A new study by BMO Nesbitt Burns suggests that slightly less than half of Canadian taxfilers will be doing their own income taxes this year.
Tax preparation software and online tax filing are making it easier for do-it-yourselfers, says John Waters, vice president and head of tax and estate planning with the wealth planning group at BMO Nesbitt Burns. But you still have an important role to play.
“The tax system continues to stay complicated,” says Waters. “That’s why it is more important than ever for clients to be extra diligent in looking for opportunities to lower their overall tax bill.”
Waters suggests the following ways you can help make sure your clients are claiming all their available deductions:
> Focus on investment income
While your clients may feel confident in putting together their tax returns with basic deductions, Waters says, they generally are less confident regarding investment income. For example, they may not understand how interest income, dividend income or capital gains are taxed.
The lower levels of client confidence in these areas represent an opportunity for you to demonstrate your value by helping to clarify how these types of income are taxed and shows ways of minimizing taxes payable.
> Prevent surprises
One cause of great anxiety for clients during tax season is the possibility of “surprises.”
Before recommending an investment product to a client, you should be aware of all the tax implications associated with that product.
For example, Waters says, if a client purchases too many flow-through shares relative to his or her income, that client could cross the barrier of diminishing returns. The client would be subject to a minimum tax amount, which could result in a higher tax bill.
“[Advisors] have to understand the taxation of the products they sell,” Waters says, “and what type of investment income it is going to produce at the end.”
> Report foreign holdings
Waters says he receives many questions from clients regarding foreign reporting. Be sure to remind your clients to report any investments held outside Canada.
For example, if a client has a large holding of U.S.-based securities in his or her portfolio, he or she may be required to file a form T1135 foreign income verification statement. You should also find out how your client can avoid the U.S. withholding tax on dividends.
If you don’t have all the answers, find out if your firm provides this information or consult an independent cross-border tax specialist.
> Tax credits
Pay close attention to the changes announced in annual federal or provincial budgets regarding the tax credits your clients might be able to claim.
Knowing your client will also help you identify specific tax credits that would be relevant to them.
For example, if your client has a young child, remind them about the children’s fitness and arts tax credits. Or, if one of your client’s has a son or daughter returning home from university for the summer for work, they might be eligible for the textbook tax credit, a moving expenses credit or credits for using public transit.
Other tax credits you should keep top of mind are: charitable donations, medical expenses, caregivers tax credit, self-employment expenses and the tradespersons’ tool deduction.
For a full list of credits, consult the Canada Revenue Agency.