# Company Bonus Questions (Ontario Resident)



## Matthew_84

Hello all,

I'm an Ontario resident. I made about $38,700 last year and my company just gave me a bonus of about $7,000. I'm very happy with the bonus, but am a little lost with how I should proceed. I know that if I deposit it into an RRSP that I won't get taxed on this, until I withdrawal it, and that I'll also get a larger tax return in doing so.

But my dilemma is this. I'm currently in about $9,000 debt and am saving up for a wedding. I'd like to simply cash-in the bonus but I know that I will get taxed anywhere between 25-44% depending on numerous factors. Getting taxed doesn't annoy me that much, as I will be taxed later anyway, and it is a bonus. But I'm also concerned about something, and different people have different answers: If I cash this in, does it become included as my income pushing me over 40k and into a different tax bracket? 

If this could be answered for me, it would greatly appreciated. Also, if anyone has any suggestions for what I should do given my circumstances that would amazing. I should mention that my fiance has 20k in RRSP's for a down payment on our first home and I currently have about 2k in RRSPs.

Thanks in advance,

Matt

EDIT TO ADD: if I were to put all of the Bonus into an RRSP, about how much of a tax credit could I expect?


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## slacker

I had originally wanted to say pay off your debt, the way I think about it is this: Paying off debt at say 4% interest rate, is like getting 4% guaranteed investment after tax, which is like a GIC at 6-7%. On a risk adjusted basis, it's a ridiculously good deal.

For what it's worth with $38700 income, you'll pay $5802 in taxes. With the bonus, you'll pay $7688, so you'll pay 27% tax on the bonus, compare to your original average tax rate of 15%

http://lsminsurance.ca/calculators/canada/income-tax


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## the-royal-mail

It makes no sense to me to lock money away in RRSPs that may COST you money and loss of principal, when you are carrying debt and you need to pay that off, save for your wedding and establish emergency savings money. You may not realize how much you need the money.

Pay off the debt before doing anything else.

Collect the $7K bonus in cash. Yes, you will pay tax on it but with marginal tax rates you will only be taxed in the new bracket for the amount you go into the new bracket. Not the entire amount (unless you are already right under the bracket).


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## MoneyGal

Did they give you the bonus as part of your regular paycheque? If yes, you are going to be taxed on it as if that was your regular pay for the pay period.


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## Matthew_84

I'm not sure how it would be paid to me. Last year I did it as an RRSP contribution and gave them my banking information, and I received a separate cheque. I would think that they would tax it first and put it in my paycheque though, but I'm not sure. I will find out and reply as soon as I know


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## Brenner

If you get it paid straight into a RRSP, with no tax deducted, then you wont also get a tax refund. Technically you could if you claimed the contribution in 2011, if done by the deadline, but then would owe it back in 2012 anyway when the income will be included with no corresponding contribution. Since you get no tax deducted it wont generate a tax refund. 

I agree with other posters, at your income level and debt I would not be bothering with RRSPs. Pay down debt and use a TFSA for any short-term savings.


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## Matthew_84

Brenner said:


> If you get it paid straight into a RRSP, with no tax deducted, then you wont also get a tax refund. Technically you could if you claimed the contribution in 2011, if done by the deadline, but then would owe it back in 2012 anyway when the income will be included with no corresponding contribution. Since you get no tax deducted it wont generate a tax refund.
> 
> I agree with other posters, at your income level and debt I would not be bothering with RRSPs. Pay down debt and use a TFSA for any short-term savings.


Thanks everyone for your insight. I decided to take your advice and cash-it. I asked my company and they will direct deposit it into my chequings account. I do have a TFSA, should I just allow this to happen and transfer the funds into the TFSA as soon as I can?

Also, the above reply from Brenner got me worried. Last year I used my Bonus as a 1,900 contribution to my RRSPs and did it basically right on the deadline. I'm assuming this is why my T4 said my salary was about 2k more than it should have been, because this bonus last year was included. So am I going to get taxed on that contribution as well?

Thanks everyone for your help, and sorry, I am really green with this stuff.

