Here’s why the most successful tax strategy isn’t necessarily about paying the least amount of tax

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The Alternative Minimum Tax (AMT) proposed in the 2023 Federal Budget has caught the attention of Canadian tax planners and family offices. Michelle Connolly, senior vice-president, tax and estate planning at Wellington-Altus Private Wealth, can recite the impact of AMT backwards and forwards. But more importantly, her approach with family office clients promotes a deeper understanding of concepts like AMT, so that tax planning can help to achieve a family’s goals.

“Success isn’t always about paying the least amount of tax in any given year — it’s about first developing a strategy that delivers what the family enterprise wants or needs, so that tax strategy recommendations can fall into place,” she says. “As an advocate for the family enterprise, I collaborate with families to understand their end goals, so we can all agree on what success looks like.”

Connolly has been serving the wealth space for the past 16 years. She values the role of trusted advisor and the ability to develop deep relationships with clients. Her favourite questions rarely involve finances:

• In 10 years from now, when you look back, what will you want to have achieved?
• What do you want to be remembered for?
• If you had $5 million to donate to a charity, to ensure your children grow up to be independent, or to better enjoy life, how would you use it?

“It’s all about perspective, and questions such as these help us to establish the goals for a family,” Connolly says. “Simply ensuring the family pays the least amount of tax this year may contradict intergenerational family goals.”

With more than 60 per cent of family enterprises expected to change hands in the next decade¹, the intergenerational transfer of wealth is top of mind for many family offices. However, families need to understand the updated transfer rules proposed in the 2023 Federal Budget to ensure the way in which they transfer wealth meets their goals.

A family may, for example, wish to set up a discretionary trust to hold business shares for four children under the age of 25 with the intention to support them equally. It sounds fair, but individual circumstances can make that transfer anything but equitable.

“If two children are involved in running the business and two are not, the two children who are not involved would be paying tax at the highest marginal tax rate on distributions from the business,” Connolly says. “It may be more tax efficient for the parents to gift them other assets on an after-tax basis. Also, if one child is living in the U.S., they could run afoul of U.S. tax consequences. Tax advisors need to share the ‘what-ifs’ of possible outcomes, so the family can assist in deciding on the type of planning that addresses their needs.”

In addition, philanthropy is a major consideration in tax planning and can include annual donations, a donor-advised fund, setting up an endowment, establishing a trust, or even social impact investing. The specific type of donor — individuals, holding companies or a trust — each has its own tax consequences that can impact the benefits associated with philanthropy.

Who a tax advisor speaks to is also important. Communicating with the family and members of their family office advisory team can shed light on what really matters and how tax planning is a component of achieving the family’s long-term goals.

“If you only focus on one aspect of planning, such as paying the least amount of tax, it is often too narrow and transactional. Such planning reverberates and negatively impacts the long-term future,” Connolly says.

Planning spans generations, so it may be important for all family members, not just the principals, to be included in  a broader discussion of family goals to determine an optimal tax strategy. Anything less may cement a strategy that can prove detrimental to the next generation or hamper their ability to run the business as they see fit.

Death, divorce, marriage and remarriage are all part of family office planning and an open discussion about these matters also allows tax advisors to work at their best.

“If Mom passes away and Dad is now with a second spouse, you may want to put appropriate structures in place so that family wealth ultimately flows through to the children, in line with succession law,” Connolly says. “If some beneficiaries are now living in foreign countries, we want to raise awareness of potential tax consequences. If one or both parents unfortunately die at a young age, a key concern is who will be the custodian of their minor-aged children, and how will they ensure that their values are carried on regarding the management of family wealth?”

For Connolly, building lifelong relationships with enterprising families is paramount. She hopes to keep in touch with new generations of family office clients long after taking down her tax advisor shingle.

But if she had only five minutes to ask two questions of family office members, they would be these: “How do you want to live?” and “To whom do you want to give?”

“Nobody says they want to give more money to the government,” Connolly says. “They want to give to family, friends and charity. Helping people live the lives they want to live and making sure their money goes to the places they intended should be the heart and soul of tax advisory.”

¹ Family Enterprise Foundation,“ Ready, Willing And Interested–or Not? Canadian Family Business Transition Intentions” 2021.

This story was created by Content Works, Postmedia’s commercial content division, on behalf of RBC Investor Services, which is a member and content provider of this publication.