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Most people never cross paths with a copy of the Canadian Income Tax Act and rarely give it much thought outside of tax season, so it’s not surprising that do-it-yourselfers miss a lot of savings opportunities.
The Mackenzie Financial Great Canadian Tax Test, released today, found that only 1% of survey respondents were able to come up with a perfect score in a test of knowledge on things like deductions and tax credits.
“Missing out on tax credits and deductions is like paying full price for an item that’s on sale,” says Sandy Cardy, vice president of tax and estate planning at Mackenzie Financial. “Canadians appear to know the basics — over 90% are aware of RRSP tax implications for example, but speaking to a tax advisor about additional tax strategies is the way for Canadians to get the best bang for their buck.”
Across the country, Mackenzie and Leger Marketing asked 1,565 Canadians 10 questions with a true or false answer. Quebec was the only province that scored correctly on a question about gifting poor performing stocks. Despite this, the province still scored lower than the rest of the country overall.
Atlantic Canada was the only region to correctly answer questions about paying adult children to take care of younger children in the household and deducting the cost of child-care expenses.
Prairie province respondents stood out overall for being more savvy about taxes compared to the rest of Canadians, scoring higher on two key questions about taking advantage of children’s unclaimed credits for tuition and the deductibility of interest costs incurred when borrowing to invest. On these questions, participants scored 12% and 8% higher respectively, than the rest of the country’s respondents.
Take the test or test your clients — true or false?
1. You can sell an asset for a profit and pay tax on the capital gain over five years, provided the sale is structured so that the proceeds are not collected right away.
2. The Canada Revenue Agency does not allow you to gift your poor performing stock to your children in order to trigger a capital loss and reduce future income taxes.
3. An RRSP contribution enables you to defer tax on that contribution until you retire or withdraw the investments.
4. The interest costs of borrowing to invest are tax deductible.
5. If you buy a mutual fund in December 2005 and the fund makes a taxable distribution in that month, you are not liable for the resulting tax in the 2005 calendar year.
6. You can reap the tax benefits of a donation to charity in your 2005 tax submission provided the donation is made before the end of February 2006.
7. You are allowed to contribute up to $4,000 each year to an RESP and if you miss that contribution in any year, you can carry the contribution room forward to a future year.
8. You can pay for adult children to take care of younger children in your household and deduct the cost of child-care expenses.
9. A parent can take advantage of their child’s unclaimed credits for tuition to a maximum of $5,000 of tuition and fees.
10. For a tax credit, you can include all of your family’s qualified medical expenses on your tax return.
Answers and survey results
1. True.
Just over half of those surveyed, 58% seemed to understand tax treatments associated with capital gains.
2. False.
The majority of those surveyed, 54% answered this question incorrectly, suggesting clients do not properly understand the intricacies of gifting stock to their children in order to trigger capital losses.
3. True.
Most Canadians are well versed in the tax benefits of making RRSP contributions. Of those surveyed, 93% answered this question correctly.
4. True.
Only 62% of survey participants knew they could deduct the interest costs associated with borrowing to invest.
5. False.
Perhaps in line with demand for income-generating products, 71% of survey respondents seemed to understand the consequences of receiving taxable distributions during the year.
6. False.
Charitable giving presents a golden opportunity to communicate with and educate clients. Most Canadians are unclear about timing their charitable contributions for tax purposes. Only 44% of those surveyed answered this question correctly.
7. False.
RESPs present another good opportunity to communicate with clients who have children. Only 33% of those surveyed were clear on the rules governing RESP contribution room.
8. True.
Believe it or not, a babysitting salary paid to an adult child to take care of younger children in the household is deductible. Only 43% of those surveyed would have known to take advantage of this opportunity.
9. True.
Only 60% of those surveyed knew that they could take advantage of their children’s unclaimed tuition credits.
10. True.
The majority of those surveyed, 78% knew they can include the entire family’s qualified medical expenses on their tax returns.
Filed by Kate McCaffery, Advisor.ca, kate.mccaffery@advisor.rogers.com
(10/27/05)