Q: Last year, I contributed to my Registered Retirement Savings Plan (RRSP). I did not claim the deduction, as I did not have taxable income.
That year I withdrew the same amount (less taxes). To my surprise, I received a T4RSP for this withdrawal. If I understand correctly, I must report this on my tax return and pay the tax.
This does not seem fair! Why must I pay tax on an amount when I never received the tax deduction?
A: For all the procrastinators out there, Thursday, March 1 is the deadline for making an RRSP contribution that can be deducted on your 2006 tax return.
Your situation occurs more frequent than not. Generally, this scenario could occur when an individual contributes to their RRSP in the unlikely event they have a large income tax liability.
After completing their tax return, they discover they may not require the RRSP deduction. Subsequently, they withdraw the undeducted RRSP contribution.
Voilà! The bank mails the taxpayer a T4RSP. T4RSP income must be reported and included on an individual’s personal tax return.
To avoid paying tax on withdrawals of an undeducted RRSP contribution, taxpayers must claim a deduction on line 232 of the tax return. This deduction will offset the T4RSP income and get your withholdings taxes refunded. Issues such as these should be discussed with your tax adviser to avoid paying unnecessary taxes.
Q: Recently, I started an incorporated business. I am the sole shareholder. If I pay myself a salary, will I be subject to Canada Pension Plan (CPP) and Employment (EI) withholdings?
A: Corporations are considered separate entities for tax purposes. Employers (corporations) must withhold employees’ CPP and EI contributions at source and remit to CRA with the employer’s portion.
However, certain employment income is not subject to EI. One such exclusion is an employee who controls more than 40 per cent of the voting shares of the company.
In this instance, you own 100 per cent of the corporation and therefore you’re excluded from EI contributions. You can obtain more information by visiting CRA’s website or contacting an accountant.
Q: My husband and kids purchase TTC Metro passes every month. Can they claim the cost for the passes in 2006 on their tax returns?
A: This long overdue tax credit for the working person took effect on July 1, 2006.
The credit is available on (at minimum) monthly or longer passes. Individuals can claim a non-refundable tax credit, starting from July 1, 2006, for the cost of TTC and other forms of transportation.
If your kids are under 19 years of age, it may be more advantageous for you or your husband to combine all the TTC monthly pass costs and make the claim on one tax return to maximize your tax credits.
Henry Choo Chong, CGA, provides accounting and tax services to individuals and businesses in the GTA. He can be reached at 416-590-1728, Ext. 304. Any questions to Money Matters should be e-mailed to firstname.lastname@example.org.