In 1988, I got my first job working at an accounting firm. It was a great year to start in the accounting world as most clients were still doing everything manually. Individual tax packages could be picked up at the post office or mailed to clients for those who wanted to prepare the personal tax return (T1) themselves, small businesses often recorded transactions on manual ledgers and nearly every corporation would have to hire a local accountant to prepare the annual financial statements and file the corresponding corporate tax return (T2).
Accounting firms were largely the only ones using computers and newer technology to prepare and file tax returns. At this time there were three accounting bodies, Chartered Accountants (CA), Certified General Accountants (CGA) and Certified Management Accountants (CMA). These three organizations are now unified under one organization, and referred to as a Chartered Professional Accountant (CPA).
Corporate Tax Returns
Over time, point of sale systems, accounting systems, payroll systems and automation have been introduced directly to businesses. This made the larger volumes of transactions more manageable. In some cases, business owners learned how to do this on their own. In most other situations, accounting firms and bookkeepers helped business owners with this transition. Today, the owner of the business and bookkeepers normally compile all the daily information. This compiled information is then provided to CPA firms to do the final journal entries, financial statements, tax returns and regulatory filings. In the future with cloud computing gaining popularity, businesses will not be limited to using accountants within a limited geography.
On a daily basis, we are communicating with our client’s accountant to ensure that they are getting the information from us that they need. For example, if a holding company has a portfolio of investments, it wouldn’t be unusual to have hundreds of transactions in a year (i.e. purchases, sells, interest income, and dividend income). Annually, we will export all of the transactions during the year into an excel spreadsheet that is forwarded to both the client and the client’s CPA. This spreadsheet saves the accounting firm time by not having to enter every transaction. We also forward all the PDF copies of the statements, fee summary, realized gain (loss) statement, and T-1135 Foreign Verification statement. Nearly every one of our corporate/business clients uses a CPA firm. Proving this information to your CPA firm enables them to spend time giving you proactive big picture advice rather than spending time on data entry.
Personal Tax Returns
In the initial meeting with a new client, we always obtain the name of their accountant who prepares their personal income tax return. We obtain the accountants name, email, phone number, and fax number. Most accountants will have an annual tax checklist that they provide to their clients with the information they require. We also provide a letter to clients with a summary of the information that they can expect to receive from our team, firm and others. The letter outlines the timing of when they will receive the tax information. Because the information is coming from multiple sources and at different times, we encourage our clients to have a system to organize this information and pass on everything they receive to their accountant.
The timing of when you give your information to your accountant is important. We always encourage clients to wait until the beginning of April before giving their information to their accountant to ensure they have all the information needed to properly file their tax return.
We keep good analytics with respect to whether our clients use the services of a professional accountant. Ten years ago, about 85 per cent of our clients used the services of an accountant. Five years ago, the percentage using professional accountants had dropped to 75 per cent. Today, 67 per cent of our clients are using the services of an accountant.
Of the 33 per cent of our clients who do their own tax returns, nearly all use a software package, such as Turbo Tax. We still have a handful of clients who like preparing their tax return with the paper copies and mailing them in.
Not everything is constant with tax policies and accounting rules. CPAs have to adapt to these changes quickly. In some cases there is a lot of overlap between the advice given from CPAs and financial advisers. One example is managing taxable income, especially in retirement. The decision of where cash flow is generated should give consideration to the tax consequences. This is especially important when clients have corporate investment accounts. The level and timing of wages and dividends can fluctuate and should be integrated into the timing of registered account contributions and withdrawals. With so many different types of registered accounts (RRSP, RRIF, LIRA, TFSA, RRSP, RDSP) it is important to have the correct combination based on your short and long term goals. Some of the decisions are driven by required cash flow and some are based on minimizing tax during your lifetime.
If a person is doing both their own self-directed investing and doing their own tax return, then they would not have any professional to obtain advice. Both accountants and wealth advisers are being asked financial and estate planning questions all the time. What is really valuable is when an accountant and wealth adviser provide proactive advice. The term, “you don’t know what you don’t know” certainly applies. The gap in knowledge can range from things that impact tax decisions in the shorter term like the contribution and withdrawals noted above. The decisions you make today could impact taxation for several years in areas such as income splitting rules, changes in RRIF minimums, and whether to collect CPP early. Accountants and wealth advisers have the tools to help with projections and decision making.
Quality of life and changes in your life are both good reasons to have qualified professionals that you know and trust. Even though you may be fully capable of doing your own taxes today, it will take time and you may miss something that you are not aware of. One simple proactive tip from an accountant or wealth advisor could save you thousands of dollars in taxes.
Deterioration in health has many cascading financial consequences and this becomes especially true if the spouse that does the tax returns becomes sick or passes away. It puts even more stress on the spouse during a difficult time if they have neither an accountant or wealth adviser that they know to speak with. During a meeting we may learn about a client’s health deteriorating. Depending on the severity, it can impact tax and estate planning. One example that has an income-tax impact is when we have recommended clients to talk to their doctor about completing Form T2201 for the Disability Tax Credit Certificate. Often at times people may qualify for the disability tax credit, but they did not know. We have had many clients get thousands of dollars back in taxes once they received appropriate advice. If we see years with high medical expenses then this could be an opportunity to offset with other taxable income, such as a higher RRIF withdrawal.
With accountants and wealth advisers working together, you will have two sets of proactive eyes making sure you are getting the best advice. In addition, you can spend your spare time, saved by not doing your taxes, with things that you really enjoy doing.
Kevin Greenard CPA CA FMA CFP CIM is a portfolio manager and director of wealth management with The Greenard Group at Scotia Wealth Management in Victoria.