November is Financial Literacy Month, which was launched virtually on Monday by Financial Consumer Agency of Canada commissioner Judith Robertson. “I encourage Canadians to take some time this month to learn more about how they can improve their financial resilience,” she said in a news release.
A big part of financial literacy, and the theme of week one of the four-week program, is a focus on managing expenses to keep up with bills and credit expenses. For many Canadians, taxes can be the family budget’s top expense. That’s why tax literacy, specifically, is of paramount importance.
How tax literate are you and how do you compare with the average Canadian when it comes to your tax knowledge?
Some academics were determined to explore just that by conducting a detailed survey on the topic. The results, along with their conclusions on the findings, were published in the Canadian Tax Journal last year. The paper was co-authored by Anthony Pham, Luc Godbout, and Jean-Herman Guay of the Université de Sherbrooke, and Antoine Genest-Grégoire of Carleton University.
“Tax is an important component of financial management,” the authors said in their introduction. “A large portion of personal income is dedicated to paying taxes, and tax law interacts with work and savings decisions in complex ways. Individuals’ understanding of personal income tax is thus an important element in furthering governments’ objectives regarding financial literacy.”
But what exactly is tax literacy?
In the simplest terms, tax literacy can be described as “having the knowledge, skills and confidence to make responsible tax decisions.” In other words, in order for us to make responsible tax decisions, we must be able to understand and correctly predict the tax implications of our choices. As a result, tax literacy does not exclusively rely on knowledge about detailed tax law itself, but goes further and tests our ability to be able to appropriately apply that knowledge to real-world situations, with confidence.
To test Canadians’ tax knowledge, the authors gave respondents multiple-choice or true/false questions about tax knowledge, their confidence in that knowledge and their tax-filing behaviour. The survey is a more expansive and thorough follow-up to a 2017 study in which the authors surveyed 1,000 Quebec residents about both sales tax and income tax.
The new cross-Canada survey, which solely focused on income tax literacy, was conducted by Leger in the spring of 2019, with results weighted to be representative of the population in terms of age, gender, region, language, education, presence of children at home and income level. The authors measured tax literacy by asking respondents a variety of questions, which cover the taxable nature of different sources of income, the way credits and deductions differ, tax progressivity and the unit of taxation.
Want to know how you’d do? Take a bit of the test for yourself (answers below).
Question 1
To your knowledge, are these items taxable or not?
a) Withdrawal from a registered retirement savings plan (RRSP) other than to study or to purchase a home
b) Withdrawal from a tax-free savings account (TFSA)
c) Employment insurance benefits
d) Lottery winnings
e) Child support received (after 1997)
f) Profits from selling a primary residence for more than it was originally bought
Question 2
Taxpayer A and Taxpayer B, both single individuals, each deduct a $1,000 contribution to their RRSP. Taxpayer A has an annual income of $50,000 and Taxpayer B has an annual income of $100,000. Which of these statements is true?
a) Taxpayer A will see his taxes reduced by a larger amount than Taxpayer B
b) Taxpayer B will see his taxes reduced by a larger amount than Taxpayer A
c) Both Taxpayers A and B will see their taxes reduced by the same amount
d) Neither Taxpayers A nor B will see their taxes reduced
Question 3
Couple A has someone with $100,000 in income and someone else who has no income. Couple B has two people who both make $50,000 in income. Which of the following statements is true?
a) Couple A will pay more income tax
b) Couple B will pay more income tax
c) The two couples will pay the same total amount of income tax
How did Canadians do?
The average global mark on the eight-question survey was 50 per cent, which isn’t great. Men did better than women, on average, as did homeowners compared to tenants. Age, education and family income were also all associated with higher results on the survey.
Spoiler alert! — Most respondents (77 per cent) knew that RRSP withdrawals are taxable, while TFSA withdrawals (69 per cent) and lottery winnings (64 per cent) were not, but only 20 per cent of Canadians realized that higher-income earners get more bang for their buck from an RRSP contribution. And only one-third of Canadians understand that our tax system, due to its progressive nature and graduated rates, taxes an individual at a higher rate than if that same income was split equally between a couple.
All this is to say that our overly complex tax system, with its myriad rules, regulations and ever-changing judicial interpretation, remains obfuscatory and beyond many taxpayers’ grasp. That’s why financial and tax literacy need to stay at the top of our agenda, not just this month, but throughout the entire year.
Answers: 1 a) Taxable, b) Non-taxable, c) Taxable, d) Non-taxable, e) Non-taxable, f) Non-taxable; 2) b; 3) a