Refiling taxes -- RRSP ERROR
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  1. #1
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    Refiling taxes -- RRSP ERROR

    Hi Everyone,

    I was speaking with a colleague and from a house sale she did a MONSTER RRSP contribution of around 70K in 2015. On her 2015 taxes she claimed the ENTIRE 70K RRSP deduction even though her income was only 70K. This is obviously very stupid b/c she effectively claimed RRSP deduction on a portion of her income that she didn't even pay taxes on. OUCH.

    She can simply refile her 2015 taxes and fix things up right? That's not an issue is it?

    Thanks

  2. #2
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    Depends on what you mean by "refile her 2015 taxes".

    CRA explicitly says:
    Do not file another return for that year.
    http://www.cra-arc.gc.ca/changereturn/

    If she has access through My Account, she can use that to identify the parts she wants to change (I am assuming she has her 2015 NOA already).

    If not, she can mail in a filled out T1-ADJ form that outlines the changes she wants to make.
    http://www.cra-arc.gc.ca/E/pbg/tf/t1-adj/README.html


    Cheers

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    Senior Member none's Avatar
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    Thanks - it's such a major screw up I've just told her to get an accountant to do it for her. I told her exactly what to do last year (and what she did certainly wasn't it). i think the peace of mind (for me too) of her getting an accountant is likely the best idea. Thanks.

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    Quote Originally Posted by none View Post
    Thanks - it's such a major screw up I've just told her to get an accountant to do it for her. I told her exactly what to do last year (and what she did certainly wasn't it). i think the peace of mind (for me too) of her getting an accountant is likely the best idea. Thanks.
    Maybe that is best, but it is just a matter of using the T1-ADJ for 2015 to provide CRA with a new number on Lines 14 and 16 on Schedule 7 http://www.cra-arc.gc.ca/E/pbg/tf/50...000-s7-16e.pdf and thus line 208 in the main tax return. Note that since she will be taking a smaller deduction, she will actually have more tax owing and CRA will send a Notice of Re-assessment with the amount owing AND interest due since April 30, 2015. After all, she has had some of the government's money as of that date for which she will owe interest. Note: I am assuming she can actually reverse out this data for a tax year that has long gone.

    Note it will mess up her Schedule 7 in her 2016 tax return since the Carry Forward numbers wil be different too. On second thoughts, best an accountant lead her through it.

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    Quote Originally Posted by AltaRed View Post
    Maybe that is best, but it is just a matter of using the T1-ADJ for 2015 to provide CRA with a new number on Lines 14 and 16 on Schedule 7 http://www.cra-arc.gc.ca/E/pbg/tf/50...000-s7-16e.pdf and thus line 208 in the main tax return. Note that since she will be taking a smaller deduction, she will actually have more tax owing and CRA will send a Notice of Re-assessment with the amount owing AND interest due since April 30, 2015. After all, she has had some of the government's money as of that date for which she will owe interest. Note: I am assuming she can actually reverse out this data for a tax year that has long gone.

    Note it will mess up her Schedule 7 in her 2016 tax return since the Carry Forward numbers wil be different too. On second thoughts, best an accountant lead her through it.
    Is it really that simple? Will CRA accept this maneuver?

    I made a large 30k RRSP deduction in 2015. Then in 2016 my income was about 25k higher than I expected it to be, I was 2 brackets higher, and only had 10k RRSP to contribute/deduct in 2016. I'd like to retract my 2015 deduction by about 15k and increase my 2016 deduction the same. Two adjustments.

    This seems like a blatant, in your face request that CRA is bound to reject... Though in none's damsel's case it is more believable that this was an "error".

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    I don't think CRA would accept your 'attempt' for the reasons you cite.... gaming your marginal tax rate in hindsight. There would (could) be a lot of people messing with adjustments then to keep CRA busy. The only thing I know that can be reversed for sure is one's Pension Adjustment, i.e. the PAR post exiting from a DB pension program.

    We don't know the specifics of the 'damsel's' tax situation in 2015 so we don't know if she took her income way below the top of the first tax bracket, or below her personal deductions or.....? Obviously if she went below what would have been taxable income of 'zero', this would be a clear case of 'not so bright'. None would have to provide more specifics. No one may know until it's tried. I certainly didn't turn up anything on Google.

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    Quote Originally Posted by peterk View Post
    Is it really that simple? Will CRA accept this maneuver?
    Why not?

    fill a change on a previous years return by lowering the RRSP deduction ?

    How much you choose to deduct for RRSP contribution is a choice.

    You are allowed to T1-ADJ for 2015... whether CRA will accept it is their decision, of course...

