Episode 5 – Family Office Integration and Tax Planning

On episode 5 of the Our Family Office podcast, host Adam Fisch speaks with Our Family Office Managing Director of Tax Henry Shew to discuss tax. Adam and Henry distinguish between tax preparation and tax planning, and the benefits of family office integration in developing tax strategies. They offer examples of additional complication that naturally arises among the ultra-wealthy, and the considerations that are critical in providing holistic advice that meets the family’s financial and non-financial objectives.

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Disclosure: This podcast contains opinions and does not constitute the provision of investment, legal or tax advice to any person.

What is The Our Family Office Podcast?

Our Family Office is proud to announce the launch of the Our Family Office Podcast. Throughout the course of the inaugural season, host Adam Fisch speaks to various guests from across our firm, offering insights into the areas of focus for an integrated family office, and the ways that a Shared Family Office™ can help Canada’s wealthiest families.

Adam: 00:08

Welcome back to the Our Family Office podcast. Over the course of this season, we're exploring the areas of focus for a purpose built family office and the ways in which a family office can improve the lives and relationships of Canada's wealthiest families. On today's episode, we'll be discussing tax and estate planning, and I'm happy to be joined by Henry Shew, our Managing Director of Tax. Henry, thanks for being here.

Henry: 00:30

Thank you for inviting me.

Adam: 00:32

So I think to start with, it's important to distinguish between tax preparation and tax planning. So why don't you start us off?

Henry: 00:41

Yeah. I would say there is a difference for tax preparation. This is from a Canadian tax context, but there's a lot of returns in Canada that you need to file. For example, personal, corporate, trusts, partnerships, a lot of different various entities where you need to just file either a tax return or information return. But that is just reporting what the taxpayer has done for the year.

Henry: 01:08

You're kind of just disclosing to the government authority saying that, oh, I made this income. It's not necessary planning per se in terms of you're trying to plan, let's say, for the least amount of tax under legal reasons, or I have my own situation. How do I structure my affairs so that I pay tax the most efficient way, whether I pay tax personally or through the company or whatnot.

Adam: 01:36

Right. So tax preparation is just, as you said, reporting kind of looking backwards, what's happened in the past. Tax planning is looking at the present and figure out, okay. How can I be most tax efficient in the future?

Henry: 01:51

That's right.

Adam: 01:52

And, you know, we do tax preparation. Many many professionals do. But where you spend most of your time is is on tax planning. Right?

Henry: 02:02

Yeah. And, tax consulting is just different because you have to really understand the family situation, and you have to know the tax rules that exist. So that when you're trying to apply the tax rules to the family's objectives, then you can determine what are the strategies and course of action that you want to do that will be tax planning.

Adam: 02:27

Right. So you need you sort of, alluded to kind of knowing the family situation, right. So you have to be strong on the technical side to just to know the rules . And also have a real intimate understanding of the family.

Henry: 02:42

Part of the great thing about a family office is that we truly have to know and understand the family, whether it's the family's facts or the family's objectives or the family's mission and vision. And under Our Family Office, we have a great team of different professionals servicing the family. We have the investment team. You have myself as a tax team. But you also have the client adviser like yourself, Adam, who really talks to the client on a day to day basis.

Henry: 03:14

So for me, although I can come with some great tax planning strategies, if I don't understand the family, some of these strategies may not even be adopted or even considered, which is why it's great to talk to other team members in the family office to come up with an integrated solution for the family.

Adam: 03:32

Right. So it's about you're not just giving tax options in a vacuum and saying, here are the things you are able to do, but it's about integrating that with the family's unique situation and saying, in light of what we know about you, here are the options, but here are the pros and cons and how those might affect you specifically.

Henry: 03:53

I would say the level of detail to understand the family is even greater than a regular family because and I've worked in different tax consulting firms and accounting firms, so I kind of understand the requirement and the objective from these families where a regular family may come to me and say, Henry, this is the situation. This is, let's say, a transaction or my various holdings, what do I do to save the most amount of taxes? Fine. I'll give the answers. I'll give the options, and here's what you can do.

Henry: 04:35

But for ultra high net worth families that we serve at Our Family Office, the demand is a little different because not only you need to know how to address their concern from a tax angle, but some of the solutions may not even be appropriate based on other things that we know. Because you also have to consider family law. You have to consider various family dynamics. How do they treat each other? What is their risk tolerance for tax? So there's actually more to consider than just say, here's how you save tax.

Adam: 05:10

Right. So that's where we would distinguish between what we could call kind of the mass affluent wealthy family that has some money that they'll leave to the next generation and multigenerational wealth, where they are they may have assets all over the world. They may have family members all over the world that are let's say, you know, those family members might be shareholders in the family business. They may be inheritors of family wealth. So there may be other factors to consider in terms of what is the structure that you're able to do that in a tax efficient way.

