Canadians are increasingly preparing their tax returns themselves, but some individuals might be missing out on significant savings, says a new study.
Almost half of Canadians (46 per cent) take the “do-it-yourself” approach come tax-reporting time, rather than seeking counsel from professionals, family or friends, according to a survey published Wednesday by the Bank of Montreal.
Forty-two per cent of those polled said they rely on outside help.
And more than one-third (35 per cent) of Canadians will be using tax software to file their returns this year, highlighting the extent to which average citizens are adopting technology and software, says the report.
As to filing regularly, 94 per cent of those surveyed said they file a personal income tax return each and every year, according to the survey results.
“It’s commendable that the overwhelming majority of Canadians are doing the responsible thing and filing annually,” said John Waters, vice-president and head of tax and estate planning at BMO Nesbitt Burns.
“It’s not only the reasonable thing to do, but also the smart option given the penalties that you can incur should you owe money and don’t file.”
Last year, Canadians paid more than $119-billion in federal income tax, up 37 per cent from 2002, according to the federal Department of Finance.
However, more work needs to be done to help taxpayers take full advantage of the savings available, the survey indicates.
More than half of Canadians (58 per cent) said they aren’t certain about the tax treatment of capital gains and close to two-thirds (62 per cent) admitted lack of knowledge about how dividend income is taxed.
On the charitable front, one-third (33 per cent) lack knowledge of exactly how giving is taxed, says the report.
Meanwhile, 25 per cent said they have trouble grasping the tax implications of Registered Retirement Savings Plans (RRSPs) and 36 per cent are spotty on the tax treatment of a Tax-Free Savings Account (TSFA).
“While many Canadians are familiar with the basics of tax preparation, there appears to be a knowledge gap – particularly on investment income,” said Mr. Waters.
People generally might feel confident they aren’t missing out on deductions or credits, he said. “Then you break it down to things like dividend income and a lot of people aren’t comfortable with that.”
Those for whom tax time is a painful event and who leave the task to the last minute are at higher risk of losing out on savings opportunities, said Mr. Waters.
“If you’re just focused on getting done with it and not taking your time, that’s where some of the opportunities are lost,” he said.
“If you prepare your own tax 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 and determine strategies for next year and beyond.”
Those who can’t, or don’t want to, bone up on the Income Tax Act might want to consider hiring a tax expert or speak to their financial adviser, he said.
As a brokerage firm, BMO Nesbitt Burns is more than a disinterested party in conducting and publicizing surveys such as the one on Canadians’ tax filing habits. It actively seeks new business in the retail investment sector.
For people who have experienced major changes in their work or family life over the course of the year, getting advice on how that affects their tax return could be helpful, Mr. Waters said.
Kurt Rosentreter, senior financial adviser at Manulife Securities Inc., says taxpayers need to take more of a “tax-planning” approach throughout the year, rather than just “tax compliance” at the end of the fiscal year.
“Tax planning is in many ways overlooked by many Canadians,” he said.
Among the tax planning strategies outlined by BMO Nesbitt Burns:
- Consider selling certain investments with accrued losses to offset capital gains realized earlier in the year, so long as the selloff makes investment sense.
- Extra cash flow from the sale of an investment could be placed into a larger RRSP contribution.
- Defer some of the gains in the proceeds of disposition from a sale until the year when the proceeds become receivable.
- Spread income among family members who are taxed at a lower rate through income splitting.
Gregory Thomas, federal director of the Canadian Taxpayers Federation, says the federal government needlessly makes tax reporting complicated.
“In many ways, they turned us into hunters and gatherers, except that what we’re hunting and gathering are receipts,” he quipped.
For example, every kids’ sports league now requires a financial officer whose job it is to distribute dozens of individual receipts to parents for fitness tax credits, he said.
“As tax time closes in it becomes a real hassle. They’re all chasing after these receipts,” he said.
The BMO Nesbitt Burns online survey is based on a sample of 1,002 Canadians taken between March 15 and March 19, 2013. The margin of error for a sample of this size is plus or minus 3.1 per cent, 19 times out of 20.Report Typo/Error