Being tax smart requires year-round planning

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This article was published 06/08/2019 (2261 days ago), so information in it may no longer be current.

(Special) – If they’re like me, I suspect many Canadians tend to forget about their income taxes once they have filed their return until the following March or April when tax season rolls around again.

A recent report by IG Wealth Management highlights the importance of Canadians taking a year-round approach to tax planning by showing there is a disconnect between their level of confidence about their ability to file their income tax returns and their knowledge of the tax system.

The report found that while 86 per cent of respondents believe they are somewhat confident they will take full advantage of all tax deductions, credits and savings available to them, less than one quarter feel they are very knowledgeable about taxes and just 36 per cent work with a tax professional.

Fifty per cent said they prepare their own tax return yet only 42 per cent admit they understand how capital gains are taxed, less than one-third understand how dividend income is treated and just two-thirds appreciate the tax implications of contributing to a Registered Retirement Savings Plan (RRSP) or Tax Free Savings Account (TFSA).

“There is a real disconnect here between Canadians’ confidence and the actual level of their knowledge,” Aurele Courcelle, assistance vice-president of tax and estate planning with IG Wealth Management, said in an interview. “You can have the best tax software available but if you don’t know what deductions and/or credits you qualify for, how will you know to claim them? Most of us start paying attention to our taxes in March or April, right before the filing deadline, but by that time it can be too late.”

Tax experts recommend you collect records and receipts throughout the year and set them aside in a separate envelope or file so you will have everything you need at hand when the time comes to prepare your return.

Courcelle advises people to review what has happened with their previous years’ returns.

For example, if you get a large refund, you should ask yourself why? Getting a refund may seem like a gift from the Canada Revenue Agency but it can signify that you might not be taking off enough income tax at source and you effectively end up loaning your money to the government without getting any interest.

A tax refund typically occurs when the amount of tax owing on your return is less than the amount of tax withheld from your income during the year. You can apply to get your tax refund paid throughout the year on every pay cheque instead of waiting until after your return is filed by completing form T1213 to request tax deductions at source. On the form you indicate your regular RRSP contributions and other deductions and credits to be taken into account when your employer calculates the tax that will be withheld from your pay.

Throughout the year taxpayers will want to track income from all sources such as employment, pensions, investments and rental income and expenses for child care, spousal support, medical costs, charitable donations, home offices, tuition fees, interest on student loans, among other things, as well as contributions to RRSPs and TFSAs.

Many Canadians dip into their TFSAs and then pay back their withdrawals. Withdrawals from your TFSA, however, are not added back to your contribution room until the following year, so you can easily go over your contribution limit by paying back into your account too early, resulting in non-deductible interest charges.

This is one of many areas where Canadians can make mistakes with their taxes and investments.

“The tax system is complex and constantly evolves,”Courcelle says. “Vigilance is required to ensure you’re getting the most out of your annual filing. If you want to be tax smart you need to make tax planning a year-round activity. If you’re unsure how to approach things, it’s important to seek out a financial professional who can work with you to ensure you’re structuring your finances strategically.”

Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors.

Copyright 2019 Talbot Boggs