As we enter the new year, it’s a great time to reflect. Look back on this year and see what you did right, and what potentially you did wrong. One of those bads might be making some tax mistakes you wish you hadn’t. Or, making tax mistakes that you didn’t even know about.
That’s why today I’m going to go over three common tax mistakes that Canadians still make. So if you’re new to investing, this is exactly where you need to be. Because whether you like it or not, those investing choices will certainly affect your taxes. Whether that’s in a positive or negative way will be up to you.
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1) Missing out on tax-advantaged accounts
One of the worst mistakes Canadians can make is not taking the opportunity to open tax-advantaged savings accounts. It’s astonishing to me how many Canadians I meet that still do not have a Tax-Free Savings Account (TFSA). These accounts allow you to invest as much as you can up to a contribution limit set out each year. All the returns, dividends, anything you make in that account is tax free.
That’s right, you don’t have to claim capital gains. You don’t count it as income. As long as you stay within the parameters set out by the government, you can look forward to earning as much income as you want. Furthermore, you can take it all out if you choose to one day. So if you hit an emergency, or need funds for a house, it’s ready and waiting.
Yet another account Canadians miss out on is the Registered Retirement Savings Plan (RRSP). This has multiple benefits. Again, you will receive a contribution limit, this time through your notice of assessment by the Canada Revenue Agency (CRA). But every dollar you contribute can go on to be taken off your annual income at tax time! This can bring you into an entirely new tax bracket. The only catch is you can’t take out the cash before retirement except under very specific circumstances.
2) Claim your losses!
A huge mistake Canadians could end up making come tax time as well is missing out on claiming your losses. If you sell your investments at a loss, which many may have done this year, you can claim a portion of your capital loss on your tax return.
That capital loss can be claimed to offset any of your capital gains. Therefore, if your capital losses are higher than your capital gains, the difference will become your net capital loss. This can reduce your taxable income for the year. Furthermore, it can be carried up to three years to help with past gains, or carried forward for future gains.
The only thing here is that you cannot claim these under a TFSA or RRSP. That’s because these are not subjected to capital gains. So this really just applies for investment accounts, rather than investment savings accounts.
3) Invest your returns
It can be so tempting to spend the money you receive from a tax refund each year. However, the best thing you can do for your family, future, and bottom line is invest that tax refund. You’ve already put the cash aside and budgeted for it. So don’t blow it by blowing it all on something you don’t need!
In fact, you can invest that cash to help fund your future goals. The best way to do this is by popping it into a TFSA or RRSP, and finding a strong dividend stock or exchange-traded fund (ETF) to help. That way all the dividend income can be used for reinvestment.
A strong option I would consider today is Canadian Imperial Bank of Commerce (TSX:CM). CIBC stock is down now so you can buy on the dip. But long-term holders will know that the stock bounces back after any bear market or downturn. Further, you can grab it with a higher-than-normal dividend yield at 6.24%! That can be used to invest again and again.