Adam: 05:45

You know, as an example, you could have a family who owns many Canadian assets in a trust for the next generation, completely makes sense, totally reasonable, except for the fact that if one of the inheritors is foreign, lives in the US, the US treatment of that inheritance is gonna be much less favorable than it will be for the Canadians, and you're not actually accomplishing what you wanted to accomplish.

Henry: 06:15

Yeah. That's right. And, like, for that situation, you know the tax. Right? You know what the family wants. The family says, I'm gonna pass on the assets to the next generation. You want to do it in a most tax efficient way. And by knowing these facts, for example, one of the beneficiaries don't even live in Canada, you have not so favorable tax results by doing so. So knowing that, you're trying to maneuver in a way that you can still meet the family objective but not run into more like a tax trap.

Adam: 06:50

Yeah. And, you know, when we talk about a family business, there's, of course, all the family dynamics around, okay, the next generation who wants to be involved in the business, who is appropriate to be involved, who wants to be completely disconnected from it, And then how do we do things from a tax perspective, right? It's not just about well, most tax efficient thing is leave all the assets in the corp and

Adam: 07:15

And it'll continue to grow and that's it. Well, if that's not gonna be the right fit for the family, then you gotta dig a little deeper and kind of lay out some other scenarios.

Henry: 07:26

Right. This is why this is a a very big decision in terms of balancing tax and other kinds of objectives. What you said. Right?

Henry: 07:35

Like, if one of the generations want to leave all the assets to the next generation, there's are so many different ways you can do it. You can say, I'm gonna divvy up all my assets equally to all my kids. Fine. You pay tax. Or you can say, you know what? I don't want to pay as much tax. Let's consolidate, aggregate it into one holding company and let's call it that's the family wealth for generations. But then that also means that the family are tied together, like siblings are tied together, cousins are tied together.

Adam: 08:04

Right.

Henry: 08:04

So if they don't like each other, they can't get along well. As much as you can save tax, you're you suddenly create a different kind of problem. Right. Which you don't want with these families.

Adam: 08:15

So and that's where these decisions don't exist in a vacuum, and the advice is not in a silo. Right? Because they all affect each other. Right? If you have foreign real estate property that you have ideas of how you might wanna pass it on to the next generation, it's not as simple as just, well, I'll just do it the same way I would in Canada because every jurisdiction has its own rules and its own limitations.

Adam: 08:44

And you need to be aware of that and understand, okay, in light of that and then in light of the family dynamics, what is gonna make the most sense?

Henry: 08:51

That's correct. You actually brought up another good point is once you deal with families at this level, chances are a lot of whatever they are dealing with are not strictly just in Canada. You can have, you have to deal with foreign jurisdictions for many different reasons. Either family members don't even live in Canada, they live in the States, they live in Europe, or they simply have assets all over the world, whether it's in Asia, in South America. And we're talking about unique assets too. We're not talking about stocks and bonds and all that stuff. We're talking about probably some unique paintings, unique sculptures, a villa, a castle, somewhere in Europe, which you have to think about the local law jurisdiction on how to deal with them because and I can tell you this. Our international tax laws don't speak to each other. So you have laws in Germany that completely have different way of thinking and complete different way of treatment than Canadian taxation. So understanding the different tax rules all over the world is also challenging, but that also makes it exciting.

Adam: 10:03

Yeah. And I think when you have when you're dealing with these different jurisdictions, again, it comes back to this idea of not just, well, I have this asset, so how do I hold it in a way that I don't have to pay tax? It's well, what are the different options? What do you want to see happen to it? What do your kids want to see happen to it?

Adam: 10:24

What do they think is going to happen when they're no longer around? Right? So it requires, at this level of wealth, this more kind of higher level, and you have to look out a little bit farther into the future and say, not just, okay, what's gonna save me the most tax today, but it's multigenerational. What is gonna be both tax efficient and practically feasible and desirable from a family harmony perspective. And then how do we weigh all of those things?

Adam: 10:55

And it's about, again, an integrated team working alongside the family to help figure out what's gonna be the best fit for them.

Henry: 11:04

Yes. And that's why it's the family office is really good in the sense that we all work in a team together. Like, I work alongside with the investment team to come up with many different strategies that could be the most tax efficient. For example, if the investment team has an investment policy statement that carve out the portfolio a certain way, I can weigh in and work with the investment team and say, okay. You want to invest in the most tax efficient way depending on how which entity invests and who is investing.

Adam: 11:41

So let's let's give an example there. Right? So we could have a client that, for example, there's a trust in place, family's investing through the trust, and it's subject to certain attribution rules, which are going to be unfavorable from a tax perspective. And you may look at it and tell the investment team, well, in that entity, you want to lean more on on growth, on capital gains as opposed to income because then you don't run afoul of attribution rules. So that's where, you know, you're not telling the investment team what to put in the portfolio. The portfolio is still gonna hold what it holds, but it's about strategic asset location, which entities, how do you wanna divvy up this portfolio in a way that is going to be favorable from a tax perspective?

Henry: 12:29

And I think you nailed that point correctly. Asset location is key in this sense because, as you said, we're not really changing the portfolio. The portfolio is great. The investment team has done a great job. They will recommend it in a certain way.

