The tax form as a planning tool

So, even if you are not a tax expert, offering to go over your clients’ tax forms can be a good idea. You may spot some red flags and planning opportunities you might not have seen otherwise.

– Date of birth

A quick look at the top right corner on the front page of the T1 form shows your client’s date of birth. If your client is getting close to 60 years of age, says Stanley Tepner, portfolio manager and first vice president with CIBC Wood Gundy in Toronto, this may be a good time to start talking about the pros and cons of taking Canada Pension Plan benefits earlier rather than later.

If your client is older than 60, consider talking about preliminary plans for a registered retirement income fund (RRIF). This conversation could lead to further discussions about pension- income splitting and reviewing the various components of income to determine what can be deferred or offset.

– Marital status

A client who has become a widow or widower in the past year may need a gentle reminder to update his or her will, powers of attorney and beneficiary designations for RRSPs, tax-free savings accounts (TFSAs), pensions and life insurance.

– Information about residence

If a client is a newcomer to Canada, he or she may have assets outside Canada. Ask these clients how they plan to manage their offshore assets. As well, you might determine whether such clients can move any retirement packages to Canada.

– Income

Low-income seniors need to be aware of how their tax bracket can affect their benefits. While seemingly incredible, Rempel says, seniors with annual income of less than $20,000 a year are in the highest tax bracket in Canada, while seniors making $20,000-$30,000 a year are in the lowest. That’s because taxpayers over age 65 with income of less than $20,000 are entitled to the guaranteed income supplement (GIS). That supplement gets clawed back by 50% for every extra dollar made. So, if a senior makes $16,000 a year, including the GIS, and earns an additional $1,000 that year, that client has to pay $710 of that $1,000: $500 is clawed back from the GIS; and the client also pays 21% in income taxes, or $210.

Discussions with clients can centre on how to ensure they retain their GIS while keeping their taxes low.

Monique Madan, an independent CFP in Toronto, looks at client income from another angle. She always requests a client’s notice of assessment and a pay stub to ensure the information on these documents meshes with the client’s annual income.

“Very often, I will see a huge discrepancy,” Madan says. “It could be a bonus, which wouldn’t show up on every paycheque. But it also could be as the result of sale of property or investment income that’s not in a tax-sheltered account.”

Such inquiries open the door for Madan to talk to her clients about the possibility of putting the money from those one-time circumstances into an RRSP instead of triggering taxes.

– RRSP contributions

If your clients didn’t make as much income in the previous tax year as they had hoped or they are expecting a windfall of some sort in the coming year (for example, a large bonus), you can suggest these clients max out their RRSP (if they have the funds), but claim the deduction in the following year, says Heather Freed, an independent CFP in Toronto. The Canada Revenue Agency allows RRSP contributors to deposit their earned-income maximum while not claiming it.

“Why put in for the tax break if you don’t need it that year?” Freed asks. “[This strategy] makes a lot of sense, from both a tax and a financial planning point of view.”

If a client is working at the same job now as last year, Rempel often suggests the client top up his or her RRSP contribution by borrowing from a line of credit. For example, if a client borrows $10,000 in February to contribute to an RRSP, that $10,000 can be repaid within a month or two via the tax refund. As Rempel explains: “The client has invested their tax refund plus an additional $4,000, and [this strategy] has not affected their day-to-day cash flow.”

– Donations

Some clients like to make charitable donations during their lifetime, while others may prefer to leave larger amounts through their wills. Those clients who are generous while they are living may receive better tax savings against their current income, as opposed to estate income. Some wealthier clients may want to start a family foundation, which can lead to some family financial planning, Rempel says.

– Disability

If your client is claiming a disability amount – for him- or herself or for a dependent child – check to see if the client has opened a registered disability savings plan, Freed says. If so, your client can then apply for the Canada disability savings grant.

This program provides matching grants of up to 300% of a contribution, depending upon the amount contributed and the beneficiary’s family income. Low-income and modest-income families also can apply for a Canada disability savings bond from the federal government, enabling these clients to receive up to $1,000. While this program has a $20,000 lifetime cap, Freed says, “these funds can go a long way toward helping families with a disabled child.”

– Medical expenses

Some employees, Tepner says, are entitled to deduct the cost of their medical and dental group plans. Many employees also have group insurance. Either way, discussion of this issue can trigger a conversation about life insurance and living benefits, and whether your clients are insured adequately.

“It’s been my experience that too many people in group insurance plans count only on that for their total life and disability insurance needs,” Tepner says. “And, yet, they are woefully uncovered. To me, this is just a reminder to open up the conversation and have a major discussion about all sorts of insurance.”

– The Homebuyers’ Tax Credit (HBTC)

If you see that a client has claimed the HBTC on Schedule 1 of his or her tax form, this can open up a major discussion about some more comprehensive financial planning, says Jamie Golombek, managing director, tax and estate planning, with Canadian Imperial Bank of Commerce‘s wealth advisory services division. You can cover topics ranging from the best way to finance a mortgage to paying down the mortgage vs saving.

– Pension income credit

Many Canadians are entitled to claim a tax credit of up to $2,000 against their company pension or annuity income, thus potentially eliminating taxes if the client’s income is low or reducing taxes for clients with higher pension income.

Tepner says this credit is valuable for clients between the ages of 65 and 71, providing seven years of withdrawals and a possible total tax credit of $14,000 per person – plus lower taxes.

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