# Company Bonus received - Cash-in or RRSP?



## Kalergie (Jan 7, 2011)

Hi everyone,

I have a question for my girlfriend. She received a company bonus today and her company gave her the option to either pay it out with her next payroll or deposit it into an RRSP. 

We are not sure what to do. She does not need the money now. Would we save on income taxes if the bonus was paid into an RRSP? Her annual income is around 40,000CAD and her bonus was around 2,500CAD.

Thanks a lot for your help!


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## the-royal-mail (Dec 11, 2009)

Hi there,

Congrats on the bonus. That's nice! Gives you options.

How is your rainy day fund? Is there enough cash available to you in case of adversity?

IMO RRSP isn't really the ideal option, esp if you don't need the tax refund. Maybe put it in her TFSA instead?

That's the best I can come up with given the limited info in your post. We can give you the easy answer but it may not be the correct answer unless we have the whole picture.

Good luck,


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## Dana (Nov 17, 2009)

If you put it directly into her RRSP, it won't be taxed like regular income. 

It accomplishes the same thing as taking it in cash net of taxes, making an RRSP contribution and then getting a tax refund for the contribution. This is just a more direct way of accomplishing it.

ETA: Would it be contributed to a group RRSP via her employer? If so, does the employer match contributions? That would sweeten the deal.


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## OptsyEagle (Nov 29, 2009)

Well they are not actually offering her $2,500 in a cheque or in an RRSP, they are offering her $1,750 in a cheque (her tax rate on the income) or $2,500 in an RRSP.

Even if she puts it in the RRSP and then takes it right back out, she will only pay the tax she has saved so if it was me, I would direct it to the RRSP in case she doesn't need it for a long, long time.


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## Kalergie (Jan 7, 2011)

Thank you for the quick replies. 

With regards to the company matching the RRSP contribution. Unfortunately, they dont do that as of yet. Next year they will though. 

Would there be a tax saving on the long run if she puts the money into her RRSP? She got a note saying that the bonus can be taxed up to 40% if she pays it out. What would be tax rate once she pays out her RRSP upon retirement.

Is an RRSP easily accessible? Or would she only be able to retrieve it upon retirement? 

Excuse my poor knowledge of the RRSP issue. We are both in our 20s and not from Canada originally (Germany and UK). We have not actually thought of retirement plans in Canada yet. It would be nice if you guys could fill us in. 

Royal-mail: Yes we do have a rainy day fund. In fact, I have been reading a lot of what you mention on this forum and I have followed your "rules" quite closely. More on that maybe in another thread. What information would you require to evaluate my girl friends case better? Please let me know.

Thanks for the infos.


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## Dana (Nov 17, 2009)

Kalergie said:


> Excuse my poor knowledge of the RRSP issue. We are both in our 20s and not from Canada originally (Germany and UK). We have not actually thought of retirement plans in Canada yet. It would be nice if you guys could fill us in.


In a nutshell


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## slacker (Mar 8, 2010)

Short answer to your question: It doesn't matter either way.

If she contributes the bonus into RRSP right now, it won't be taxed at all (until withdrawal years later)

If she takes the cash now, it'll be taxed. But she can then contribute that money back into the RRSP at a later time. And she'll receive a tax refund on the taxes she had paid earlier.

So both scenario are roughly the same, and I wouldn't stress about it.

PS: there are some differences, in terms of time value of money, rainy day fund, forced savings, and all. But that's not your question. Your question is on tax, and I'm saying it'll be a wash either way.


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## OptsyEagle (Nov 29, 2009)

slacker said:


> Short answer to your question: It doesn't matter either way.
> 
> If she takes the cash now, it'll be taxed. But she can then contribute that money back into the RRSP at a later time. And she'll receive a tax refund on the taxes she had paid earlier.


This is correct, but don't forget about the chicken and egg philosophy. If she puts $2,500 in the RRSP, she will save about $750 in tax.

If she takes the money personally, she will receive $1,750 after tax. Now if she wants to get the $750 of tax back she needs to take the $1,750 and then find another $750, so she can contribute $2,500 to the RRSP and only then does she save the $750 in tax.

I hope that made sense. The issue is if you don't direct it to the RRSP initially, then the government takes some money and you now have to come up with this money from other sources, so that you can get your money back.

May not be a problem but should be considered.

