Losing a job is a traumatic event in anyone’s life.
But for Mary Campbell, it turned into a tax nightmare.
The Georgetown, Ont., resident was given a retirement package from her employer in 2005, and took some of the money from her settlement to top up her registered retirement savings plan.
As she had done for many years, Campbell completed her 2005 income tax on her own, expecting to get a refund because of the contribution she made to her RRSP.
To her horror, she got a notice back from Canada Revenue Agency saying she owed them $8,700.
Campbell receives a disability pension and is on a fixed income, and was unable to come up with the payment for the CRA.
Campbell went to the local branch of H&R Block for help.
The agent reviewed her tax return and discovered that Campbell’s employer had made a mistake when it filled out the T4A form and had not recorded that some of the settlement funds were eligible for an RRSP contribution.
To make matters worse, that error resulted in Campbell’s RRSP contributions exceeding her allowable limit and she was charged by CRA with a penalty for over-contributions.
What followed were a series of letters and meetings with Campbell’s employer to educate them on the error and how to avoid it in the future, and eight appeals to the CRA to try and correct the mistake.
Last year, the issue was finally resolved and Campbell received a cheque for $9,000 in back taxes with interest. However, CRA still is trying to determine Campbell’s RRSP contribution limit.
“The lesson learned is that if you have a major change of any kind like this in your life, it’s a good idea to talk to a professional and get some help, because it could affect your tax situation in ways that most people wouldn’t know,” said Cleo Hamel, senior tax analyst with H&R Block.
Major life-changing events, such as losing a job, getting married or entering into a common-law relationship, having children, a death in the family, taking a retirement package, or graduating from school and entering the workplace, all can have tax implications.
Virtually anyone it seems — taxpayers, employers and the tax department itself — is capable of making mistakes.
A recent report found that CRA has issued at least $3 million in paycheques to people who don’t work there. In the 2005-06 fiscal year, 1,922 people received pay they didn’t deserve, and that figure rose to 2,258 the next year.
H&R Block lists the following top five tax mistakes that taxpayers make:
• Not filing an income tax return. Even if you don’t earn any income, file a return, because you still may qualify for credits and deductions that result in a tax refund.
• Caregivers not claiming a non-refundable tax credit, including parents taking care of infirm children 18 and over, or children taking care of infirm or elderly parents.
• Not claiming certain moving expenses that are tax deductible, provided you are moving 40 km closer to work or school.
• Not claiming premiums paid to private health plans, as a medical deduction.
• Failing to keep all receipts and supporting documentation, even if you file electronically.
“There’s also a common misconception among people who have lost their jobs and collect unemployment insurance that they are making less money and will pay less tax and get a refund,” said Hamel.
If you lose your job and receive unemployment insurance, you may have to pay more in tax than you think. For example, if you made $50,000 a year gross, you are eligible to receive $35,000 in unemployment insurance payments. Ten per cent of these payments are withheld at source for tax, however, the minimum tax rate is 15 per cent.
When you file your tax return you will have to make up that five per cent shortfall, Hamel noted.
Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors. He can be contacted at email@example.com.