Investors think they are getting the most out of their returns but research suggests otherwise. So, what role can an advisor play?
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The deadline for individual tax returns flew by yesterday but advisors have been urged to add value by helping close the knowledge gap among clients.
An IG Wealth Management study revealed people’s confidence that they are getting the most out of their return in terms of deductions, credits and savings did not match their level of understanding.
A total of 86% were “somewhat confident” yet only about 25% said they were “very knowledgeable” and just 36% said they worked with a tax professional. Only half did their own tax returns.
Aurele Courcelles, assistant vice president, tax and estate planning at IG Wealth Management, told WP: “I think it makes you realise that although people think they know, they probably have some gaps in their knowledge.
“The RRSP is a staple of Canadian’s retirement planning. But if 86% are confident that they are taking advantage of their deductions but only two-thirds say they have a good handle on how RRSPs work and the tax implications, even that’s not matching up.
“That means a third don’t feel comfortable or understand RRSPs, and even more than that don’t understand capital gains and even more don’t understand taxation dividends. If you are putting the puzzle together, there are pieces that don’t fit.”
IG’s study also revealed only 42% understand how capital gains are taxed, while fewer than one-third understand how dividend income is treated.
Courcelles said a lot of folks who do their own returns, or rely on friends or family, simply don’t recognize the subtleties and leave money on the table when aspects of their taxes get complex.
He held up the example of charitable donations as an area where investors often fall short, thinking that if they get their receipts and charitable registration numbers, it’s job done. However, Courcelles said that at least at Federal level – provinces vary to a small degree – the first $200 of charitable donations receive tax credit at a much lower rate than the amount above $200.
He explained: “If my total donations this year are $1,000, for the first $200 I get a small credit and the next $800 I get a much higher credit.
“The tax rules allow you to claim these donations for up to five years. In theory you could accumulate all those donations and claim them in one year so a lot more hits that higher bracket and you get a much higher credit.
“Maybe you are paying a little more tax to get more reduction later on but the spread in the tax rate is so large that, in many cases, people should probably pool them unless they are making around $200. Not a lot of people would know these subtleties.”
So what can an advisor do? Direct a client to a tax professional and wash their hands of the issue? Or maybe a holistic approach can bridge this gap and educate investors in the process?
Jeff Carney, president and CEO of IG Wealth Management and IGM Financial, said: “We believe in holistic financial planning and ensuring you have optimized all aspects of your living plan, including saving, budgeting, investing, insurance and, of course, tax.
“Tax is important, but if your advisor is not approaching your financial plan in a comprehensive way you could be leaving money on the table. The tax system is complex and constantly evolving - it requires vigilance to ensure you're getting the most out of your annual filing.
“With 50% of Canadians saying they'll manage their own tax filing, it's likely that many people could be missing out on deductions and credits they have a right to claim."
Courcelles added that advisors should be playing a role in making sure their clients understand, for example, that dividends are tax preferred over interest and, in most cases, capital gains are tax preferred over dividends.
And he believes that anyone who wants to call themselves a financial planner has to take a broader approach – a trend that is already happening industry-wide.
He said: “You can’t just be a product person; you can’t just be a tax person. People’s lives are complex and you need to understand your client. There are KYC rules and these go beyond just a small portion of your life; you can’t do planning in isolation.”
In an age where advisors are dealing with fee compression and scrambling to prove their value to clients, being tax aware is an avenue that can prove their worth. A look at a client’s tax situation could reveal missed opportunities and save them money, as could helping them with year-round planning.
“Part of the advisor’s job is being on top of a clients’ life events that affect the planning. Tax is part of that,” he said. “It’s all value-added. If you can save a client $200 or $2,000 or whatever the case maybe, even if they are paying fees they can see the value attached to the advisor.”
