April 30, 2007 is cut-off date for filing 2006 Canadian income taxes

It's absurd that critical papers, such as T5013s from income trusts and limited partnerships, don't legally have to arrive until mid-April. The result is a last-minute crunch as millions of Canadian taxpayers and/or their accountants complete tax returns in Canada during the coming two weeks.

In the rush to get finished, however, important tax savings can get often overlooked which sadly results in you paying Canada Revenue Agency (CRA) more money than you should. Procrastination can actually prove costly.

But Bob Thompson, a senior investment advisor at Canaccord, offers several great tax tips in order to make this traumatic time preparing your taxes a little more pleasant:

What Types Of Income Do You Usually Receive?

Most Canadians receive some form of employment income. The total income tax paid is based on your average tax rate in Canada. From $8,800 to $36,000 of income, you pay 23% tax. (All these tax rates include the total of provincial and federal tax rates ... I am just approximating the numbers so as not to confuse you with exact numbers). From about $36,000 to $72,000 you pay 33% tax. It also goes up after this.

Other types of income might include real estate rental income, interest, dividends and capital gains.

How Much Tax Do I Pay On Various Types Of Income?

With the whopping amount of tax Canadians pay on employment income, it is necessary to reduce tax on other income received. The smallest amount you pay is on dividend income from Canadian corporations and capital gain income, while the greatest amount of tax is due on interest from bonds, GICs, savings accounts, etc. Real estate rental income is on a par with interest income, meaning you pay the highest amount of tax on this type of income.

When Do I Pay Tax On My Stocks Or Mutual Funds?

This question brings the most amount of confusion among investors. It's sad because many investors end up paying way too much in tax. Paying tax on stocks or mutual funds is a bit complicated, but let's take a look.

You may have to pay tax on two different occasions, on a yearly basis, and when you sell.

If you own stock of Canadian corporations, you may receive dividends, that you can claim a credit with regard to taxes. You must pay taxes on dividends, whether you take the dividends, or reinvest them back into the investment. Most mutual fund investors reinvest the distributions, but some do not realize that they must pay tax even if they reinvest.

When you sell the mutual fund, if you have made a profit, you must then pay tax on the capital gain you have made. Here's the trick, and where many mutual fund investors end up paying too much tax. Once you have paid tax on your yearly distributions, you don't have to pay that tax again.

Let's take the case of a stock mutual fund whose distributions are in the form of capital gains. For example, you buy a fund at $10 per share and it pays out a distribution of $1 per year for three years. At the end of three years, you decide to sell the fund for $15 per share.

As you can see, you have received three distributions, for a total of $3. Since you have paid tax yearly on these distributions, you only have to pay tax on what you haven't paid already. In this case, you pay tax on the difference between your sale price, $15, and $13 (your purchase price plus distributions).

Confusing? Yes, but don't despair, many people are in the same boat as you. I have only covered the most basic part of tax preparation on income, but hopefully it has helped to simplify the process a little, and maybe make it a smidgen less painful. I hope I have been of some help to you. Anything that makes Canadian tax preparation simpler is a welcome idea for most investors.

For more information, contact Bob Thompson at Canaccord, a registered investment dealer in BC and member of the Canadian Investment Protection Fund (CIPF).

Avoid the expense of procrastination when it comes to filing your Canadian income taxes in 2006, NetFile your e-return online using a qualified electronic service such as uFile (English) or ImpôtExpert (francais) from Dr. Tax in Canada. You can even complete your entire tax return on your personal computer (PC) for free. You only pay a small fee ($15.95) when you decide to eFile your federal and Quebec income taxes on line to the Canada Revenue Agency (CRA-ARC) Agence du Revenu du Canada.