Lump sum pension payout of $8300 (taxed at 20% before deposit) is entered following my T4 and decreases my return by $1100. Why is this happening? No higher bracket too!

[taxquestion2017]

The pension money was from an old part time job and the tax was withheld before I ever saw the money. I'm below the 26% bracket so that is not the issue. My return dropped from about 1760 to 500 or so after the T4a indicating this lump sum was entered (Which, again, I already paid the proper tax on).

[TurboTaxTerry · Accepted solution]

The 20% withholding was a minimum as required by Revenue Canada but the actual tax payable on that income is calculated on your tax return. The marginal tax rate including Federal and Provincial taxes is likely over the 20% withholding. The additional income may also impact other amounts you claimed on the tax return, as an example Medical Expenses.

You could consider making a contribution to an RRSP before the deadline of March 1st to defer the tax payable to a future year.

[taxquestion2017]

Thanks, I really appreciate the input. I wish the CRA would be more clear on this matter. In their lump sum section they merely state that the taxes owed may change with a lump sum payout. Worthless answer. You stated with an rrsp purchase it would defer taxes owed to a later year, all you meant was when they are eventually paid out, correct? My plan was to purchase the labor sponsored funds in SK because of the massive tax incentives. Essentially the same idea right? Just making sure there isn't some tax deferral benefit I am unaware of. Thanks again for your time, getting a straight answer at tax time can be tricky.

[TurboTaxTerry]

Yes any contribution to a Registered Pension Fund will provide tax savings for 2016 but the resulting withdrawal in the future (perhaps years away) would be subject to tax. And we can all hope marginal tax rates are lower in the future.

[taxquestion2017]

Thanks again! Be well.