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By: Brenda Bouw
You Ask, We Answer
Financial Post
May 4, 2002
Question
In April, 2002, I will be receiving a low five-figure bonus
from the company I work for; 50% of the bonus will be cash, the
other 50% will be company stock. Neither of these are being taxed
by my employer. Other than maxing out my RRSP limit early in the
year, is there anything else I can do with this bonus that might
lower my 2002 tax burden?
Answer
Adrian Mastracci, a fee-only investment counsellor at KCM
Wealth Management Inc. in Vancouver, says a bonus from your
employer is fully taxable as income when received. You may be able
to defer the receipt of the bonus for up to three years, provided
your employer agrees. If you receive the bonus in 2002, then prepare
an estimate of your taxable income projection for all the incomes,
expenses and tax credits likely to be received this year.
This provides the opportunity to plan your tax matters early in
the year for deductions such as charitable donations, accounting
fees, investment counsel fees, and medical expenses. All of these
must be paid by Dec. 31 to be deducted in 2002. Mr. Mastracci
says you may also consider a tax deferral project; however, the
investment merits of many of these have been less than stellar.
They also make sense primarily in the higher tax brackets.
Another approach, according to Mr. Mastracci, is to determine
if you can defer the receipt of any other income from this year
into a subsequent year. "If you have a spouse in a lower tax
bracket, or receiving little or no income, you may consider a loan
to your spouse at the prescribed rate of 2%. This is a form of income
splitting and must be done by June 30, 2002. The benefit is a reduced
taxation on the investment income you would normally receive,"
Mr. Mastracci says.
Question
My father passed away this past November. He had received a form
to reapply for the disability deduction about two weeks prior to
his death. How do we handle this on his income taxes?
Answer
Tim Geoffrey, a chartered accountant in Ontario, says if your father
was disabled during the year of his passing, then he is entitled
to claim the disability tax credit on his terminal return.
The non-refundable disability tax credit amount for 2001 is $6,000.
Terminal returns cannot be e-filed with CCRA and therefore the application
form should be completed by his attending doctor and enclosed with
the tax return. Mr. Geoffrey says to please be aware that the income
tax rules associated with the death of a taxpayer are extremely
complex and may require that you seek professional advice.
Adrian Mastracci, fee-only investment counsel
at
KCM Wealth Management, says, “You may be able to defer the
receipt of the bonus for up to three years, provided your employer
agrees.”
Question
How old do you have to be before you can contribute to a RRSP? My
daughter is 15 (16 this year) and has "earned income"
of $3,000 on her 2001 income tax. She has been filing income tax
for 3 years now, earning about the same income each year. This income
includes interest/capital gains, from mutual funds from her direct
deposited child tax benefits.
Answer
Paul Lambe, a financial planner in Ontario, says you can contribute
to an RRSP at any age. There is an over-contribution of $2,000 that
can be contributed in any year, but can not be deducted until RRSP
contribution room is attained. You will get RRSP contribution room
on earned income only. For practical purposes, the Income Tax Act
excludes such "passive" taxable income as interest, dividends,
royalties, ordinary annuity income, pension income, etc. from the
element of income upon which the RRSP maximum will be based.
"Earned income" includes only certain salary or wages
before CPP/QPP, EI and RPP deductions. You can check the "Notice
of Assessment" sent to taxpayers by CCRA after you file your
tax return for your RRSP contribution and deduction information.
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