The biggest problem… you don’t know you have. (the good news is you can fix it!)
With tax season finally over and now more than halfway into the year; Taxes and tax planning for many may seem off in the horizon. My objective in this article is to challenge that conventional thinking. Like an athlete preparing for a race, he or she would never wait until summer to train, as he or she knows to get the greatest results it is a year-round commitment.
Achieving financial success is no different. For many people the focus is on the asset management and a hopeful rate of return. And that is the one thing they do look at year round. One major difference between tax planning an asset management is that asset management returns are, in many cases hypothetical, as where tax planning his mathematical. Let me explain. When someone is able to organize themselves in a tax effective manner the outcome is very real and measurable; that tax is saved and that’s that! If you are able to structure yourself to pay less tax the result is a predetermined one. Tax planning is not affected by market conditions for the most part and for many of our readers they are subject to an unprecedented level of taxation in recent years.
Common mistakes that I see with clients especially ones who are not self-employed and believe that little planning can be done are willing to except the status quo. I do see it with many self-employed who think because they are able to do some creative accounting they have done it all. I can assure you for most this is not necessarily the case. On average I find that clients are paying anywhere from five to $10 million unnecessarily. And less than 5% of people are utilizing the readily available solutions that are out there. And I'm not talking about RSP contributions and TFSA's.
Most, simply assume that they're overwhelmed accountant who is up to his eyes in returns over the month of April will somehow provide him with all of the options. The reality is most of these returns or simply file as it is without any real consideration for what can be done now and ongoing; True structured tax planning.
One comparison could be the way many North American's approach health. Instead of taking care of themselves by thinking on a preventative bases the wait until the problems are there and then seek treatment. And just as it is with our health this is the most costly approach. Given today's uncertain market of interest rates, politics and not to mention one of the longest standing bull markets, there is much to be concerned about. And I challenge you to control the controllable, and taxes are one of them.
For most high net worth clients the threat of taxes outweighs the concerns of rate of return. The question is whether they see it or not. Many are so focused on chasing return that too much risk is taken, and many Canadians knowingly exceed their comfort levels of investing. If your financial advisor isn't making the tax conversation as equally important as the investment Conversation they should be.
Something to consider… If you could reduce your income tax by an average of 10%(recapture what you would have paid in tax) and manage assets with the return of 5% to 7%,(and hopefully with much less risk) potentially your effective net rate of return would exceed 10% over all. Wouldn't this be worth taking another look at how you manage the tax problem? Or better yet discovering a tax management solution you didn't even know existed?
It just might be worth looking into.
Colin Keddy, RFC
Partner & Director of Private Wealth Services
Colin has a well-established reputation for financial planning throughout Canada's financial sector. He is recognized for his expertise in developing customized, comprehensive wealth management strategies.
