Money

Track ex­tra in­come to avoid a CRA am­bush

ZOOMER Magazine - - CONTENTS - By Gor­don Pape

How to avoid a CRA am­bush

tHERE ARE LOTS OF THINGS that can go wrong in life. One of the most stress­ful is run­ning into prob­lems with the Canada Rev­enue Agency (CRA). Once they get their hooks into you, th­ese folks don’t let go. They can even go so far as to gar­nishee your wages, seize your as­sets and put a lien on your house. You don’t want to tan­gle with them.

Un­for­tu­nately, some peo­ple do, of­ten through no fault of their own. The re­sult can be a lot of sleep­less nights.

Let’s con­sider the case of a re­tired high school his­tory teacher in Man­i­toba who is draw­ing a full pen­sion. She was a saver all her life, tucking away ev­ery spare penny in an RRSP. Three years ago, in 2015, she turned 71. She was re­quired by law to con­vert the plan to a RRIF or to buy an an­nu­ity. She chose the RRIF.

On Jan. 1, 2016 the RRIF had a value of $400,000. The min­i­mum with­drawal re­quire­ment for her that year was 5.28 per cent of that amount, or $21,120. She took the money in quar­terly in­stal­ments and used some of it to go on a cruise and the rest to help buy a new car.

Then April 2017 came around, and she sat down to pre­pare her tax re­turn. She was shocked to find she owed about $8,000 – money she didn’t have.

What hap­pened? What our teacher didn’t re­al­ize is that no with­hold­ing tax is re­quired on RRIF in­come if you don’t take out any more

than the min­i­mum amount. But at the end of the year, the RRIF in­come must be de­clared on your tax re­turn, at which time it is taxed at your mar­ginal rate. Her teacher’s pen­sion, Canada Pen­sion Plan and Old Age Se­cu­rity put her in a 37.9 per cent mar­ginal tax bracket, and her RRIF in­come was taxed ac­cord­ingly. Af­ter the ini­tial shock, she spent the next sev­eral months scram­bling to pull to­gether the money to pay off the CRA.

What could she have done dif­fer­ently? She could have in­structed the RRIF ad­min­is­tra­tor to with­hold tax from each RRIF pay­ment, based on her es­ti­mated mar­ginal rate of 37.9 per cent. At tax prepa­ra­tion time, the amount with­held would be cred­ited to her ac­count, and she would have ended up owing noth­ing to Ot­tawa. That’s ex­actly what she is do­ing now, and her fi­nan­cial life is back on track.

Ev­ery­one who is earn­ing ex­tra in­come, whether from a RRIF, part­time work or in­vest­ments, needs to take steps to en­sure they don’t end up owing thou­sands of dol­lars in tax at year-end. Step 1 is to es­ti­mate how much money in to­tal you will re­ceive from all sources this year. From that, deduct the ba­sic per­sonal amount ($11,809 for 2018) and any other tax credit amounts for which you are el­i­gi­ble. The re­sult will ap­prox­i­mate your tax­able in­come for the year.

Then go to the free on­line tax cal­cu­la­tor pro­vided by the EY ac­count­ing firm at www.ey.com/ca/en/ser­vices/tax/tax-cal­cu­la­tors. En­ter your es­ti­mated tax­able in­come, and you’ll see the mar­ginal tax rate that will ap­ply to any ex­tra earn­ings (there’s a lot of other in­for­ma­tion as well, which may be use­ful).

Fi­nally, ask that tax at your mar­ginal rate be with­held from your RRIF, part-time in­come or what­ever. When fil­ing time comes around next year, you should be in the clear. Maybe you’ll even get a re­fund!

Gor­don Pape is the ed­i­tor and pub­lisher of the In­ter­net Wealth Builder and In­come In­vestor news­let­ters. Visit his web­site at www.build­ing­wealth.ca.

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