Quote:
Originally Posted by Cappy
Question for the accountants in here.
My wife ended up having to pay CRA this year. First time she has had to.
She earns a salary and has modest investments (mostly RRSP).
She received two bonuses this year and asked for them to be put in her RRSP (tax deferred). They ended up on her T4 as income and then gets dinged for a few grand in taxes.
This seems wrong to me, no?
The upgrade in income from salary and bonus didn't push her into another tax bracket, so i don't see that account for being under-taxed. So i am assuming its because the Company paid the bonus tax free direct to her RRSP, then counted it as income on t4?
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Assuming $100K salary, $10K bonus, $10K RRSP contribution...
T4 should show $110K in compensation because the $10K (although deferred) is actual compensation received during the year (it's legally her money)
Your wife should have a $10K RRSP contribution slip which is a deduction.
Taxable income should then basically be for those items $100K.
Now keep in mind, tax deferral is not the same as tax savings.
Use your RRSP correctly, you're reducing your taxable income in the higher tax brackets and withdrawing when retired (presumably) in the lower tax brackets. That spread is a tax savings.
But tax deferral (ie: pay taxes later) if used incorrectly, can often mean you pay more taxes than if you didn't defer at all. That's because the deferred amounts come into taxes all at the same time, which means it potentially is taxed in higher tax brackets than the bracket it was deferred from.
Like delaying a minor plumbing repair to preserve cashflow for a leak that's a few drips vs delaying too long and the damage is far worse than the cost of just doing the repair earlier when everything flushes out at once.
Now, I seriously have to ask... by "dinged a few grand in tax", what do you mean?
Total payable (line 43500) vs the amount you have to pay at year end (Total payable line 43500 minus Total credits line 48200) are different things. There's a difference for each line if you say, "How do I reduce my taxes owing?" I have run into this confusion many times.
For line 43500, it's basically to reduce your income or ensure you have all your appropriate deductions at year end. For balance owing, it's stuff like increasing deductions from slips, paying installments etc. to prepay your tax balance prior to filing your tax return.
Additionally... the income tax deducted on the tax slip is not a calculation of taxes. It is just an amount that is prepaid to the CRA for taxes that will be owed once the taxes are calculated with everything included.
So, it's not "bonus paid tax free to the RRSP account" then counted as income on the T4 slip. It's more like bonus transferred to the tax account with no prepayment of tax to the CRA before transfer.
On a side note. If people want the CRA to do more auto-filing of taxes for basic returns, my understanding is that many countries that do this are able to do this because many wages have a significantly higher amount withheld per year. Many people are in refund positions vs owing positions for this foreign government auto filing program to work as smoothly as it does. IDK how many people would be as happy if there was a requirement for an extra 10-20% withheld on basically everything. I guess it incentivizes people to review and approve an auto filed return ASAP?