"Mom, can I have another orange pop?"
"Yes."
Not sure I heard her right, I asked again. "Yeah, ah... Mom, I wanted another treat. Is that okay?"
She barely acknowledged my anxiety. "Sure thing. And have a hotdog too! It's your birthday!"
I ate with deliberate glee, then asked yet again, and eventually finished off four hotdogs and at least two bottles of orange pop, along with my cake.
Running, playing, gleefully enjoying my special day, I was especially glad to have my little four year-old friends to join with me, including the lovely Collette, who was convinced we would grow up and marry, chasing me around the house incessantly trying to kiss me and hold my hand.
"Oh stop it some more!" I invited, running just slowly enough to be within reach of her adorableness.
But running and cake, and excitement and hotdogs and orange pop and the nervousness of a cute girl have their own agenda when in the belly of a four year-old, even on his special day. At the top of the stairs, I halted suddenly, bent over, and unleashed a large orange puddle of stomach contents.
It actually didn't look that bad. It was a nice mix of colours and shapes, the intimate details of which I will spare the reader. The abdominal relief was genuine.
I may have been relieved but my little wife-to-not-be was disgusted. She stood there, hands on her hips, alternately glancing at me and my body of work, horrified. Our brief betrothal ended in a heap of hotdogs and orange crush.
Having your RRSP Cake and Eating it Too:
Minimize Withholding Tax
Generally when your employer pays your bonus or lump sum payment to you, they are required by law to deduct withholding tax at source. Then, if you wish, you can contribute the net amount to your RRSP, but you receive the benefit of the tax savings only when you file your income tax return the following year.
There is an exception that allows your employer to contribute your bonus or lump sum payment (including an ineligible retiring allowance) directly to your RRSP or spousal RRSP without withholding tax. In order to do this, you must have enough unused RRSP contribution room. The benefit of transferring the amount directly to your RRSP without withholding tax is that you can invest the full amount, rather than the net after-tax amount, and you don't have to wait until you get your refund cheque to invest the rest.
How it works
There is no prescribed CRA form for this direct contribution.
In order to have the gross amount transferred without withholding tax, your employer needs to have reasonable grounds to believe that you can deduct the RRSP contribution for the year.
Providing your employer with a copy of your most current Notice of Assessment, which indicates your RRSP deduction limit, might be sufficient for their records. In addition, they may ask you to sign a confirmation that the contribution can be deducted for the year.
In order to reduce the withholding tax, your employer must transfer the bonus or lump sum payment directly to your RRSP or a spousal RRSP. You cannot receive the gross amount and then contribute it to your RRSP free of withholding tax. The transfer must be done directly to the RRSP to reduce the withholding tax.
An alternative option exists in which you make RRSP contributions yourself during the year. Your employer is able to reduce withholding tax on your regular paycheque and your bonus if they know you are contributing to your RRSP or a spousal RRSP. In order for your employer to reduce withholding tax you will need to provide them with a copy of a letter of authority that the Canada Revenue Agency (CRA) has issued to you. To obtain a letter of authority, you need to send the CRA a completed Form T1213, Request to Reduce Tax Deductions at Source for year(s) ____, or a written request to any tax services office. You should include documents that support that you will contribute to your RRSP (for example, provide back-up for your previous RRSP contributions) to prove that less tax should be deducted at source.
Please note that your employer is not obligated to provide this service to you and reduce withholding tax. Some employers will not transfer the bonus or lump sum payment without withholding tax to your RRSP and instead will only pay the gross amount directly to you, which will be subject to withholding tax.
This information is not intended as nor does it constitute individualized tax or legal advice. Readers should consult a qualified legal, tax or other professional advisor when planning to implement a strategy.
Mark Ryan is an advisor in Prince George with RBC Wealth Management, Dominion Securities (member CIPF) and can be reached at [email protected].
