# Refiling taxes -- RRSP ERROR



## none (Jan 15, 2013)

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


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## Eclectic12 (Oct 20, 2010)

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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## none (Jan 15, 2013)

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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## AltaRed (Jun 8, 2009)

none said:


> 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/5000-s7/5000-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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## OhGreatGuru (May 24, 2009)

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.


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## cashinstinct (Apr 4, 2009)

OhGreatGuru said:


> 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).


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## none (Jan 15, 2013)

cashinstinct said:


> 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).


This is EXACTLY what I told her to do. She's been a bit of a challenge in the sense I tell her exactly what to do and she tends to flub it up. She even was going to say - forget it - I screwed up and it's DONE. NOOO!!!! That's basically accepting a 10,000 mistake. Just hire a god damn accountant already. 

Thanks for the help everyone!


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## Eclectic12 (Oct 20, 2010)

^^^

Sounds like a second source saying the same thing *might* help. If the accountant does it, likely the chance it is done as suggested probably increase.


Cheers


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## cashinstinct (Apr 4, 2009)

none said:


> That's basically accepting a 10,000 mistake. Just hire a god damn accountant already.


One point to note: does she still have some money from the 2015 refund she received?

She will need money to pay her 2015 taxes + interest (edit: no penalty, since it's not an error, it's an adjustment).

She will save money on her 2016 tax return, but accountant will need to calculate difference between 2015 amount due Vs 2016 refund... might impact her decision.


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## Eclectic12 (Oct 20, 2010)

^^^

I can see interest from the date the change is filed but *penalties*?? 
I doubt it.


It is a good point though that there likely will be some money owing.


Cheers


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## cashinstinct (Apr 4, 2009)

Eclectic12 said:


> I can see interest from the date the change is filed but *penalties*??


Good point, it's not an error, there should be no penalty, I edited my answer.

The title says here "error", but it's actually a bad financial decision, but not an error if you take the tax man's definition of error (or omission).


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## Nerd Investor (Nov 3, 2015)

I mean, if she absolutely didn't want to pay more she could just reduce the deduction such that her taxable income = all her personal tax credits. She would at least be "removing" the deduction she got zero return for.


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## OhGreatGuru (May 24, 2009)

Some people can't be helped. Stop making her problem yours. You gave her your best advice. Now walk away.


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## none (Jan 15, 2013)

OhGreatGuru said:


> Some people can't be helped. Stop making her problem yours. You gave her your best advice. Now walk away.


What a piss poor attitude. I bet youre one of those people that trip the kids to get on the life rafts first. Jerk.


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## peterk (May 16, 2010)

AltaRed said:


> 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/5000-s7/5000-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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## AltaRed (Jun 8, 2009)

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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## cashinstinct (Apr 4, 2009)

peterk said:


> 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...&p=592308&hilit=RRSP+deduction+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/2017/tt170327-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).


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## peterk (May 16, 2010)

Thanks cashinstinct.

I just ran the math, and Doing the two adjustments (2015 and 2016) would net me $335, but I would owe $267 in interest on the 2015 return. Hardly worth the hassle or risk.


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## cashinstinct (Apr 4, 2009)

peterk said:


> Thanks cashinstinct.
> 
> I just ran the math, and Doing the two adjustments (2015 and 2016) would net me $335, but I would owe $267 in interest on the 2015 return. Hardly worth the hassle or risk.


I am surprised you would save only net $335, what is the difference in % between the two tax brackets? There are other factors of course...

If numbers are accurate, I would agree it's not worth doing in your case


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## peterk (May 16, 2010)

Ya, Alberta has some tight tax brackets now with the new rates... Went from 36.5% last year to 42% this year, across 3 rates, but only a 20k increase in income.


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## cashinstinct (Apr 4, 2009)

peterk said:


> Ya, Alberta has some tight tax brackets now with the new rates... Went from 36.5% last year to 42% this year, across 3 rates, but only a 20k increase in income.


Yeah in that case 5.5% change in bracket Vs 5% interest on about a full year... close to even. Calculation seems reasonable.

In Quebec and Ontario, 2 brackets could be close to 10%, depending on income... so rule of thumb I was thinking about higher refund.


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## none (Jan 15, 2013)

I once refiled my taxes a few years back when I realized that I could defensibly claim BC residency over BS scotia residency. That resulted in a $1000 refund. Crazy. and awesome.

Anyway, just wanted to thank everyone for the helpful comments. This has been a good learning thread for me (nice to get outside of my usual wise cracking and crapping on those stumbling around in clouds of uncertainly and thinking they know what they're doing). Good times.


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## Eclectic12 (Oct 20, 2010)

peterk said:


> 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?




peterk said:


> ... 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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## redsgomarching (Mar 6, 2016)

I don't believe she would be getting any penalties as her rrsp limit allowed for the contribution, however, in terms of optimizing taxes, she should have spread it out. 
on 45k of taxable income (lowest bracket) she couldve pretty much wiped out most taxes payable with credits.

Unsure as to why people do silly things with their finances. she jumped the gun and is probably going to regret it.


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## Eclectic12 (Oct 20, 2010)

^^^^

What I have noticed is that people get tied up learning what is in an article then stop. This means they don't take the extra step of using what they have learned to investigate any nuances.

Case in point is the post on CMF where an article had profiled a retired person with a big pension, medium investment income and CPP being added meant a higher tax rate. The person who read the article decided to withdraw everything from their RRSP and take the tax hit now. When asked if they had used what was learned in the article to see if the scenario fit, they said no plus had no plans to check as it was more important to liquidate the RRSP. :rolleyes2:


Pointing out that the plan might not make sense, depending on other factors made no difference.


Cheers


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