# small tax question - is owing tax 1:1?



## MrMike (Sep 30, 2020)

Lets say I owe $500 on my taxes. Rather than pay, can I deposit $500 into my RRSP and it will erase what I owe - is it a 1:1 thing?

For some reason I've always gotten money back - no idea why it always works out like that (I've had a steady job for 19 years). But my wife always owe an amount (she is a contractor, on and off) and I'm just wondering if the above makes sense.

Thanks all!


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## P_I (Dec 2, 2011)

MrMike said:


> Lets say I owe $500 on my taxes. Rather than pay, can I deposit $500 into my RRSP and it will erase what I owe - is it a 1:1 thing?


Not necessarily. You could try fiddling with TaxTips.ca - Canadian Tax & RRSP Savings Calculator for 2020 & earlier years to understand the specifics for your circumstances.


MrMike said:


> For some reason I've always gotten money back - no idea why it always works out like that (I've had a steady job for 19 years). But my wife always owe an amount (she is a contractor, on and off) and I'm just wondering if the above makes sense.
> 
> Thanks all!


Getting a tax refund seems to make people happy. But that shouldn't be the goal. All that means is you've always given the government an interest free loan. It means you've possibly missed some tax planning opportunities. My tax planning goal each year is to owe the government a small amount, under the $3000 limit that triggers instalments. 

This is common for salaried employees with minimal tax deduction options. The payroll tax tables use the information from your TD1 form to determine your paycheque tax withholdings. Read TaxTips.ca - TD1 forms for employees - make sure they are up to date for more details and to see if you are missing any opportunities to reduce your paycheque tax withholdings.


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## Eclectic12 (Oct 20, 2010)

First thing is whether it's an RRSP contribution you did. In the past, I have requested and had over time paid into the company Group RRSP. This means that the full funds went into the Group RRSP without any income being reported and no additional taxes.

If this was an RRSP contribution you requested and deduct on the tax year with the $500 owing, it is a more like 0.3 (taxes) to 1 (RRSP contribution).
What is 1:1 is the RRSP contribution to Income reduction. A $500 RRSP deduction will reduce you taxable income by $500. If the full $500 would have been taxes at 25% then the tax bill will go down by 25%.


What typically gives a refund is some combination of factors that mean more pre-payment of taxes were sent to CRA, before the tax return was filed. 

From employment, withholding tax is sent as one is paid so as long as the RRSP contribution is big enough - there might be a refund. Other credit/deductions like charitable donations will also affect the refund. Employment overtime is another source as per CRA directions, the company has to take withholding taxes as if one was paid this amount all year long (i.e. even more than usual is taken).

Part of what generates the refund is the employer only knows about what they know or you tell them. For example, an RRSP contribution made through the company (ex. my overtime), the employer can skip sending withholding tax for. Whatever one does on their own through a personal RRSP or charitable donations, the company won't know about.


A contractor does their own thing so if they don't sent in pre-payments or under estimate what to send - they will owe. Most contractors I know prefer to owe. Getting a refund as P_I says is an interest free loan to the Canadian gov't so contractors and a few employees prefer to avoid it.


Cheers


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## Eclectic12 (Oct 20, 2010)

P_I said:


> ... This is common for salaried employees with minimal tax deduction options. The payroll tax tables use the information from your TD1 form to determine your paycheque tax withholdings. Read TaxTips.ca - TD1 forms for employees - make sure they are up to date for more details and to see if you are missing any opportunities to reduce your paycheque tax withholdings.


The link does include a sub-section about the T1213 *Request to Reduce Tax Deductions at Source* but IMO, checking out the details in the form are worthwhile.





T1213 Request to Reduce Tax Deductions at Source - Canada.ca


Individuals use this form to ask for reduced tax deductions at source for any deductions or non-refundable tax credits that are not part of the Form TD1.




www.canada.ca





Since the OP mentions two types of employment, this link may be of interest as well. The employed section is a repeat but the self-employed section may be new ... TaxTips.ca - Reduce income tax payments now for current RRSP contributions


Cheers


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## Eclectic12 (Oct 20, 2010)

P_I said:


> Not necessarily ...


Are there any situations where the taxes owing of $500 _could_ be offset by a $500 RRSP contribution?

I can't think of any as the top tax rates that I have seen are 50+%. 

This forces the income that the RRSP contribution is deducted against, dollar for dollar, to be something less than double. 
At lower tax rates, more RRSP contributions are needed.


Cheers


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## MrMatt (Dec 21, 2011)

Eclectic12 said:


> Are there any situations where the taxes owing of $500 _could_ be offset by a $500 RRSP contribution?


No.


