What sort of tax decisions can advisors help their clients make before year-end
Somehow the end of the year is almost upon us. In the way that it can, November has appeared suddenly with a laundry-list of tasks, chores, and deadlines before year-end. For advisors that means tax decisions. Coming in a year where the capital gains inclusion rate has been potentially raised by a significant margin and where market performance has been broadly positive, advisors need to talk clients through their options and potentially find ways to make key decisions while political and market uncertainty abound.
Aurèle Courcelles, AVP of tax and estate planning at IG Wealth Management, talked through many of the choices and issues now facing advisors and their clients. He outlined the uncertainties that still exist around the capital gains inclusion rate, what the impact of a bull market is for possible tax-loss sales, and how advisors can clearly communicate what kind of tax liability their clients might be subject to.
“If you’re looking for anything unique about this year, you’d probably start with the change in the capital gains inclusion rate. Not just the fact that it’s supposed to change, but the fact that we have uncertainty around the pending legislation because it is not yet law,” Courcelles says. “So if you’re planning for year end should you clients trigger more gains, trigger losses, or donate marketable securities? These all play into the idea of the inclusion rate going up from 50 per cent to 66 per cent for any gains above $250,000 realized after June 24th of 2024.
“There’s been some uncertainty around what happens if this doesn’t pass before the next election. That’s different. That’s not something we typically have to deal with when we’re talking about year-end planning.”
While that political uncertainty is out there, Courcelles believes that advisors should look past the question of whether it will pass, to the question of whether it applies to their clients. Because the 66 per cent inclusion rate only applies in gains over $250,000, Courcelles argues that it will not apply to the vast majority of clients. Advisors may need to begin by triaging their clients somewhat, explaining to some clients why this rule won’t apply to them, while working on strategies to help manage the tax burden for the clients this rule will apply to. Proactive communication in this case is key.
Those clients who this should apply to include potentially some clients liquidating assets for a home purchase, or clients selling properties at significant gains. Private corporations, too, are not eligible for the $250,000 exemption so their 66 per cent inclusion would begin from the first dollar of gains. Those individuals with private corporations, like many physicians, dentists, and business owners, tend to be well served by other professionals including tax accountants. Nevertheless, this is a key consideration for advisors with incorporated clients.
In some ways, the quick route advisors can take to manage a possibly onerous tax bill is the tax loss selling of securities. The trouble with 2024, at least so far, is that losses are a bit hard to come by. With equity markets up by double-digit percentages, there are few assets where a sale can cause a meaningful tax break. Even rebalancing done in non-registered accounts this year could trigger significant capital gains exposure. Courcelles says that advisors may be wanting to talk with clients about the charitable gifting of securities. Anything with a significant unrealized gain could be gifted as a marketable security to a charity, resulting in a significant tax write-off while also offloading a possible source of capital gains tax. If a client wants to donate securities, though, proactivity is key. Not all charities are set up to receive securities, and those that are will take time to process the gift. These gifts therefore need to be made sooner, rather than later.
While these tax considerations are all essential areas for advisors to discuss with their clients, Courcelles emphasizes that the tax decisions should serve the client’s financial plan and not the other way around. Letting the tax tail wag the dog, as it were, may result in worse decisions from a holistic standpoint. He argues that other strategies like tax deferral could also help clients manage this year’s tax uncertainty without necessarily upending their overall plan. In all things, especially in this year of uncertainty, being able to communicate proactively and calmly is key.
“Be realistic about what could occur,” Courcelles says. “Maybe if you do rebalance and trigger gains, you can look for opportunities to offset that incremental tax bill. If your client is going to go above the exemption, then what would the tax bill be attached to that? You might need to set aside the funds to make sure your client can cover that tax bill. The last thing you want is a panic attack.”
