Don’t let the tax tail wag the dog

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…