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## OptsyEagle (Nov 29, 2009)

Just give it a little more thought. If it was 1:1 there would never be any taxes paid. Who would ever pay tax to the government when they could just give the money to themselves?


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## P_I (Dec 2, 2011)

OptsyEagle said:


> Just give it a little more thought. If it was 1:1 there would never be any taxes paid. Who would ever pay tax to the government when they could just give the money to themselves?


Isn't that an ironic statement in the COVID-19 world of government programs.


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## MrMatt (Dec 21, 2011)

P_I said:


> Isn't that an ironic statement in the COVID-19 world of government programs.


uhh
Government money is being paid out at 1.5:1, which is why the debt is skyrocketing.

You can't buy votes with just 1:1 payback, you need to give a bit extra.


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## Plugging Along (Jan 3, 2011)

MrMike said:


> Lets say I owe $500 on my taxes. Rather than pay, can I deposit $500 into my RRSP and it will erase what I owe - is it a 1:1 thing?
> 
> For some reason I've always gotten money back - no idea why it always works out like that (I've had a steady job for 19 years). But my wife always owe an amount (she is a contractor, on and off) and I'm just wondering if the above makes sense.
> 
> Thanks all!


No, it is not 1:1. RRSPs come off your income, tax is a % of your income. The amount you need to contribute depends on your marginal tax bracket. You can look that up.

Let's say you are paying 25% tax (good chance it's higher), then to reduce the $500 tax owing you would need to need to contribute $2000 in the RRSP. That assumes that the contribution doesn't make you cross tax brackets


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## Plugging Along (Jan 3, 2011)

Eclectic12 said:


> *Are there any situations where the taxes owing of $500 could be offset by a $500 RRSP contribution?*
> 
> I can't think of any as the top tax rates that I have seen are 50+%.
> 
> ...


No, in order for it to be a 1:1, someone would have to be at a 100% tax bracket. The only exception would be if you were on some sort of government benefit or claw back where it is based on income, and by reducing your employment income, you could get the benefit that you might not other wise. However, that is not a reduction of tax, it is a reduction of income to be applicable to get a different benefit, or not have a claw back.


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## afulldeck (Mar 28, 2012)

P_I said:


> Getting a tax refund seems to make people happy. But that shouldn't be the goal. All that means is you've always given the government an interest free loan. It means you've possibly missed some tax planning opportunities. My tax planning goal each year is to owe the government a small amount, under *the $3000 limit that triggers* instalments.


Anyone know why this trigger is set so darn low? It should at least be at the personal exemption limit.


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## Ponderling (Mar 1, 2013)

The places where an RRSP contribution it has the most kick, though it is not 1:1, for me is in Ontario when it reduces you provincial tax so you no longer need pay provinicial surtaxes, and might even bump you under the maximum health premium.


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## ian (Jun 18, 2016)

My understanding is that you do not have to pay installments if you do not wish to.

You do however need to be aware that when you do calculate your tax owing, you will be charged interest on the installments that you did not make.


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## Spudd (Oct 11, 2011)

afulldeck said:


> Anyone know why this trigger is set so darn low? It should at least be at the personal exemption limit.


It's $3000 in tax owing, not $3000 in income. You have to make way more than the personal exemption to owe 3k in taxes.


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## james4beach (Nov 15, 2012)

Eclectic12 said:


> Most contractors I know prefer to owe


So I should be happy about the $5,000 tax bill I'm about to pay out?


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## afulldeck (Mar 28, 2012)

Spudd said:


> It's $3000 in tax owing, not $3000 in income. You have to make way more than the personal exemption to owe 3k in taxes.


uh? My point was that 3000 is a very low threshold, moving it up to 15K makes way more sense. But then again, in my books tax installments and withholding taxes are a travesty that should not exist. Everyone should pay taxes only once in a year, that way, when they they write the big check they would be forced to ask themselves was it worth it.


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## Eclectic12 (Oct 20, 2010)

james4beach said:


> So I should be happy about the $5,000 tax bill I'm about to pay out?


Versus giving the gov't an interest fee loan of $5K or more?
I'd be happy. 

Cheers


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## Eclectic12 (Oct 20, 2010)

afulldeck said:


> uh? My point was that 3000 is a very low threshold, moving it up to 15K makes way more sense ...


Considering the number of co-workers and friends tearing their hair out over a $1K tax bill, it seems likely to avoid a lot of hassles/upset.

Cheers


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## afulldeck (Mar 28, 2012)

Eclectic12 said:


> Considering the number of co-workers and friends tearing their hair out over a $1K tax bill, it seems likely to avoid a lot of hassles/upset.
> 
> Cheers


So punish the good for the sake of the bad?


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## Eclectic12 (Oct 20, 2010)

That's one way of looking at it. 


Cheers


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