“Income Tax planning should be proactive and sophisticated. If you are paying significant sums, it can be immediately profitable to obtain sound tax advice.”
At Howlett Financial Partners, the fourth quarter is Go-Time.
Traditionally, busy season in the retail financial planning world rested upon the Registered Retirement Savings Plan (RRSP) contribution deadline, which is the period of time individuals can add funds to their RRSP and receive an income tax deduction against the previous year’s income. While that timing can still work just fine for some folks, we believe in proactive planning and I would categorize a First 60 Day contribution as reactive. Sometimes it’s the only option but I really prefer to get ahead of the issue and begin the conversation around income taxes prior to year-end.
And what a strange year it’s been! [At the time of writing, the COVID-19 Pandemic rages across the globe.]
We start reaching out to our clients in September and October to get meetings on-the-books. I ask clients to begin collecting the actuals for income over the course of the year, given at that point we have a reasonably good idea of where it will land come December 31st.
If I can collect all the data prior to meeting, then on our end we can begin to generate ideas about which strategies might prove useful and have the strategy discussion in full at the face-to-face meeting. If not, we finalize data collection on site and reconvene.
Because I know my clients well, I mostly just need in-year projected gross income, but then people have a way of doing things when I’m not looking so there are surprises: a change of employment, a pregnancy or birth, plans to relocate or purchase a vacation property, diagnosis of an illness, change of marital status, and the list goes on. These factors can all play a role in which strategies become appropriate or effective to use in a given year.
This is really fun conversation for me generally (who’s to say what THEY think?). When we go through the numbers, and through the circumstances and goals, it makes for a fun puzzle to solve. Sometimes the solutions are identical to previous years, sometimes they are easier, and sometimes they are downright mind-benders.
So, why December 31st and not the end of February? Most tax deadlines for non-RRSP deductions and credits have a calendar year-end deadline, meaning that if we want to employ more sophisticated tax planning it is incumbent upon us to hammer things out earlier than has been the industry standard for personal tax planning.
And that’s because most financial planners use only one tool to reduce personal income taxes – an RRSP contribution.
Crafting a tax plan is half musical composition, half horticulture. There’s a structure that needs to be established with all the nuance and mood of a symphony, and then the patience to tend regularly to the weeds and growth. [I know this sounds self-aggrandizing.]
Who Should Consider Establishing a Tax Plan?
The most obvious question to ask yourself is “how much income tax am I paying?” This SOUNDS straightforward, but many people tell me that they don’t pay tax because they receive a refund most years.
If only.
An individual’s entitlement to a tax refund is, in actuality, simply a cash flow issue. For most folks who don’t run their own businesses or receive substantial taxable income from investments, the tax is withheld each pay cheque to cover their anticipated liability come the following April. It is a convenience for a lot of people who don’t want to have to worry about budgeting for a significant lump sum expense.
[2020 Aside: this has received sufficient press if you follow the news, but if you were collecting the Canada Emergency Response Benefit (CERB) for a period of unemployment related to the COVID-19 pandemic shutdown then those funds had no tax withheld at source as per my commentary above. This means that you should plan to have some amount of funds available to pay this out in April, assuming you don’t engage in tax planning to reduce your liability.]
So, determine your tax liability. An easy way to do this is to look at your final paystub or tax return from the previous year, assuming this year’s income will be relatively constant. There are lines you can find on both documents which will indicate the amounts you paid, generally broken down by what amount was paid to the federal and provincial governments separately.
If your income this year is going to be materially different last year, then you can do a quick-and-dirty calculation with this great tool built by the fine folks at Ernst and Young LLP.
For some flavour, their default setting loads the calculator with $75,000 of gross annual income. At that level of income for an Ontario worker you’d be on the hook for $15,205 of combined federal and provincial income taxes.
That ain’t chump change! In fact, from my experience income taxes tend to be the single largest line item expense in the family budget assuming there are two incomes being earned and the mortgage payment isn’t completely insane (an assumption that is making me increasingly tremulous).
