Financial Facts & Money Matters: Making Clients Aware of Impending Tax Changes – A Roundtable
Beyond Numbers · January 2007
Thane Stenner, CIM, FCSI, and Rod Bower, CFP, FMA
On October 31, 2006, federal Finance Minister Jim Flaherty dropped a bomb on the income trust sector, declaring an overhaul of the existing tax treatment of trust income and placing a moratorium on new trust offerings. Needless to say, the ruling took many investors by surprise, and left many facing the prospect of having to revamp their portfolios.
While not every CA is involved in the management of client investment portfolios, the income trust issue does bring up important questions about tax law, and about the role of the professional in making clients aware of this law. For example, what can professionals do to ensure that clients are aware of potential tax problems before they happen? Is a proactive approach even possible? What happens when a client insists on being aggressive despite a professional’s advice to the contrary?
These are some of the questions my colleague Rod Bower recently posed to a group of CAs who specialize in serving high-net-worth (HNW) individuals. Here’s what they had to say.
At the table:
Rod Bower, CFP, FMA
Investment Advisor, T. Stenner Group, CIBC Wood Gundy
Glen Wong, CA
Partner, Glen J. Wong, CA, Vancouver
Dalbir Rai, CA, TET
Tax Partner, Ernst &Young LLP, Vancouver
Gordon Baldwin, CA
Partner, Nordahl, Craig, Cummings & Gares, Vancouver
Rod Bower, CFP, FMA: Glen, let’s start with you. Would you say your clients are generally aware of at least some of the tax issues that might affect their financial position?
Glen Wong, CA: My clients generally keep up to date with tax issues when they’re reading the business section of the newspaper. If an issue affects them, they might make some quick notes and ask us some questions. Usually not immediately—perhaps three months down the line, at our next client meeting.
RB: What about issues clients don’t read about? What do you do to make clients aware of potential problems before they happen?
GW: We prefer to be proactive, and point out that if the client is using a tax deduction that hasn’t been tested, or one that’s questionable or outdated, there may be changes to that rule. We let them know that tax law can change, and that changes could be grandfathered or retroactive. So that means it can affect not only what the client may be doing today, but what they’ve done in the past as well.
RB: Dalbir, what about you? Are your clients aware of the potential impact tax changes can have on their finances?
Dalbir Rai, CA, TET: We deal with a very sophisticated client base. They may not always be knowledgeable about all the specific implications of a potential tax change, but they’re generally aware of changes that could happen.
RB: Is that because of the effort you take to educate them?
DR: Yes. The education process never ends. It’s not the client’s job to be on top of these changes, it’s the professional’s job. Some people are very good at running their businesses but can’t take the time out to be aware of changes in the tax laws—they have to rely on other people to do that.
RB: So what specifically do you do to educate clients about potential tax changes?
DR: As a larger firm, we have all sorts of newsletters, tax alerts, and web-based information that we give to our clients. When changes come through, and we determine which clients will be affected, we take a proactive approach by contacting them.
RB: Gordon, what about your clients? Are they generally aware of what might happen with the tax laws?
Gordon Baldwin, CA: It depends on the client. Some are very good at keeping track of financial news and, in fact, bring it to our attention. Others rely on us to inform them.
RB: What do you do to keep them up to speed on changes?
GB: If there’s something specific, something that has broad implications, we’ll send them a tailored newsletter to inform them about it. Otherwise we send out a quarterly newsletter that discusses some of the recent changes in the taxation arena.
RB: So what kinds of preventative measures do you take when you see a potential problem?
GB: A lot of times, there’s not much you can do. Government is going to do what it’s going to do. Generally, I advise my clients about the risks. I come out and tell them: Here’s the downside. Because I like for people to have a good sleep at night. So when a change happens, my clients don’t get that worked up about it, because they’ve been warned ahead of time about possible adverse rulings.
DR: It’s tough to predict what kinds of changes will happen, and when. By and large, changes aren’t predictable, and sometimes they’re retroactive. Other times, you think that changes are coming, but they never happen. That was the case in the late 1980s when CAs encouraged their clients to lock in their capital gains exemption. I don’t think there was any CA in the country who wasn’t advising their clients to do that. It was very good tax advice for clients at the time. But here we are today—15 years later—and the exemption is still in place. You just don’t know what will happen in the future, so if you’re in a position where you can take advantage of a particular strategy or structure now, then you do it.
RB: Would you say that of income trusts as well?
DR: Our advice is based on the laws as we know them today, and we communicate that fact to our clients. We don’t know what the law will be tomorrow. In terms of the income trust laws, did we suspect that the government would make that change? Probably. But does that mean clients should have stopped taking advantage of the trust structure? Absolutely not—that was the best known course of action at that point, so clients were right to have pursued it.
RB: Does the professional have a duty to steer clients away from potential tax problems?
DR: I don’t know if “duty” is the right word. The onus is primarily on the client. But it certainly is something we need to be on top of. We can only survive as a profession if we provide a valuable service to clients, and making clients aware of potential problems is part of what makes a valuable service.
GB: A lot of people are dialed into what I call the “cocktail circuit”—that is, they’re talking to a friend or colleague at a party, and they come back and say: “Hey, my friend is doing such and such... Why aren’t we doing it too?” My usual response is to ask them whether their friend has been audited. It’s a self-reporting system, so you can do whatever you want. But watch out.
BN: What about a client who wants to be aggressive with tax planning? What do you do?
GW: In the past, we’ve had a couple of clients come to us with questionable investment ideas, where they were to invest a nominal amount of money and get a big tax credit in return. One client had a “comfort” letter from the tax shelter stating its opinion that this was a reasonable investment. We could tell right away that it wasn’t reasonable for the government to allow such a situation. We documented our opinion and told the client we anticipated he would be reassessed.
BN: And what happened?
GW: Turned out we were right. The client’s return was delayed, and the CRA denied the tax shelter deduction. Fortunately, the client didn’t blame us. The client was a sophisticated investor who knew the risks, and he was satisfied that we had given the correct opinion on the situation. He’s still a client.
RB: Gordon, what about you? What do you do about a client who wants to take an aggressive approach to tax planning?
GB: I think the best solution is to prevent it from ever being a problem. If it’s a new client, I make it clear that I will show them the line and help them get close to it, but that if they want to go over the line, they can go elsewhere. With existing clients, they know the relationship. They trust me to only take them toward the line, not over it.
DR: A client can be as aggressive as they wish. It’s our job to provide them with the information they need to make an informed decision. As accountants, we can only recommend a course of action—the client is under no obligation to accept that course of action. If it’s permissible under the Income Tax Act, then as long as you advise the client as to what the possible consequences are, they can do it. And you leave it at that.
RB: What if the client wants to go “over the line”?
GW: We make the client aware that we don’t think the structure will work. If the client wants to do something outside the Income Tax Act, and if after we explain our position on it they still want to go ahead and do it, we tell them they have to do it alone. As a CA, you expect to build a trust with your client, and if they trust you, they’ll go with what’s reasonable. If they don’t trust you, there’s really no point in having them as a client.
RB: Dalbir, same question. What if a client insists on pushing the envelope?
DR: That’s different. If the client wants to do something outside of the Act—something illegal—you have to walk away from them.
Thane Stenner and Rod Bower are investment advisors with the T. Stenner GroupTM of CIBC Wood Gundy. The views of the authors do not necessarily reflect those of CIBC World Markets Inc. This article is for information only. Clients are advised to seek advice regarding their particular circumstances from their personal tax and legal advisors. CIBC Wood Gundy is a division of CIBC World Markets Inc., a subsidiary of CIBC and Member CIPF.