# 1st 60 day contribution, and large tax bill following year?



## victor_vvv (Jan 25, 2016)

Hello,

New to this forum, and I was hoping someone with some basic tax expertise could help me with a situation before I go find an accountant.

First thing to know: I do not have a complicated tax situation. I have a regular employer and each year, they deduct tax from my income and pay me net on my paycheck. When I file my yearly tax returns, they are generally always spot on with $0 balance.

Okay, so in the first 60 days of 2014, I contributed a lump sum amount into my RRSP for 2013 tax year, say $30,000 from a bonus. This is the first time I've ever done a 60 day contribution. The contribution was deducted at source by my employer and directly deposited into a group RRSP account. So this $30,000 was done pre-tax. I then proceeded to file my 2013 tax return and ended up receiving a $13,000 refund from the CRA in the spring of 2014 for the $30,000 contribution. Great - spent it on a down payment for a car. 2014 was a low income year for me and as a result, I did not make any further registered contributions.

Fast forward to spring of 2015 when I am now doing my tax return for 2014. I did not make any 1st 60 day contributions for 2014 tax year. Nothing changed in my employment so I figured I would owe no tax just like in years prior. Boy was I wrong. For some reason I got a huge tax bill from the CRA for about $13,000. 

Why would this happen? Some of my friends have told me it's probably because my employer undertaxed my income in 2014. But how is this possible if they've always gotten it right in the past? Also, $13,000 of undertaxation is a lot and I would think I would notice a significant increase to my net paycheck twice a month if they were not deducting as they were in years past. In reality, my net paychecks have remained relatively stable. I always thought that maybe it's because I never paid tax on that $30,000 that was transferred to begin with (remember it was done pre-tax), and then I got a $13,000 refund from the CRA - it would be like double dipping and the CRA is asking for their money back?

Any ideas?

Thank you!


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## naysmitj (Sep 16, 2014)

Ask your payroll or hr about how the contribution was handled. Seems that you may have taken credit for an RRSP that was deducted from your pay pre-tax. In that case you did not pay tax when you received the bonus as it went directly into RRSP.
Either hr or payroll should be able to assist you with understanding what happened.


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## OhGreatGuru (May 24, 2009)

I'm not quite sure why you are doing your 2014 taxes in spring 2015, but we will leave that aside. It sounds to me like the bonus, which presumably was more than $30K, was taxable income for 2014, not 2013. But you applied the RRSP contribution deduction to your 2013 income. If so, your taxable income for 2014 is a lot higher than it was for 2013 (& other years). And your employer may not have withheld (enough) tax for 2014, thinking that you were going to claim the RRSP deduction for 2014, not 2013.
That's my best guess at any rate.


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## victor_vvv (Jan 25, 2016)

OhGreatGuru said:


> I'm not quite sure why you are doing your 2014 taxes in spring 2015, but we will leave that aside. It sounds to me like the bonus, which presumably was more than $30K, was taxable income for 2014, not 2013. But you applied the RRSP contribution deduction to your 2013 income. If so, your taxable income for 2014 is a lot higher than it was for 2013 (& other years). And your employer may not have withheld (enough) tax for 2014, thinking that you were going to claim the RRSP deduction for 2014, not 2013.
> That's my best guess at any rate.


I think you are onto something here. But first, generally 2014 tax year is filed in early 2015 (by spring I mean March 2015, before April 30th cutoff?). 

Anyways, you are correct, my total bonus was about $55K for my work in 2013 was paid out in 2014. So the income hits in 2014. However, I did a pre-tax first 60 day contribution to my 2013 rrsp year for $30K. My 2014 income was larger than 2013, about $40K more because of this one time large bonus. My base salary has not changed much over the past 4 years. I don't understand why my employer should have withheld more tax in 2014. I mean, my regular bi-weekly paycheques haven't changed much in years. I don't get why making a large rrsp contribution for previous year would cause my taxation to skyrocket by $13K.


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## OhGreatGuru (May 24, 2009)

I got confused by your use of the present tense "I am now doing my tax return for 2014". So somehow my brain transposed that to spring 2016.


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## OptsyEagle (Nov 29, 2009)

If you had applied the RRSP contribution to the tax year that you received the bonus then you would have been a wash for taxes owing. Unfortuneately you applied the RRSP contribution to 2013 and received a $13,000 refund and now to balance the books the CRA needs you to give them back the refund. 

You were never eligible for a refund from this RRSP contribution since they use Pre-taxed money to make it. Refunds come from after tax RRSP contributions. They are actually both the same, just the timing of when you and the government get their money is different.


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## Eclectic12 (Oct 20, 2010)

victor_vvv said:


> ... The contribution was deducted at source by my employer and directly deposited into a group RRSP account. So this $30,000 was done pre-tax. I then proceeded to file my 2013 tax return and ended up receiving a $13,000 refund from the CRA in the spring of 2014 for the $30,000 contribution.


Are you sure it was "pre-tax"?

My employers who did similar made the RRSP contribution "pre-tax" by skipping charging income tax. I don't see how money that is already tax free can then generate a tax refund.

If the employer charged income tax then the RRSP contribution is after-tax, where depending on how all the numbers add up on the tax return - one may or may not have a refund.


IMO ... the two key pieces that need to be investigated are whether the employer charged income tax on the bonus. If it truly was tax free, then why is there a tax refund - unless there are other special items such as charitable donations or such?


Cheers


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## Nerd Investor (Nov 3, 2015)

What happened has been touched on already, but just to hopefully make it as simple as possible:

You received a significant bonus in early 2014. One of two things normally happens here: The employer withholds tax (like they would on your salary) _or_ you deposit the amount directly into an RRSP so they don't withhold tax. 
Here's what it looks like:

Scenario 1: Bonus of $30,000 less $13,000 tax withheld by employer = $17,000 to you. You file your 2014 taxes, report $30K bonus income, incur tax of $13,000, you're employer already withheld $13,000, no tax owing. 
Scenario 2: Bonus of $30,000 elected to go directly into an RRSP = $30,000 to the RRSP. You file your 2014 taxes, report $30K bonus income less a $30K RRSP contribution, which is zero additional income, no tax owing. 

What actually happened: Bonus of $30,000 elected to go directly into an RRSP = $30,000 to the RRSP. You file your 2014 taxes, report $30K bonus income, incur tax of $13,000, you're employer withheld nothing, you owe $13,000. Why? Because instead of using the RRSP deduction in 2014 (which would have put you in scenario 2) you opted to claim the deduction in 2013. 

It's a nasty surprise, but if you were in a relatively high income tax bracket in 2013 (and it sounds like you were) you may have come out ahead by doing this. Essentially, it gave you a refund a full year earlier which you smartly used to pay down your mortgage. Think of it as an interest free loan you've had for a year.


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## victor_vvv (Jan 25, 2016)

Nerd Investor said:


> What happened has been touched on already, but just to hopefully make it as simple as possible:
> 
> You received a significant bonus in early 2014. One of two things normally happens here: The employer withholds tax (like they would on your salary) _or_ you deposit the amount directly into an RRSP so they don't withhold tax.
> Here's what it looks like:
> ...


Thanks guys! this makes sense now. Just thought I double check in case I did my accounting wrong an overpayed the CRA


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