What advisors need to know as their tax role stretches past February

This article was featured in Wealth Professional.

Time was, an advisor’s tax role from the previous year ended on March 1st. Once the RRSP contributions were made and the receipts handed to the client or their accountant, tax filing work moved into the hands of the experts and financial advisors could go back to managing markets, growing their AUM, and meeting new clients. The promise of ‘holistic wealth management,’ however has changed some of how advisors are approaching March and April, playing more of a role in the depth of tax season.

John Natale believes there’s a great deal of value that advisors can add to this stretch of tax season. The Head of Tax, Retirement, and Estate Planning Services at Manulife Investment Management explained that advisors’ value add begins with their position as the client’s financial ‘quarterback.’ He contrasts advisors’ longstanding relationships with their clients against the somewhat more momentary and transactional dynamics at play with accountants and lawyers. While those relationships are essential, Natale notes that advisors tend to understand their client lives more fully and that tax season offers a real opportunity to leverage that knowledge.

“Many advisors are already doing this work as part of their holistic planning. The reality is that nobody’s in a better position to support, because advisors have almost all of the client’s financial information as well as that personal relationship,” Natale says. “They know what’s going on in their lives, the births, deaths, marriages, divorces, sales of businesses. Some other professionals don’t have that all-encompassing view, so this gives advisors the opportunity to demonstrate the value of advice.”

Advisors’ tax work revolved around information gathering and communication. Steps as simple as tax checklists for clients can help remind clients about often-forgotten tax slips like charitable donation receipts or day care expenses. Natale notes that advisors can also take a close look at last-year’s tax returns to ensure their client hasn’t forgotten something from this year.

Natale notes that there are some more technical areas that advisors can flag. That includes filing requirements that may not come with income disclosure. He notes the example of the T1135 form, which lists foreign assets with a total cost of over $100,000, whether they provide an income or not. That disclosure exercise, he says, can often confuse clients who don’t realize that some of what they own would be classified as foreign assets. Their insight into a client’s total asset picture means that advisors can also present crucial info to accountants, who have the technical knowledge but perhaps get a narrower picture of the client.

The advisor-accountant relationship is crucial to execution during tax season, Natale explains. Each professional’s value can be multiplied through clear communication, while gaps in communication can result in bad or even disastrous outcomes. Natale emphasizes the time constraints facing accountants, especially during tax season, which can limit the extent to which they can use their expertise in planning decisions. Advisors can support on the planning side while providing quick and effective summaries of existing plans for accountants to digest.

Not only does Natale see this kind of elevated communication and information-gathering as helpful, he views it as an essential extension of the tax planning work that advisors are now doing year-round. That includes tax loss selling and philanthropy planning. It also includes corporate investments. For clients with personal corporations, advisors and accountants can work together on the administration of Capital Dividend Accounts (CDAs), which are notional accounts that can pay out their balances to a shareholder tax free. Natale notes that when capital gains occur and the non-taxable portion is credited to these CDAs, there are greater opportunities for tax-free payouts that clients could benefit from, provided they’re executed at the right moment.

Tax season can be an interesting moment for planning decisions. Clients and their service providers can face a great deal of stress as deadlines creep up, documents sit unfiled or unprovided, and stress levels start to rise. Natale, however, frames this heightened moment as an opportunity for planning conversations. When past mistakes are identified in the tax filing process, it’s important to give timely feedback and build a plan that prevents that mistake from being repeated. That could mean finding areas where a refund was missed, or finding out where too much tax was paid ahead of time. That could mean identifying opportunities to income split or to turn an RRSP into a RRIF.

“Use that time when you have their ear, or when they might feel the pain of a missed opportunity, to implement strategies that will hopefully pay off long-term down the road,” Natale says. “Advisors play the most powerful role in this process because they know everything about their clients. But with great power comes great responsibility. In tax season advisors have the responsibility to leverage their partners, gather that information, and become the critical multiplier of value for clients.”