At Moodys, our bench strengths are Canadian, US, and
cross-border tax advisory services. We are a unique
multi-disciplinary firm that employs both accountants and lawyers
to arrive at optimal solutions for our clients. However, what does
"optimal solutions" mean? Good question.
Given that we are a tax specialist advisory firm, you might
think that all of our solutions are centered around tax. While
there is some truth to that, we believe that to deliver optimal
solutions to clients it is critical that non-tax objectives of
clients be fully considered. Often, if not always, the non-tax
objectives of a client will drive the "optimal solution."
It is critical for tax advisors to have empathy with their clients
when crafting optimal tax solutions. While tax knowledge can be
obtained through study, empathy is something that is not easily
learned and involves truly appreciating the client's needs and
objectives so as to provide "optimal solutions."
Given the above, one of my favorite mantras is "don't
let the tax tail wag the dog." In other words, do not be so
focused on the tax issues so as to lose sight of the more important
objectives of the client. Tax is simply a piece of the puzzle and
is not the puzzle. However, do not misunderstand me...tax is
usually a very important consideration when dealing with client
objectives but it is not always the most important.
Let me try to illustrate. Over the years, I have had a number of
meetings where clients have come to me seeking advice about
becoming a non-resident of Canada. They have usually heard from
their friends and colleagues that becoming a non-resident of Canada
is often a good thing since they will not pay Canadian tax any
longer (since Canada taxes residents on a worldwide basis) - I
refer to this type of advice as "cocktail party tax
advice." These meetings usually involve a fact pattern where
the individual is being transferred by his or her employer to a
location outside of Canada...often times the US. I explain to such
clients that becoming a non-resident of Canada involves the
severing of ties with Canada and is usually not an easy thing to
do, especially if their objective is to come back to Canada. Many
times, the clear intent of the clients is to come back to Canada.
In such a case, letting the "tax tail wag the dog" may
significantly or severely impact the individual and/or their
family's lifestyle. It may involve having to sell (or long term
rent) their existing home, relinquishment of certain memberships,
not being eligible for Canadian health care in the future, affect
investment portfolio management and many other non-tax matters.
In a recent client meeting, a family with plans to temporarily
leave Canada and reside in the US, shared some "cocktail party
tax advice" they had received. Their intention was to come
back to Canada in the short term. Given the client's facts, it
would be difficult if not impossible to sever ties from Canada.
However, the outside advice they received lead them to believe they
needed to sell their house so as to become non-residents of Canada
to improve their tax situation when they temporarily resided in the
US for the next 2-3 years. However, they liked their house and
neighborhood and really did not want to sell their home if they
could avoid it. We explored the "tax benefits" of
becoming non-residents of Canada and quickly concluded, given their
unique facts, that the "benefits" were non-existent
(assuming they could become non-residents). When the clients
realized that there were no real tax benefits of becoming
non-residents of Canada and, more importantly, that they could
retain their beloved home, imagine the relief I saw in their faces.
I explained to the family that the tax optimization process should
always include analyzing the whole picture as opposed to simply
focusing on the tax issues. It is this approach which allows an
"optimal solution" to truly reveal itself.
In other words, don't let the tax tail wag the dog...
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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The new subsection 55(2) regime has now been enacted into law. With these new rules, the ability to pay tax-free dividends amongst related Canadian corporations, once a foundational concept of the Canadian tax system, can no longer be taken for granted for dividends received after April 20, 2015.
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