Paying the absolute lowest in tax no longer top priority for today's families

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It’s easy to assume there’s only one way to feel about taxes: the less paid, the better. But some families with substantial wealth are prioritizing other things, such as a commitment to global philanthropy and the protection of family legacy, over a desire to squeeze the last drop out of a tax strategy.

Tax advisors, take note.

Toronto-based Ralph Awrey, director of Stonehage Fleming’s Family Office, says he sees a change in attitude toward paying taxes as part of families’ increased focus on their contributions to society.

Families are increasingly aware, for instance, of social inequality and the need for environmental sustainability, he says, among the next generation in particular. You could broadly call it the ongoing development of a collective moral conscience.

“In Canada, there are lots of first- and second-generation families who have very strong philanthropic intent with global causes that are very important to them. And it may not always be ideal for them to do that from a tax perspective. But the philanthropic imperative is more important to them than a tax outcome, so they’re going to do it anyway,” says Awrey.

Families are also becoming more sensitive to society’s growing antipathy to wealthy people, he says, particularly in regard to tax mitigation strategies.

Families are also paying more attention to the creation of a broader legacy for future generations, including a family culture and value set. “Families, particularly those that are looking at creating a multi-generational impact, are asking: ‘What’s the legacy of my family?’” says Awrey. “They’re thinking more about social and cultural capital and then as a subset to that they’re asking: ‘What are we doing about tax?’”

Quillan Quarrington, principal at Toronto’s Creaghan McConnell Group, a family capital company, has seen a shift, too, and agrees that negative public perception surrounding aggressive tax planning is driving some of that change.

Another factor, says Quarrington, may be an increase in federal oversight and fewer opportunities for aggressive planning. “I think that there’s been a huge contraction or shrinking in the amount of tax planning that can be done, over the last 10 to 15 years especially. Governments have worked to close perceived loopholes, so some of the opportunities that maybe were there 20 years ago, they’re not there now,” he says.

‘Wild West’ days are over

Scott Binns, partner at Montreal-based Richter LLP who specializes in tax and estates, says in years past Canadians might have experienced a “Wild West” period with regards to tax payment, but those days are gone.

“If you’re going to play games, you’re going to get caught. The same tools that people are using for artificial intelligence are the same tools the government is going to have,” says Binns, describing the sophisticated monitoring that enables governments to detect improper tax planning more quickly.
“Usually, it’s just not worth it. So the question is, is that a change in mindset?”

Another place that may be experiencing a shift is the world of cryptocurrency, Binns says, where increasingly people are voluntarily disclosing taxable assets. But he sees this voluntary disclosure as a response to the amnesty offered by the Canadian government for participants, rather than a change of heart among taxpayers.

“There are a lot of taxpayers out there who didn’t know at first — maybe it was a hobby when they started,” says Binns, describing people who may have inadvertently dodged their tax responsibilities. “I’ve seen them using the voluntary disclosure programme to come forward to tell the government: ‘You know, I wasn’t aware of my obligations.’”

Not just the next-gens

Whatever is driving them, these changes in approach to paying tax are not limited to the rising generation. “Attitudes generally are changing across all generations,” says Awrey. “It may be slightly more visible with the next generation, but it’s not exclusive to next-gen.”

Quarrington has observed another trend that illustrates the point.

“For most of my clients, the largest tax bill they’re dealing with is not necessarily the annual tax bill on the investment in companies; it’s their tax liability on death. And I think this is one place there’s been a bit of a generational shift and a change of thinking.”

Increasingly, he says, founding generations are opting to plan for successive tax bills, generations down the line.

“In the past,” Quarrington says, “each generation would say, ‘I’ll deal with my tax bill, and you deal with yours.’” But older family members are realizing that a generational tax strategy can help future-proof a family business and keep a family fortune from drifting away during the succession process.

Family friction can result

Is it all smooth sailing? Not a chance. Some of these changes in thinking can cause friction among family members if opinions differ or if families have not had robust discussions about values and how tax planning aligns with family purpose.

Quarrington says it’s incumbent on family offices and advisors to nurture those conversations and ensure families have a comfortable environment where they can talk openly with each other.

Advisors, too, need to adapt to changing expectations.

“You’ve got to be up on the issues. You’ve got to understand the ramifications and implications of what the planning is, and not just the financial consequences of particular choices,” says Quarrington, adding that advisors should also be ready to counsel clients about the potential social impact of choices that lay before them, and offer advice and best practices if aggressive tax planning is not what a family is looking for.

Awrey says, “For the most part, advisors understand that creating a hugely complex technical solution to a tax issue just might not fit every family because they may not looking for that high-wire act.

“If they have particular objectives and views about what the purpose of their wealth is, about their social and cultural capital, then that may be more important to them and, therefore, they’re less concerned about grinding down their tax bill to the absolute minimum.”

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