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Top Tax Questions Canadians Are Asking This Year: BMO Survey

With the deadline to file 2015 personal income tax returns fast approaching, BMO Wealth Management asked Canadians what tax topics are on their minds most this year. The top five personal tax questions were counted down in a new online video series this week featuring John Waters, Vice President, Head of Tax & Estate Planning, BMO Wealth Management, providing the answers.

Top five tax questions answered:

1. Should I contribute to my RRSP or TFSA? (identified by 46 per cent of Canadians)

“One key ‘rule of thumb’ to consider is your marginal tax rate today and your expected marginal tax rate in retirement, including the possible clawback of government benefits. Generally, if you expect your marginal tax rate to be lower when you retire, an RRSP is more beneficial, but if you expect the rate to be higher in retirement, then a TFSA may be the better option.

“A financial professional can help you make this decision by considering your unique financial situation,” added Mr. Waters.

2. When is interest deductible for tax purposes? (45 per cent)

“The purpose of the loan determines if the interest you pay on it is tax deductible or not. For example, if you borrow money to buy investments to generate taxable income such as interest or dividends, you can generally claim the interest you pay on the loan,” said Mr. Waters. “If you’re unsure about whether you can deduct interest on a loan for tax purposes, get help from a tax professional.”

3. How is my TFSA contribution limit calculated? (39 per cent)

“Your TFSA contribution room is made up of the annual TFSA dollar limit for the current year – which is $5,500 for 2016 – any unused contribution room carried forward from the previous year, and any withdrawals you made from your TFSA in the previous year.

“It accumulates every year starting in 2009 for Canadian residents 18 years of age or older, even if you don’t file a tax return or open a TFSA,” added Mr. Waters.

4. What should I do with my tax refund? (38 per cent)

“The temptation is strong to use your refund to do something fun, like take a trip or buy a big ticket item. But before doing so, take some time to consider what would make the most financial sense for your individual situation,” said Mr. Waters. “Using the money to make a 2016 RRSP contribution now instead of waiting until the deadline will give you almost an extra year of tax-deferred growth. If you make a charitable donation with the funds, you’ll receive a tax credit.

“Other options could include making a TFSA contribution, paying off credit card debt, topping up savings, making a mortgage payment or saving for education.”

5. How does making a contribution to a registered charity benefit me from a tax perspective? (36 per cent)

“You’ll receive a non-refundable tax credit if you make a charitable donation. This can only be used to reduce tax owed. However, it’s important to remember that, if you aren’t subject to tax, you won’t get a refund.”

Mr. Waters concluded, “To confirm the specific tax implications and any planning available in your particular situation, please consult with your tax advisor.”

The survey results cited in the Bank of Montreal Tax Tips Report, conducted by Pollara, are compiled from a random sample of 1,516 adult Canadians between March 28 and 30, 2016. A probability sample of this size would yield results accurate to ± 2.5 per cent, 19 times out of 20.

Mr. Waters’ responses to Canadians’ top five tax questions are also available at www.youtube.com/BMOcommunity.

For more tax tips, visit www.bmowealthexchange.com.

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