Advisors, how are tax changes impacting your clients’ money?

Changes to tax brackets are forcing advisors to rethink investment strategies

When Justin Trudeau announced a plan to give middle earners a tax break in his pre-election manifesto, many voters were impressed. The plan helped Trudeau get elected and, as part of the changes, Canadians with an annual income of $45,000 - $90,000 saw a 1.5% tax break in their marginal rates. For Canadians earning $90,000 - $200,000 there was no rate change, but for people earning more than $200,000 the rate was increased from 48% to almost 52%. For those receiving an income of $220,000 and up, the rate went from 49.5% to 53.5%.

“When I first share that information with clients there is a bit of shock, and then a sigh of relief because they think they’re never going to earn that sort of money,” says retirement planning specialist, Robert Lewkowitz. “What I’m constantly pointing out is that if you have $150,000 in your RRSP and your husband has $200,000 in his, your children are going to be inheriting your money in the 53.5% tax bracket when you pass away.”

In addition to the tax changes, the government has also lowered the minimum RIF payment for the second time. While the common consensus is that this decision will enable the majority of Canadians to have a decent income for their entire retirement, Lewkowitz is more skeptical. He thinks the government is hoping that more Canadians will be inclined to leave their RIF accounts untouched, with the government then able to claim 53.5% of whatever is remaining when they die.

“I’m regularly telling my retired clients to take money out of their RIFs every year,” Lewkowitz says. “If a retired client with an income of $30,000 takes out $11,000 a year, they’re still going to be in the 20% tax bracket. Pay your lumps now when they’re smaller and put the money into TFSAs and non-registered accounts.”

Lewkowitz also suggests a more aggressive RIF meltdown strategy, which not all advisors are prepared to follow. “It’s based around the concept of borrowing to invest, which provides an interest deduction,” Lewkowitz says. “You’re slowly converting fully taxable money from the RIF to money that is 50% taxable outside of the RIF. Not everyone is comfortable with that, but it depends on the situation.”

In fully understanding the tax implications on retirement plans and having the ability to develop effective strategies, advisors have a good opportunity to justify their value in the aftermath of CRM2. “Many advisors think their role is purely to select good investments, but it’s also about managing cash flow, tax planning and estate planning,” Lewkowitz says. “These are huge issues. Returns are going to vary but taxes are guaranteed, and that’s a place that advisors can add a lot of value.”