Page 27 - Newcom

Tax planning
Marvin Khoshkhassal: We can assume they’re Can- adian residents for tax purposes: Natalia’s employer is from Canada, their ties are more in Canada than Argentina, and the move is short term (the contract is for one year).
There’s definitely room for tax planning. Wilson’s severance pay will be treated as employment income — subject to Wilson’s normal withholding rate based on his tax bracket, and also subject to deductions (such as employment insurance and Canada Pension Plan contributions).
How much tax Wilson pays depends on how his employer pays his severance. If Wilson gets his severance as a lump sum, he could ask his employer to transfer some or all of the severance directly to his RRSP with no income tax deducted.
However, he must have enough contribution room available to transfer the non-eligible severance pay, which is for employment years after 1996; otherwise there
will be high penalties. Eligible severance pay, which is
for employment years prior to 1996, can be transferred
to the RRSP without impacting contribution room. The employer will provide further information.
Wilson can also ask for the severance as a deferred payment over two or more years. Since he’s going to be off work for at least a year, it would make sense for him to ask his employer if they can defer pay-
ments to two calendar years.
Let’s assume he’s going to be unemployed for two years. If he splits his severance pay and receives $125,000 each year, he will already be in a high tax bracket — 43% com- bined federally and provincially in Ontario. Every dollar after $100,000 will be taxed
at 43%. If he can defer his severance, only $25,000 would be taxed at 43%, instead of $150,000 if he takes it all at once.
James McCreath: There’s always a risk of employer insolvency, which factors into whether Wilson wants to receive that pay- ment in a lump sum or over two years.
MK: If he has enough available contribution room, then he doesn’t have to take that busi- ness risk and he can transfer the full sever- ance into the RRSP. That would be the best scenario. He can take it out whenever he wants to and pay tax on it.
Also, Natalia can deduct moving expenses to and from Canada. She should claim rea- sonable amounts for moving expenses, household items, transportation costs, storage costs, travel expenses, meals and accommodations, and temporary living expenses up to 15 days.
Financial planning
holistic planning
“Resident status is not defined in the Canadian Income Tax Act. It’s based on facts and the courts look at it case by case.”
David Harris: One of the first things they can do is cre- ate a monthly budget. Their monthly cost of living should include their mortgage in Canada and any other continu- ing expenses.
The average cost of living in Argentina is $2,600 a month, and their mortgage is $2,500, so we have a monthly budget of $5,100 per month, or $61,200 per year. Since they want to travel when they’re in Argentina, let’s plan for another $20,000, bringing their yearly total to $81,200.
Natalia’s after-tax income would be $83,755 based on a 43% federal and provincial tax bracket, so they’ll be OK for the year.
They can use some of Wilson’s severance for a rainy day fund covering three months of expenses.
JM: Whatever excess capital they have from the sever- ance that they don’t need for a rainy day fund I would split between paying down debt and long-term investing for retirement. Wilson has a TFSA, which would be the natural place to put it if the RRSP ends up being maxed out.
DH: Natalia and Wilson will also rent their home out to offset some of the mortgage payments.
MK: When you change your principal residence to an income-producing property, however, this is considered a change of use to a business property, which means there’s a capital gain after selling for the year they rented it out.
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