ADVICE GONE WRONG
A senior takes free help for her taxes from a friend. It ends up costing her $5,000.
People who have the least amount of money and the narrowest margins of financial security often have the fewest places to turn for help.
Banks and financial planners aren’t interested because they don’t generate fees or have money to invest. Their friends and social circle are unable to help because they’re in the same boat. So, they muddle through, sometimes with disastrous consequences.
Here’s a story that illustrates the point.
Mary is 67 and owns a small house in Toronto that badly needed some repairs. She lives on $15,600 a year, getting $1,300 a month, made up of $300 from the Canada Pension Plan, $500 from old age security and $500 from the guaranteed income supplement (GIS).
Mary has been able to hang on to her mortgage-free home by the skin of her teeth, but has been hard pressed to maintain it. She faced some critical basement repairs that cost $10,000 and wondered whether it made sense to cash in her only savings — $12,000 in RRSPs.
Mary lives a debt-free life, preferring to pay as she goes.
“So I thought it best to cash in my RRSPs rather than take out a line of credit,” she says.
For advice, Mary turned to a woman who has done her taxes, along with many others in a nearby seniors apartment. She asked whether there was any downside to cashing in the RRSPs. She was told that since her income was so low, a $5,000 increase in any one year would not make a difference to her tax bracket.
Cashing in the money over two years would cost the minimum in withheld tax.
When you cash in your RRSP, the bank keeps a portion for the Canada Revenue Agency against the taxes due.
If you withdraw $5,000 or less, 10 per cent is withheld, in Mary’s case $500. Above $5,000 and less than $15,000, the amount withheld is 20 per cent, so at $5,001 the amount becomes $1,000.
The well-meaning, but incomplete advice cost Mary half of her GIS payment, or about $250 a month. That’s because the GIS is means tested and as her income rose, her GIS was reduced.
“Cashing in $10,000 worth of RRSPs cost me $5,000,” Mary said. “I thought (the woman who helps me) would know the ins and outs of a low-income senior’s tax situation. Had I taken a line of credit loan over two years, while I get the house ready for sale, it would have cost me about $783.”
I referred Mary to our Money Makeover feature, which offers readers a free review of their personal finances by experts. Her full story will appear Friday.
As tax seasons rolls around, don’t make the same mistake. If you are a student, or live on a modest income, there are places to go for free help:
The Chartered Professional Accountants of Ontario (CPAO) holds free tax clinics between mid-February and April. Last year, 2,300 volunteers did 24,000 tax returns, says spokesman Perry Jensen.
Visit cpaontario.ca and look for ‘Tax Preparation Assistance Program’ under the ‘Serving the Public’ drop-down. Individual phone numbers are available on the site.
To qualify for a 30-minute one-onone, the return must be simple and household income must be less than $35,000 with dependants or $25,000 without. You will also need last year’s return, notice of assessment and receipts showing income and expenses.
The CRA offers free help through community organizations. It offers tax preparation clinics and helps prepare returns for people with modest incomes. Google: “CRA voluntary tax program” or go to the CRA’s site. You’ll find a list with phone numbers and contacts.
H&R Block prepares about 2.5 million tax returns a year and offers a service for families with income under $20,000.
Caroline Battista, senior tax analyst with H&R Block Canada, says they give out 20,000 gift certificates to non-profit groups who pass them on to people who can redeem them at H&R Block offices. More than 25 per cent of these gift certificates are distributed in Ontario, she says.
Turbo Tax, owned by Intuit, is used by five million Canadians a year, says spokeswoman Julie Smithers. It offers free online returns for students earning less than $20,000 a year.
Another free version is available for families earning less than $20,000 a year. Turbo Tax is free for members of the military and a SnapTax app is available for iPhones and iPad. It handles simple tax situations, deductions and slips, also for free.
Ufile, part of the Thomson Reuters family, offers free returns for students, those with incomes under $20,000 and those filing for the first time. Adam Mayers writes about investing and personal finance. Reach him at amayers@thestar.ca.