Almost half of Canadians are “Do-It-Yourselfers”, preferring to prepare their own tax returns rather than relying on a tax professional or family and friends to do it for them, reveals a new study from BMO Nesbitt Burns.

The study also found more than a third of Canadians (35%) will be using tax software to file their returns this year.

While it is encouraging that so many are choosing to prepare their income tax returns themselves, some might still be missing out on valuable tax savings, notes John Waters, vice president, head of tax & estate planning, BMO Nesbitt Burns.

When Canadians were asked about their level of knowledge about how various investments are treated from a tax perspective, the study found the following:

  • more than half of Canadians (58%) are not sure about how capital gains are taxed, while almost two-thirds (62%) are not knowledgeable about how dividend income is taxed.
  • one-third (33%) lack knowledge on how charitable donations are taxed.
  • one-quarter (25%) have trouble understanding the tax implications of a Registered Retirement Savings Plan (RRSP) and 36% lack knowledge on the tax implications of a Tax Free Savings Account (TFSA).

“While many Canadians are familiar with the basics of tax preparation, there appears to be a knowledge gap — particularly on investment income,” said Waters.

“For those who want to be sure they’re taking advantage of all applicable tax credits and deductions and don’t have time to study the tax system, consider hiring a tax professional or speak with your financial advisor who can help determine the best strategy for you.”

Advisors can share these tips from BMO Nesbitt Burns to help clients reduce the amount of tax paid on capital gains and dividend income:

> Offset capital gains with capital losses
If an investor realizes capital losses in the same taxation year that a significant capital gain is triggered, the tax liability on the capital gain can be reduced. Consider selling certain investments with accrued losses to offset capital gains realized earlier in the year — provided that the sale makes sense from an investment perspective.

> Spot tax deductions
The extra cash flow from the sale of an investment could be directed towards a larger RRSP contribution, especially if you have significant unused contribution room carried over from prior years.

> Defer a portion of gains
If proceeds of disposition from a sale triggering a capital gain are not all receivable in the year of the sale, it may be possible to defer a reasonable portion of the gain from taxation until the year when the proceeds become receivable.

> Consider income splitting
Income splitting allows you to spread income amongst family members who are taxed at a lower rate (subject to possible attribution rules). Some valid income-splitting strategies include: pension splitting between spouses or common law partners; an interest-bearing loan to family members in a lower tax bracket; and gifts to adult family members (such as a parent or adult child).