What of the recession?Brian Gable
Of all the mistakes that you can make on your taxes, paying more than necessary must rank among the most dreaded. A lot of Canadians may be doing just that, according to a survey released by BMO Nesbitt Burns on Monday.
Almost 40 per cent of those surveyed are not confident they are taking advantage of all tax incentives available to them and more than 75 per cent of Canadians do not take tax implications into consideration every time they make an investment decision.
"The results clearly indicate that many Canadians do not fully understand their personal tax situation," says John Waters, manager of tax planning at BMO Nesbitt Burns. "People have the opportunity to pay less tax if they take the time to understand the basics and seek advice when needed."
It's not easy to stay on top of the latest changes to personal tax laws. I find that online tax software such as Turbo Tax Canada (formerly known as QuickTax) and UFile do a good job of capturing the updates year-to-year, but I often do my own research to determine how to apply some tax deductions and credits to my personal situation.
When it comes to investments, mine reside in a registered retirement savings plan (RRSP), a tax-sheltered account. But if you have reached the maximum allowable contributions in your RRSP or tax-free savings account (TFSA), more attention must be given to the tax implications of your portfolio.
This is where the "power of portfolio allocation" kicks in, writes the personal finance blogger behind Million Dollar Journey. In an article on how to build a tax-efficient portfolio, he discusses the tax consequences of various investment instruments and how to minimize your investment taxation when your tax sheltered accounts max out. For example, he notes, the dividend tax credit makes Canadian dividend income very tax efficient in a taxable account.
While your portfolio should be built based on an overall investment objective and factors such as risk tolerance and expected return, Mr. Waters says, "taxes can have a significant impact on the net returns ultimately achieved."