Why do people say "RRSP Income Tax refund". What "refund" is there?????

Question

The only thing that Canadians get is a tax deducation from "Total Income" on their return. Some people say the deduction is off Taxable Income, not right though - there is a diff between: Total Income,Net Income and Taxable Income
Anyway, getting back to my question, let's say for example your Total Income is 100,000. You decide to contribute 12,000 to your RRSP. Let's assume your marginal tax rate is 40%. So by contributing the $12,000 to yor RRSP you SAVE on your Tax Payable by $4,800. This I understand from the following calculation: Taxes w/o RRSP ded. = $40,000 - Tax w/ded $35,200 or (40000-35200) = $4,800

IBut why do people say you actually get a Tax "refund" of $4,800??

They think this is like a big fat cheque from CRA in the amount of $4,800. Is it???????????

Do you actually get "cash back" in the amount of $4,800 IN ADDITION to saving on your taxes by $4,800???. So then isn't this the SAME thing as getting to keep $9,600 right now???

please verify thanks

James L, thank you for answering my question.

I know for a fact, that RRSP contributions are deducted from TOTAL INCOME - please read the entry below you. The entry below is from a real tax professional.

If you say you are "tax preparer" and you are deducting your client's RRSP contribution from their Taxable Income....well I'd say your clients are in trouble.

James L, I am sorry you said you are deducting your client's RRSP contribution from their NET Income - that's wrong too.

So in summary, RRSP contributions are deducted FROM TOTAL INCOME (among other items) to ARRIVE at NET INCOME.

Answer 1

Your thinking is pretty accurate.

The RRSP deduction will result in a reduction from your total income in calculating your net income. The net result of this is a reduction to a person's taxes owing. But, because most employees have their taxes withheld by their employers every pay period, the employee in your example will have already paid (through the employer withholdings) the tax bill of $40,000. As a result of this, when the employee files his/her tax return and reports the RRSP deduction, the employee will receive a refund of $4,800 so that the net taxes paid equal $35,200.

Answer 2

Your calculations are correct. A RRSP contribution, provided it is within your eligible contribution limits, is a deduction against total income. You will save tax only if you have tax to pay . There is no separate refund cheque for a RRSP contribution it is part of your overall tax credi.

Using your example if you have had no income tax deducted at source on your $100, 000 and assuming your marginal rate is 40% you would first have a tax debt of $40,000 using your RRSP deduction your debt is now$4800 less.

RRSPs are not for everyone. The purpose of an RRSP is to defer tax to a later date when you either cash the RRSP in or go on retirement benefits. At that time all the withdrawals are taxable at that time even if you did not receive a deduction for the RRSP.

RRSP contributions can be made on only eligible earned income like salary, net self-employed income and certain pension income. Investment income like interest or dividends, and rental income are not eligible income so you will not be allowed a RRSP deduction if that is your only source of income.

Answer 3

People say "tax refund" for RRSP's because the tax "savings" is like getting a "refund" of whatever taxes you paid on that income at source - before it was put into an RRSP. If you hadn't put that money into that RRSP, you would either be paying that $4800 more on top of what you would have already owed... alternatively, if you had been expecting a refund, you would be getting $4800 LESS than you would with that RRSP contribution. It is rather confusing.

It does come off your "total" income, resulting in your "net". This reduces your taxable income by this amount because you are not paying taxes on the amount that was taken off for your RRSP contributions. It is just taken off sooner in the calculation. RRSP contributions do still reduce your taxable income.

I hope this helps you to understand a little better. Now I'm confused. lol =)

Answer 4

They call it a refund because it is a refunding of taxes you already paid.

Your thinking is correct, but using a dictionary you will find that refund is the proper term - you paid taxes throughout the year as withheld by your employer, and at the end of the year some of the money that you paid gets refunded to you because it is in excess of what you really owe.

I won't get into the merits of contributing or not contributing to an RRSP, but it is a refund of money you already gave the government.

Hope this helps. Very stimulating answers here.

Answer 5

The deduction is not from Total Income. The RRSP contribution is deducted from NET Income.

Answer 6

It would be a misnomer to call it a tax refund. You are correct.