Many Canadians file their own tax returns

Canadians are responsible with their taxes. In fact, 94% say they file a personal income tax return each and every year, finds a BMO Nesbitt Burns study.

And almost half of Canadians prefer to prepare their own tax returns, while more than a third of Canadians use tax software to file returns. Canadians paid more than $119 billion in federal income tax in 2012, notes the Federal Department of Finance.

Read: Pay your taxes using mobile devices

But taxpayers might be missing out on valuable savings due to lack of knowledge. When asked about how various investments are treated, the study found:

• 58% are not sure about how capital gains are taxed, while 62% are not knowledgeable about how dividend income is taxed;
• 33% lack knowledge on how charitable donations are taxed;
• 25% have trouble understanding the tax implications of a RRSP and 36% about a TFSA.

“If you prepare your own return, ensure you become as familiar as possible with the tax system so you can spot opportunities to reduce the amount of tax you pay,” says John Waters, vice president, head of tax & estate planning, BMO Nesbitt Burns.

Read: 15 tax credits for Canadians

Here are some tips to save this year.

Offset capital gains with capital losses: If an investor realizes capital losses in the same taxation year that a significant capital gain is triggered, the tax liability on the capital gain can be reduced. Consider selling certain investments with accrued losses to offset capital gains realized earlier in the year — provided the sale makes sense from an investment perspective.

Read: Party’s over for tax-advantaged investing

Spot tax deductions: The extra cash flow from the sale of an investment could be directed towards a larger RRSP contribution, especially if you have significant unused contribution room carried over from prior years.

Defer a portion of gains: If proceeds of disposition from a sale triggering a capital gain are not all receivable in the year of the sale, it may be possible to defer a reasonable portion of the gain from taxation until the year when the proceeds become receivable.

Read: Get U.S. clients ready for tax season

Consider income splitting: Income splitting allows you to spread income amongst family members who are taxed at a lower rate (subject to possible attribution rules). Some valid income-splitting strategies include: pension splitting between spouses or common law partners; an interest-bearing loan to family members in a lower tax bracket; and gifts to adult family members (such as a parent or adult child).

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.