As for what her tax rate will be when she takes it out, no one can tell you. If it is done in the same year it goes in, it will be the same. Later, if done when working, it might be higher, it depends on her income at the time. Most likely in retirement it will be lower, but not always. Wish I had a better answer. 

At the end of the day, you have a tax savings of $750 in your hand and maybe more tax payable later in the bush. I forget how the saying goes, but I bet that $750 is going to feel better in her hands then in the governments. Good luck.


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## sprocket1200 (Aug 21, 2009)

she is currently in one of the lowest tax brackets and is a good enough worker to make bonuses. if her income is expected to keep increasing I would build RRSP room and take the cash. put it into a TFSA and get your financial base ready so you can start using RRSP account to build retirement funds in the future.


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## larry81 (Nov 22, 2010)

TFSA x2


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## Eclectic12 (Oct 20, 2010)

larry81 said:


> TFSA x2


Assuming she has or can open a TFSA, then I agree.

Like others, I'm thinking that there is a reasonable chance of income going up which also the higher tax bracket where the refund on the same amount contributed will be higher.

By the way, is or could she in future, be in a defined benefit pension plan (db plan)? If so, this is another reason to save the RRSP contribution room for the future higher income. I don't have numbers with me so don't take these ones literally - they are to illustrate the difference.

DB Pension
Employee contributes $1, employer $3 for a total of $4 db pension contribution. Based on the benefit, available RRSP contribution room is
reduced by the calculated future benefit (pension adjustment) which reduces
the available RRSP room by $16.

DC Pension or RRSP
Employee contributes $1, employer $1 for a total of $2 dc pension/RRSP.
Available RRSP contribution room is reduced by $2.

The point here is that you might plan on using the RRSP contribution room earned in 2010, say $6K but the db plan may reduce this to only $2K. I've known people with a high enough salary/db benefit/PA that no RRSP contribution room is earned. This means that once the previously earned RRSP room is used up, no further contributions can be made.


As for the TFSA option, there is bad new and good news. The bad news is that she will have to pay the taxes, so it will be the smaller amount. (I believe someone estimated the after-tax amount as being $1750.) The good news is that any growth while in the TFSA is tax-free, as are any withdrawals.

As for your question about accessibility of the RRSP, withdrawals before retirement are possible but there are a couple of factors that affect if it is worthwhile.

From a tax point of view, the withdrawal adds to income for that year and withholding taxes are taken on the withdrawal. When the income tax for that year is filed the balance of owing or refund is calculated.
http://www.investopedia.com/university/rrsp/rrsp7.asp
http://www.globefund.com/archive/commentary/19990309/weekly.html

From a practical perspective:
a) if you really need say $1000, you'll need to withdraw $1000 plus withholding tax of $100 making for a total of $1100 - or make up the difference with other money.
b) the money withdrawn can't grow tax-free anymore so there is a cost beyond simply what the amount is.
c) if the money is in stocks/mutual funds, there is a delay while the sale is settled.
d) I haven't done a withdrawal but I suspect the financial institution will build in a delay as well as they calculate the withholding tax, file paperwork etc.


So - if the money might be needed in the short term, the TFSA is a better option as once the tax is taken then moved into the TFSA, there is no further tax to pay, even for a withdrawal.


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## SaveURFinances (Jan 15, 2011)

Kalergie said:


> We are both in our 20s and not from Canada originally (Germany and UK).


Since we don't know their immigration/citizenship status, are there any drawbacks and/or benefits to both the TFSA and RRSP for non-citizens? What penalties, tax withholdings,etc would come if she withdraw either the RRSP or TFSA and moved back to her birth country?

Anyone?


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## allgood (May 17, 2010)

If you don't stay in Canada permenantly, there is a hassle factor to the RRSP that would make me lean toward a TFSA. Estate planning issues, tax issues, etc. That way if you decide to move back to Europe, you can simply take your money and go, rather than having to deal with collapsing your RRSP.

I second the idea of building up RRSP room for the future too - if you are in your 20s, your income should go up a lot in the next few years - don't use up your rrsp room until you are in a higher tax bracket.


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## Kalergie (Jan 7, 2011)

Hi everyone,

Thanks a lot for the abundance of answers. This is a very interesting topic. She has decided to receive the bonus in her next pay. I told her to at least open a TFSA so she would not touch it. 

We will read through this topic more in detail to allow us to make educated decisions for our future. This forum is amazing and I hope I will be able to contribute to it as much as you guys one day.

All the best.


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