How to help your clients boost tax efficiency

Helping clients create tax efficient methods of drawing income in retirement is a great way for advisors to increase their value proposition and differentiate themselves from the crowd. Most clients require a little more attention during tax season, but for those in their retirement years (or approaching retirement) the tax services provided by an advisor and their team can be vital.

Canadians are living longer than ever before and creating portfolios that enable clients to enjoy their retirement years without money worries is becoming increasingly challenging. Simply put, the money has to last longer and, as a result, having the ability to build tax and income strategies is crucial for the modern advisor.

“Efficiently drawing income can increase a client’s after tax returns by as much as 40%, and, therefore, tax planning is one of the major ways an advisor can increase the client’s returns without increasing risk,” says Blake Griffith, an advisor at Sun Life Financial.  “We call that tax alpha because, as the saying goes, ‘it’s not what you earn but what you keep’.” 

Most clients who are heading into retirement have multiple potential sources of income to draw from. Working out which income streams to utilize, and when, should be an important part of an advisor’s strategy to boost investment returns. “It’s vital to understand what a client has to lose in the way of government benefits if they earn too much taxable income in retirement,” Griffith says. “If the client is ineligible to certain benefits because of their income, the advisor should be thinking about that as another potential tax.”

Advisors should examine whether or not the client is likely to lose out on any benefits due to the income they draw in a certain year. Key things to look out for include eligibility for old age security, tax credits, pension amounts and long-term care subsidies, which vary depending on provincial policy.

“The advisor should be exploring strategies which help ensure the client does get some of those benefits,” Griffith says. “Some of those taxable income reduction techniques include pension income splitting, an eligible dividend investment strategy, loans between spouses using non-registered funds, utilization of family trusts, investment corporations and T-class and corporate class investments, which have been subject to some tax changes recently but still remain very tax effective.”

Although minimizing a client’s current tax expenditure should definitely be part of the conversation, advisors should be focusing on the client’s income tax from a future aggregate and present value perspective. “It might be more beneficial to have a little more income today at a lower tax rate rather than getting that income at a later date at a higher tax rate," Griffith says. "Advisors should consider helping clients run down their income sooner, so that it doesn’t become an issue when they reach the age when they are required to take minimums out of their registered plans.”


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