Matt


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## Brenner

Matthew_84 said:


> Also, the above reply from Brenner got me worried. Last year I used my Bonus as a 1,900 contribution to my RRSPs and did it basically right on the deadline. I'm assuming this is why my T4 said my salary was about 2k more than it should have been, because this bonus last year was included. So am I going to get taxed on that contribution as well?
> 
> Thanks everyone for your help, and sorry, I am really green with this stuff.
> 
> Matt


If the bonus was paid straight to a RRSP, with no tax deduction, and the income and contribution aligned to the same tax year then it would generate nothing in a refund, as it would be +$2k in income - 2k RRSP contribution. This is the advantage of having it paid straight to the RRSP, you essentially get the "refund" right away into the RRSP rather than contributing the net, and then the refund a year later. 

If you actually claimed the contribution in 2010 then yes it would generate a refund for that tax year, but now you will owe roughly the same back in 2011. This is ignoring all other tax circumstances.

Don't worry about being green on this, it seems like you might be a young guy and no one really teaches you these things. Certainly not in school anyway.


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## Matthew_84

I'd like to thank all of you for your helpful information here. I've spent a lot of time talking to different people about this and when I share what you've taught me with others, most people disagree and I even got in an argument or two, but once I explained it, it made sense to everyone. There is a lot of misleading information out there, and it's unfortunate that so many people have been misled about such an important issue.

Most of the people I had talked to, and myself prior to this, were under the impression that if you put a Bonus cheque directly into an RRSP, that not only did you not pay taxes on it, ever, until you withdrawal it, but that you even got a tax credit on it for the simple act of contributing it to an RRSP, no matter when it was done. This always seemed too good to be true, but everyone I talked to reinforced this, bosses, managers, even my accountant.

I guess it's time for a new accountant...

Thanks again everyone, it all makes sense now.

Matt


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## Koala

Matt, thanks for posting! It's good to hear from some of the misinformation others have had to deal with, before I see the same thing myself


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## MoneyGal

Matthew_84 said:


> Most of the people I had talked to, and myself prior to this, were under the impression that if you put a Bonus cheque directly into an RRSP, that* not only did you not pay taxes on it, ever, until you withdrawal it,*


This is true. 



Matthew_84 said:


> *but that you even got a tax credit on it for the simple act of contributing it to an RRSP, no matter when it was done*.


This is also true. 

Here is a quick calculator you can use: 

http://www.walterharder.ca/RRSPCalculator.asp

First, put your income without any bonus or RRSP contribution in. See how much tax you pay. Then, put your income in with no bonus, but an RRSP contribution. Then, put your income in with the bonus and put the amount of the bonus in as an RRSP contribution. 

You will be able to see the varying amounts of tax and tax refunds under different scenarios.


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## Matthew_84

Thanks Moneygal, I understand what you mean, but I am talking about how I did it, getting the bonus as part of my 2011 income but contributing it as an RRSP for 2010. If I do them in the same years then yes, I don't pay taxes on it, and I would get a credit back if I did.

But with the way I did it, I'm under the belief, that I got a credit back in 2010 because all of my taxes were accounted for (the company subtracted them from my paycheques), and when I suddenly put 2k into RRSPs they gave me a tax credit on that 2k because I shouldn't have been taxed on it. But now that the 2011 tax season approaches, and I am not making an RRSP contribution, that 2k bonus I received is listed as part of my 2011 income, and since it wasn't taxed, because I put into 2010 RRSPs, I will now I have to pay taxes on it. But had I done them in the same year, then they should have cancelled each other out.

I could be very wrong about this, and if I'm totally confused about this now, it would great if someone could set it straight before my mind spins out of control, LOL. 

Thanks,

Matt


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## MoneyGal

OK, now I understand what you (and others) are saying. 

What you wrote is correct. If you get a tax refund for 2010, you can use that to pay the taxes owing in 2011. Or designate the RRSP contribution for 2011 instead of 2010. 

Or skip all of that and pay down debt / put it in your TFSA, as discussed earlier in the thread.


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## Matthew_84

Thanks again Moneygal. Yeah, I really learned a lot here, when I am ready to contribute to RRSPs again, I will definitely put it in the RRSP for the corresponding year, so that when I stop, or make a lesser contribution I won't be in the position where I may have to pay taxes that I wasn't prepared for.

There are about two thousand employees at my work, who I feel, aren't fully aware of this, because most of them are putting them into last year's RRSPs.

Anyways, thanks again everybody. This is invaluable information and I, and a lot of my friends, really appreciate it!

Matt


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