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
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.