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Minimize your tax obligation

<p>Last week, I was offered a retirement package. I worked for more than 30 years at the same company. The package is just more than $100,000. I estimate my RRSP contribution limit at approximately $14,000, based on if I take this package and retired in four months.</p>




Through an RRSP, you can defer taxes from your income earned by investments. For more on RRSPs, check out today’s special RRSP guide.





Q: Last week, I was offered a retirement package. I worked for more than 30 years at the same company. The package is just more than $100,000. I estimate my RRSP contribution limit at approximately $14,000, based on if I take this package and retired in four months. To minimize my income taxes should I contribute to my wife’s RRSP? Can you suggest other ways to reduce my income tax burden?







A: Should we spend as our governments are prompting us to do or save and invest for our retirement? For the average taxpayer, contributions to an RRSP offers tax savings in the year of the contribution, a deferral of income taxes from the income earned from the investments and a tidy sum of money for retirement that complements the government’s Old Age Security (OAS) and Canada Pension Plan (CPP).





Here are several options for you to consider that could minimize your income tax obligation:





Contribute the maximum RRSP deduction limit for the year. Check your prior year’s income tax assessment for RRSP deduction limit. To do a quick check, this amount is determined by adding the current year’s limit. This is the lesser of: 18 per cent of your prior year’s earned income (less pension adjustments) and $19,000. Also add your carry-forward RRSP amounts not previously deducted in prior years.





Rollover to an RRSP for special eligible payments received. Under the income tax act, specific amounts received due to recognition of long service of employment may qualify to be transferred into a special RRSP. The eligible retirement allowance is determined by the number of employment years of service between 1989 and 1995 multiplied by $2,000 and the number of years prior to 1989 times $3,500. Depending on the circumstance, you may qualify for approximately $50,000 as a retirement allowance that maybe rolled into an RRSP. This amount is above and beyond your normal deduction limit.





If your retirement package is received over more than one year, you must report the amounts as they are received. Payments received over several years will effectively reduce your marginal tax rate and result in lowering the tax payable. Speak to the human resource department of your firm and discuss if this is an option.





A contribution to a spousal RRSP will not necessarily reduce your income taxes, as your total contributions to you and your spouse’s RRSP cannot exceed the deduction limit for the year. Before accepting any package, speak to your accountant or lawyer to determine the conditions, if the amount is sufficient, particularly for younger workers and the tax consequences.

















Henry’s tax tips (individual):



  • Most taxpayers must file their 2007 individual income tax return on or before April 30, 2008.

    Taxpayers who file after this date and owe CRA will be subject to late penalties. However, taxpayers who file after this date and are entitled to a tax refund will not be subject to late penalties.




  • Non-incorporated (sole proprietors) business owners and their spouse must file their 2007 income tax return on or before June 15, 2008. However, any income taxes owing must be paid on or before April 30, 2008.




  • For RRSP contributions to be deducted on your 2007 income tax return, they must be contributed by Feb. 29, 2008.

    You may deduct RRSP contributions made by you to either your RRSP or a spousal RRSP. Contributions made by your spouse are not deductible by you.




  • First time homebuyers may withdraw up to $20,000 each from their RRSPs to purchase a home. This amount is not taxed when it is withdrawn. However, you must repay your RRSP the second year following the withdrawal.

    To calculate the annual repayment amount divide total by 15 years.




  • Employees may deduct expenses if it is a requirement of their employment. The taxpayers must have a signed T2200 form (employment expense deduction) from their employer. Some eligible expenses qualify but are not limited to: home office, travel, meals and entertainment, etc. Ask your employer for this form if you are not sure.





choochonghcga@yahoo.com





Henry Choo Chong, CGA provides professional accounting and taxation solutions for individuals, businesses and corporations. Henry can be reached at 416-590-1728, ext. 304. E-mail all questions to Money Matters: choochonghcga@yahoo.ca.

 
 
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