    Example of someone who did it (your mileage may vary):
    http://www.financialwisdomforum.org/...change#p592308

    Interest to be paid on "overdue" taxes
    You will pay interest on your new tax owing from previous year (because according to your new choice to deduct a lower RRSP account, you owe money to CRA from one year ago). Current Q2 2017 rate on overdue taxes is 5% (http://www.cra-arc.gc.ca/nwsrm/txtps...70327-eng.html). The rate of interest charged by the CRA can change every three months and I did not check each quarter in 2016.

    It's a matter of calculation whether the "5%" interest is worth paying Vs saving taxes.

    Especially if someone goes back many years ago, interest charge can become significant in the calculation.

    Cost of accountant
    If someone hires an accountant to help them in such process, it's another cost to consider.

    How to amend previous tax return

    Never file a second tax return. Wait till you get your Notice of Assessment (NoA) before making corrections

    If you have a CRA account, one could consider doing the change there, which is equivalent to a T1-ADJ: Change my tax return / Change my tax return – select tax year, deduct $Xk from line 208 RRSP deduction and add X$k to line 245 RRSP Unused Contributions.

    The CRA website says an online T1-ADJ request usually takes 2 weeks to process.

    After you receive Notice of Reassessment, always double-check the new unused RRSP contribution room, you could then Change my return for the next tax year (if original NoA has already been received for that year) and deduct extra $Xk on line 208.

    Attention: your "real" marginal tax rate is not only the tax bracket

    Higher income in a prior year could also impact programs/credits such as
    - $2,000 "family tax cut" in 2014 and 2015 (Harper era)
    - Canada child benefit (CBB) starting in 2016 (Justin era)
    - GIS calculation for people 65+
    - OAS claw-back for people 65+
    - Total eligible medical expenses must first be reduced by 3% of your net income or $2,237, whichever is less
    - Ontario Health Premium extra tax rate
    - etc...

    Examples for Quebec of different scenarios in 2016, having marginal tax rate up to 75-90% when considering potential impacts (in French) depending for families or people 65+ : https://www.cqff.com/claude_laferriere/courbe2016.htm


    So, anyone reading this, make sure to consider the full impacts of retroactively increasing your income, which could mean having a different "real" marginal tax rate
    (not specific to peterk)

    That's why an accountant (or yourself using prior's year tax software) should :
    - do the full calculation of the complete impact on your return to see the impact of reducing RRSP contribution
    - do an estimate of interest owing on the impact on your return that will need to be paid to CRA.

    It's not only about tax brackets. In my case contributing to RRSP in 2014 and 2015 had a potential impact on my $2,000 family tax credit from Harper era for example, so it was a factor to consider to know my "real" marginal tax rate. The higher income person in the couple contributing "too much" to RRSP could mean losing/reducing the $2,000 family tax credit if both partners end in same tax bracket because of RRSP contribution. I ended up with RRSP Unused Contributions to maximize this $2,000 family tax credit.

    One can not simply look at tax brackets to confirm the full impact of a RRSP contribution.

    Disclaimer
    (not advice, only opinion, I have no idea what I am doing, etc).
    Last edited by cashinstinct; 2017-04-22 at 02:59 AM.

  8. #8
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    Quote Originally Posted by peterk View Post
    Is it really that simple? Will CRA accept this maneuver?
    What maneuver?

    How is it different than changing a return for say, under-reporting a charitable donation or forgetting to deduct an RRSP contribution?


    Quote Originally Posted by peterk View Post
    ... This seems like a blatant, in your face request that CRA is bound to reject... Though in none's damsel's case it is more believable that this was an "error".
    Unless there is a history of doing the same thing - I don't see why there would be problem.


    Cheers

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    It depends on what she meant by "claimed".

    If she didn't have enough RRSP room, CRA would probably already have been in touch with her about penalties for over contributions.

    Assuming she had sufficient accumulated RRSP room, she was obligated to "report" the $70K contribution.

    She should not have deducted more than necessary to reduce her income tax to zero. The remaining contribution would be carried forward for use in future years.

    It is possible that CRA detected the error if she deducted the whole amount unnecessarily, and carried part of it forward automatically. She, and possibly her accountant, would have to study her NOA's to figure this out.

  10. #10
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    Quote Originally Posted by OhGreatGuru View Post
    She should not have deducted more than necessary to reduce her income tax to zero.
    I would argue she should not deduct any contribution that brings her under $45k, if her regular income is 70k, so use around 25k a year in deduction.

    She could spread it out over 2-3 years to bring her income around 45k+ each year, instead of 70k... which will save her way more taxes.

    (depending on the time value of money and what she will do with the tax refund).
    Last edited by cashinstinct; 2017-04-20 at 11:35 PM.

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