With tax season in full swing, financial advisors have an opportunity to help clients understand the tax implications of their investments – an area where knowledge is lacking for many Canadians.
Indeed, a recent survey by BMO Nesbitt Burns showed that many Canadians are unaware of the tax implications of investment income. The poll of 1,500 Canadians, conducted by Leger Marketing, showed that 58% do not know how capital gains are taxed, and 63% do not know how dividend income is taxed.
“It is critical to understand the full picture on how you are being taxed – especially with investments,” said John Waters, vice president and head of tax, estate and trust expertise in the wealth group at BMO Nesbitt Burns. “The taxation of investment income can have a real impact on net returns, which is why it is necessary to understand how you are being taxed before making investment decisions throughout the year.”
Younger clients are likely to need the most help in this area. Canadians over the age of 45 are considerably more likely to say they understand income taxes than those 44 and younger.
Canadians are even less knowledgeable on the tax implications of transferring wealth upon the loss of a loved one, the BMO Nesbitt Burns poll showed. Only one in five Canadians understand the taxation rules in this area, which is concerning given the aging population and the looming generational transfer of wealth, Waters says.
Despite their limited knowledge, however, 84% of Canadians said they’re confident that their completed tax return will take advantage of all of the tax deductions, tax credits or other tax savings that may be available to them. Only 23% said they don’t anticipate receiving a tax refund this year.
According to the Canada Revenue Agency, the average total tax refund received last year was $1,506.
Of the respondents, 42% said they prepare their own tax returns; 38% hire a professional; and 18% have a friend or relative do them.
Advisors should embrace the opportunity this tax season to help clients ensure their investments and tax goals are aligned, Waters says. He suggests helping clients understand strategies to minimize capital gains, such as catching up on unused RRSP room; delaying or deferring the gains to next year; and donating securities to a charity.
Advisors can also direct clients to educational resources, calculators and tools available online.