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Test yourself to see how much lack of knowledge is costing you

So you think you're smart when it comes to tax issues? How about taking the Mackenzie Financial Great Canadian Tax Test? This week, the mutual fund company released the results of a test given to 1,565 Canadians. Over all, Canadians get a "C" grade.

"Missing out on tax credits and deductions is like paying full price for an item that's on sale," says Sandy Cardy, vice-president of tax and estate planning for Mackenzie.

Okay, time to take the test. Answer each question true, or false.

The test

1. You can sell an asset for a profit and pay tax on the capital gain over five years, provided the sale is structured so that the proceeds are not collected right away.

2. The Canada Revenue Agency does not allow you to gift your poor performing stock to your children in order to trigger a capital loss and reduce future income taxes.

3. A contribution to a registered retirement savings plan enables you to defer tax on that contribution until you retire or withdraw the investments.

4. The interest costs of borrowing to invest are tax-deductible.

5. If you buy a mutual fund in December, 2005, and the fund makes a taxable distribution in that month, you are not liable for the resulting tax in the 2005 calendar year.

6. You can reap the tax benefits of a donation to charity in your 2005 tax submission provided the donation is made before the end of February, 2006.

7. You are allowed to contribute up to $4,000 each year to a registered education savings plan and if you miss that contribution in any year, you can carry the contribution room forward to a future year.

8. You can pay for adult children to take care of younger children in your household and deduct the cost of child care expenses.

9. A parent can take advantage of their child's unclaimed credits for tuition to a maximum of $5,000 of tuition and fees.

10. For a tax credit, you can include all of your family's qualified medical expenses on your tax return.

The answers

1. True. Deferring tax on a capital gain can be done using the "capital gains reserve." (58 per cent got it right.)

2. False. You can in fact trigger usable capital losses by gifting shares to a child. (Only 46 per cent got it right.)

3. True. No big surprise that most Canadians understand this about RRSPs. (93 per cent got it right.)

4. True. Interest will be deductible, as a general rule, if you have a reasonable expectation of earning income from the investment. (62 per cent got it right.)

5. False. You'll face tax in the year of the distribution if you are a unitholder on the distribution date. (71 per cent got it right.)

6. False. Sorry, but you've got to make your donations in the calendar year to be entitled to a tax credit. (Only 44 per cent got it right.)

7. False. Use it or lose it. If you fail to contribute to an RESP, that contribution room is not carried forward as it is with RRSPs. (Only 33 per cent got it right.

8. True. Yes, a child 18 or older can babysit those 16 or younger. Even if the kids are yours, the payment to your 18-year-old may be deductible as child care expenses. (Only 43 per cent got it right.)

9. True. This one should have been a no-brainer for students or those with kids receiving postsecondary education. (Only 60 per cent got it right.)

10. True. Most knew this. (78 per cent got it right.)

Tim Cestnick, FCA, CPA, CFP, TEP, is a tax specialist and author of Winning the Tax Game 2005 and The Tax Freedom Zone.

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