Financially Speaking – Transferring a Bonus or Other Lump-Sum Payment to an RRSP without Withholding Tax

Financially Speaking – Transferring a Bonus or Other Lump-Sum Payment to an RRSP without Withholding Tax

The financial advice in this column has been provided by Philippe Pomerleau, F. Pl.
RBC Financial Planning

If you receive a bonus or other lump-sum payment as part of your compensation package, consider requesting your employer pay the bonus or lump-sum directly into your RRSP – provided you have enough unused RRSP contribution room – to avoid the withholding tax.

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 will 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. As well, you don’t have to wait until you get your refund cheque to invest the rest.

How it works
There is no prescribed Canada Revenue Agency (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. 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.

For more information you get in touch with Philippe via the contact details below or visit his website.

Philippe_Pomerleau_RBC

About Author

Philippe Pomerleau

Philippe Pomerleau has worked in the financial sector for years. He is based in Quebec City and speaks English and French.

Write a Comment

Only registered users can comment.