Do-it-yourself Tax Returns

I have seen too many seniors try to cheap out on tax advice.  If the cost of a professional is too high, stop complaining about high taxes—because you are not even exploring the possibility of savings.

Retiring Allowances

Yesterday, Alex called from London with great news, he’s finally retiring. He’s receiving a retiring allowance from his employer and wants so help in tax planning.  A retiring allowance is money received on or after retirement in recognition of long service.  It can include payments for unused sick leave credits and/or severance packages and payouts.  For tax planning, having funds designated as a retiring allowance regardless of your age qualifies for additional RRSP contribution amounts and does not affect your current contribution amounts.  Companies can also offer the payout over two or more years so they don’t have to come up with the funds right away; then the employee can plan to take income over a few years to spread out any possible tax liability.

Alex began working with his company in 1983 and is about to receive $40,000 as termination pay, $2500 for unused sick leave, and $1500 for vacation pay. His retiring allowance is calculated as $42,500.  He wants to know the best way to shelter the payout from a big tax hit. He was allowed to contribute to an RRSP a combination of $2000 per year before 1996 and an additional $1500 per year of service before 1989.  In Alex’s case, he can transfer all of the money tax-free to an RRSP.  If Alex wants to take it out one day after the transfer he can.  He can now decide when to trigger the tax and how much.

Severance Strategies

Losing a job raises a lot of concerns, not to mention tax planning concerns. Will from Chatham came in the other day and asked me for some help on his company severance package. First, we talked about negotiating to take his severance over two years to spread out the tax liability. Second, we made sure that he topped up his unused RRSP contributions.  Severance income can often be offset with RRSP rollover based on eligible service.  Using remaining severance payments to top up previously unused RRSP room can also be effective, especially over several years.  Third, we discussed the possibility of withdrawing from RRSPs, if necessary.  When cash flow falls short of needs, withdraw RRSP accumulation in a lower-income year.  Fourth, we took into account all the possible refundable tax credits to which he is entitled and offset income taxes payable with these amounts, even if that means projecting taxes forward a couple of years.  This gives him a true net tax cost that relates to his cash flow timing. It can sometimes be better to forego some tax credits available in the future in order to minimize taxes payable today. 

The final part of his planning came down to his pension plan.  He had the option of transferring his pension plan to a locked-in RRSP or keeping it with his former employer.  The pension plan hadn’t performed well over the past few years so Will decided to transfer out the funds to a portfolio that is in line with his risk and time horizon.  Will now has less tax worry when it comes to his severance.