shifting income sources from employment to self-employment and pensions, for example, a number of tax consequences can affect cash flow (the requirement to make instalment payments, for example) or the reality of the need for the taxpayer to continue to work longer than expected, if portfolio losses or lifetime savings won’t cover retirement income needs.
Inflation is a threat, too. How do we adjust for wage stagnation or investment loss, when the cost of living rises? When things cost more and there is less money to spend, it will also be significantly more difficult to “save”. Taxes on inflated values of taxable assets will also be higher, thereby eroding real wealth. Advisors who focus on building tax efficient income as well as tax-deferred capital under a strategic Real Wealth Management Plan will do more than accumulate assets for their clients: they will build sustainable inter-generational wealth.
Tax strategies can add tens of thousands to a family’s wealth and a significant increase in return on investment, which is instrumental in determining the difference between financial success and financial failure in times of volatility.
It’s a great opportunity to put a firm circle around a family’s wealth and help multiple generations manage it, too.
Next Steps
This completes the written portion of your course material.
Please return to your Student Resource Centre and take the CE Quiz for your certification and accreditation.