Henry: 12:44

But how you're gonna invest it is a very important question because that that would lead to the family paying more taxes than necessary. So for me to work with the investment team, we can come up with ways to address those things. For example, what you said, the trust and attributions and all that. And in that way, the family can still meet the objective but doing it favorably from a tax angle.

Adam: 13:11

And, you know, I mean, you've been doing this a long time. I think you know every client situation is different. The tax laws are always changing both locally and abroad. So every situation really requires, you know, you're not reinventing the wheel because you're drawing on your prior knowledge, but every situation is going to have its own ins and outs. And over time, the needs might change or the family's desires might change or someone might move or right? It's everything is a moving target, which is why tax planning is not it's not a stationary thing. Right? It's not a yep. I got a tax plan. Okay. It's in place. That's the end. These things are always evolving, and families that we work with really benefit from that ongoing relationship.

Henry: 14:03

Yeah. And that's why it's important for us to speak to the client adviser because we're one team to understand, hey. For this family, what has changed from a fact perspective, situation perspective? Because we need to maneuver or change the tax plan based on the facts. For example, let's say a a client originally invests something through a company. And from understanding the facts, we know that this person actually moved, left Canada, and moved to the States. And if nothing has been done, you that person will actually get a very unfavorable result because for an American, it's not good and that person will get penalized from a tax angle for investing assets through a foreign company. In this case, it's a Canadian company. So by knowing that, we have to change the strategy by winding up the company in the most tax efficient way and have that person hold the investments personally instead of through a company. So that is one example where we need to know the family really well in order to give the tax strategy that suits them.

Adam: 15:18

Right. And in that case, you know, we know that they they still want to hold the investment, and they can continue to hold it. But going back to that idea of asset location, right, how do we how do you continue to hold this investment that you wanted to hold, but in a tax efficient way that's gonna work for you? And that's where, you know, it's ongoing, and I know you get to know families well. We've had a lot of meetings directly with client families together where it's not you walking through, okay.

Adam: 15:50

Here's what saves the most tax, so here's what we recommend. Right? It's a conversation between us and the client families to say, well, here's the tax consequences of if you choose this path, if you choose that path, here's where I see it fitting with you. Here's where I think you might not like it knowing you, knowing the personalities, knowing the relationships. Right? But all of that all that should be a factor. Right? It's not about, oh, just finding, alright, what saves the most tax? Because when you're at this level, the the tail doesn't need to wag the dog.

Henry: 16:23

I also want to mention that it's not only us working internally, like, the tax team and investment team and the client adviser. Yep. We also work with their existing advisers too. Yep. Because we've seen a lot of families who come to us.

Henry: 16:39

They may have an existing relationship with their own either lawyer or accountant for 30 years, 20 years, and they also know the family really well. So for us, we also work with their advisers to understand the fact it's a teamwork at the end of day.

Adam: 16:57

Yeah. And and a lot of those advisers are excellent.

Henry: 17:00

Yeah.

Adam: 17:01

At the same time, they may operate more kind of in their silo, and they may not have the same overall perspective as we do just in how intimately we get to know the multiple generations of family members. Right? They may only deal with patriarch, matriarch kind of thing and kind of what they want. They may not be dealing as much with with the children. They certainly might not be dealing at all with grandchildren.

Henry: 17:28

Right.

Adam: 17:29

And so they you know, everyone is doing their job well, but when their job is more narrow in scope, they may just not realize that there may be other factors at play that could impact what's gonna make sense for everyone as a whole.

Henry: 17:46

That's why it's it's good to always in communication with their own advisers as well so that we collectively come up with a solution that fits the family.

Adam: 17:58

It makes everyone better at their jobs.

Henry: 17:59

It does.

Adam: 18:01

Henry, thanks a lot. This is a great conversation. I appreciate it. Thank you.

Adam: 18:05

I hope you enjoyed today's conversation.

Adam: 18:07

Thank you so much for listening. Our family office is Canada's 1st purpose built shared family office, and the Our Family Office podcast is produced by Henry Shew. Please visit ourfamilyoffice.ca for more information about our firm, and don't forget to like, comment, and subscribe so you don't miss an episode. See you next time. The information in this podcast is presented as a general educational and informational resource only.

Adam: 18:32

While certain participants in this podcast may be registered to provide investment advice as a representative of our Family Office Inc, itself a registered firm in certain Canadian jurisdictions, this podcast does not provide individualized investment, financial planning, legal, tax, or insurance advice, nor is it meant as a recommendation to any listener to buy or sell any specific securities or otherwise take any other investment action. Any action you may take as a result of the information presented in this podcast is your own responsibility. Our Family Office Inc and each of its representatives that participate in any podcast disclaim that any listener should rely in any way on any of this content as investment, tax, legal, or insurance advice. Listeners are encouraged to consult with their individual investment adviser and other financial professionals prior to taking any potential investment actions or making any insurance or tax decisions.