Canadians' confidence in filing taxes could be misplaced

Prominent scholar Noam Chomsky has been quoted as saying “People not only don't know what's happening to them; they don't even know that they don't know.” And based on a new study, that could very well be true about Canadians and their taxes.

In an online survey of over 1,500 Canadian adults conducted by Pollara Strategic Insights, an 86% majority reported being somewhat confident that they will take full advantage of all deductions, credits, and savings they are eligible for as the April 30 tax-filing deadline approaches.

But many could actually be missing valuable opportunities. At most, one quarter of the respondents rated themselves as “very knowledgeable” on Canadian taxation. In addition, just 36% said they work with a tax professional, and 50% said they’re preparing their own tax return.

That’s not even considering likely financial friction from overlooking how taxes fit into their overall financial picture. “Tax is important, but if your advisor is not approaching your financial plan in a comprehensive way you could be leaving money on the table this tax season,” said Jeff Carney, president and CEO of IG Wealth Management and IGM Financial.

The study uncovered a knowledge gap in how investments and savings are treated from a tax perspective. The concerning findings include:

• Only 42% of respondents understand how capital gains are taxed;
• Fewer than one third understand how dividend income is treated; and
• Just two-thirds appreciate the tax implications of contributing to an RRSP and TFSA.

It’s likely too much to expect that the average Canadian knows all the ins and outs of the Income Tax Act. A recent study by the Fraser Institute determined that the Canadian tax system has become more difficult to understand because of “a growing web of complicated rules and changes,” impacting the costs of compliance. Policy experts from the Montreal Economic Institute have also called for a review to “simplify the language of the law, reduce its size, use a tax-complexity index, improve communication with taxpayers, and eliminate tax credits.”

"The tax system is complex and constantly evolving--it requires vigilance to ensure you're getting the most out of your annual filing," Carney said.

IG Wealth Management has identified some key areas that deserve attention this filing season:

• Principal Residence Exemption – Unlike recent years in the past, the government now requires taxpayers to report basic information on the sale of their principal residence in their tax return, with possible penalties for non-compliance;
• Tax on Split Income – Because of changes effective in the 2018 tax year, the opportunities for incorporated business owners to split their income with family members have been severely restricted. Those already in a high tax bracket may therefore see the tax bill for their family increase; and
• TFSA Over-contributions – Many Canadians dip into their TFSAs and “pay it back” later once they have more cash. But they may not realize that TFSA withdrawals don’t count as additional contribution room until the following tax year, so they may unknowingly overshoot their contribution limit for the current year.

Aurele Courcelles, assistant vice-president for Tax & Estate Planning at IG Wealth Management, also advises taxpayers to make the most out of tax filing season by planning well in advance.

“If you want to be tax smart you need to make tax planning a year-round activity,” Courcelles said. “ If you're unsure of how to approach things, it's important to seek out the help of a financial professional who can work with you to ensure you're structuring your finances strategically.”

Follow WP on Facebook, LinkedIn and Twitter