What is the Cost of a Professional Tax Plan?
This is going to vary significantly depending on who you want to consult and the complexity of your affairs.
We charge a flat rate of $1,000 for a basic scenario involving individuals only (no trusts or corporations) for a comprehensive financial plan, which basically always involves some measure of tax planning. There is a lot more involved with the creation of the complete plan (we analyze what we call the Seven Pillars of Financial Planning) so that may not be the right solution for someone who just wants some tax advice. We do charge an hourly rate as an alternative, which will range from $200-500/hour depending on the seniority of the planner. This cost pays for it self immediately, in my mind, as the tax saved inevitably is greater than the cost of the advice.
Another option to establish a tax plan would be to consult a Chartered Professional Accountant (CPA). The cost of those services varies widely also, anywhere from $100-500/hour perhaps. Sole practitioners will tend to be the cheapest rates, with small-to-mid-size firms ramping up the cost until we eventually land at the Big Four accounting firms (EY, KPMG, PWC, Deloitte) which are really best built for different services in my opinion, like auditing public corporations for compliance purposes among other very important and valuable services they provide. Tax advice at the big is a bit of a throwaway, they don’t make much money on it because they have a LOT of overhead to cover. You can ask me how I know this over a beer some time…
It is possible to obtain tax advice from investment professionals who can perform a basic level of planning with no direct cost to the consumer. These folks tend to work at investment houses and bank branches and often are paid via commission on investments they manage. The tax advice is thus paid indirectly and is part of a package of services rendered, perhaps including other financial planning services. In my experience having spent about a decade in the field, the sophistication of tax planning you can expect from a bank branch advisor, for example, is not going to be at the level of a CPA or a boutique firm specializing in that work. This might be a time that you get what you pay for.
I should mention that even tax preparation services like H&R Block may be able to provide some advice at minimal cost. They advertise these services, but I can’t really speak to the quality of the advice. A lot of tax reporting tools like the monolithic TurboTax, or the new-kid-on-the-block SimpleTax (my current weapon of choice, it’s free! And actually very slick, you can file your taxes on your phone with this bad boy.) purport to offer advice on tax reduction strategies but the landscape is too complex and they don’t know enough about their clients to really capture most of the opportunities that exist. The cost is very low for these services, if any. You can count on spending less than $100 for a single tax return, which is how these “advisory” services will bill you.
At all the major banks, there are higher service tiers for clients who have a minimum level of investments. This can vary greatly between institutions and has been increasing in recent years as the landscape has become more competitive and fees charged to manage investments have been squeezed. There are typically a few ranges, say $100,000-500,000 for a second tier of planning support and $500,000+ for a third tier planner. Each level might unlock access to a broader set of financial products and strategies based on the licensing and expertise of the planner and the business strategy of the institution.
Then You Subtract
I mean, the math isn’t super complicated is it? If you are in the range of $5,000 or less of income tax I can probably get you most of that back but it may not be worth our collective time and effort. It’s good to contribute to society a bit, right?
In the $5,000-15,000 range there is some solid opportunity to get those expenses DOWN.
$15,000 and up, you’re a little silly not to get some advice. But hey, what do I know, I just get up in the morning and do this every day.
What if I Run a Business?
I wasn’t focusing on this demographic because these folks tend to have some accounting support already.
What I’ll say to readers in this situation is that 1) not all accountants are created equal. Do yourself a favour and get a second opinion. And 2) your Business Executive team should include a coordination of efforts between legal, accounting, and financial planning. We like to position ourselves (the financial planner) as the metaphorical Quarterback, throwing plays out to the other professionals as needed to execute sound, comprehensive tax (and other) planning.
Conclusion
Income Tax planning should be proactive and sophisticated. If you are paying significant sums, it can be immediately profitable to obtain sound tax advice.
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