Personal Finance

Signing Bonus Question

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  • Apr 11th, 2012 6:56 am
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Member
Jan 2, 2007
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Signing Bonus Question

My wife will be starting a new job soon, with the new contract she will receive a signing bonus (50G). We have the ability to indicate when and how we want the signing bonus.

This year my wife and I will both make our full salaries (50G & 50G). My wife is now pregnant and provided everything goes well we will have a new baby in December of this year at which time she will begin maternity leave for 10 months, I will take the final 2 month after that.

We would like to take the bonus and apply it directly to a mortgage.

When would be the best time to take the payment resulting in minimal taxes?

A) This year?
B) Next Year while she is on maternity leave?
C) Next year when she resumes work?
D) Other?

Thank you in advance for your suggestions.
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Feb 1, 2005
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Matt723 wrote: My wife will be starting a new job soon, with the new contract she will receive a signing bonus (50G). We have the ability to indicate when and how we want the signing bonus.

This year my wife and I will both make our full salaries (50G & 50G). My wife is now pregnant and provided everything goes well we will have a new baby in December of this year at which time she will begin maternity leave for 10 months, I will take the final 2 month after that.

We would like to take the bonus and apply it directly to a mortgage.

When would be the best time to take the payment resulting in minimal taxes?

A) This year?
B) Next Year while she is on maternity leave?
C) Next year when she resumes work?
D) Other?

Thank you in advance for your suggestions.

Assuming it's employment income, B and C are the same.

Do you know how much in EI maternity she will be receiving? If you can calculate that, then you can calculate where the best time will be (idea is to try to income average over the two years).

To be honest, it probably won't make too much of a difference what you choose (A or B/C), except that if you opt to get the bonus early you can use it against the principal earlier, so you might want to factor that as well (interest saved on having a reduced principal amount versus how much extra tax on the bonus taken early than if you delayed it).

If it doesn't matter, then I would suggest you take the bonus in January 2013. This way you get the money relatively soon and pay the tax on the money as late as possible.
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Jan 2, 2007
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ShopperfiendTO wrote: Assuming it's employment income, B and C are the same.

Do you know how much in EI maternity she will be receiving? If you can calculate that, then you can calculate where the best time will be (idea is to try to income average over the two years).

To be honest, it probably won't make too much of a difference what you choose (A or B/C), except that if you opt to get the bonus early you can use it against the principal earlier, so you might want to factor that as well (interest saved on having a reduced principal amount versus how much extra tax on the bonus taken early than if you delayed it).

If it doesn't matter, then I would suggest you take the bonus in January 2013. This way you get the money relatively soon and pay the tax on the money as late as possible.

I had a buddy recommend January 2013 as well but his reasoning was that my income plus my wife's (on maternity leave she will get 80% after top up) would be less than us both getting full income.

If the difference is relatively small then we would like to just get it and put it on the mortgage.
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Mar 25, 2005
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Matt723 wrote: I had a buddy recommend January 2013 as well but his reasoning was that my income plus my wife's (on maternity leave she will get 80% after top up) would be less than us both getting full income.

If the difference is relatively small then we would like to just get it and put it on the mortgage.

Calculate the tax payment at the marginal rate this year and next. Then find your opportunity cost of not paying the mortgage, inclusive of any penalties. Should be a fairly straight forward.
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Jan 2, 2007
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wesboag wrote: Do you guys have RRSP room? That tax bill will be pretty steep. Perhaps contributing to your RRSP's could help alleviate the tax burden, even though your MTR's are still at a questionable level for claiming the deduction. The tax refund will help with the taxes. Use the rest for your mortgage. This is only a suggestion from a different side. Interest rates are so low right now; it doesn’t necessarily make sense to pay the mortgage before considering your other options.

With that said, the answer depends on many factors. Your age, other debts, savings, the fact that you are bringing a child into the world, employment situations, your overall risk tolerance, etc. should have a great impact on the decision. If you are young and your mortgage debt isn't sky high, with a low interest rate environment, it may be better to apply that bonus to your retirement savings or safety net. Your principle residence shouldn’t be your only asset as it’s not liquid from a cash needs standpoint. If there was ever a need for funds, throwing it all at your mortgage could prove dangerous. Trying to get credit is the hardest when one needs it the most.

In any event, taking it early as possible makes the most sense as if you don't you are essentially lending that 50k to her employer interest free. A dollar today is worth more than a dollar tomorrow.

We do in fact have lots of room in our RRSP's. Our mortgage rate is low as well so this may be a better option. Thanks for the advice.

We are a young family with one 15 month old and one on the way. We have relatively low amount of RRSP's and have not topped them up in previous years. With the new baby and both of us in secure jobs we are thinking of moving in the next 2 years. We figured paying down the mortgage (our only debt) would be the best way to qualify for a larger sum when we look for a new house. If we move the money into an RRSP would that factor equally into the "credit assessment" when we apply for a new, larger mortgage?
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Jan 10, 2009
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You absolutely should not take income while she's on mat leave. You need to take the money at least one day before it starts or one day after it ends. If she receives income while she's on her mat leave period then the gov't will ask for money back from her mat leave payments.
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Jan 2, 2007
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wesboag wrote: You are welcome.

If you are thinking about moving and you think you will need the "equity" in your house as a borrowing criteria, then RRSP's may not be your best bet as RRSP's are not taken into the equation when calculating the accumulation of assets one has through the lenders eyes as they are meant for retirement. With that said, If you both have good incomes, and the current home has appreciated a fair amount you may not need that extra $50k of equity in the house or 50k less of debt to show the new lender. Are you looking to upsize substantially? Any idea what your current debt to equity ratio is?

It’s a tough call, but if you have the RRSP room as you mention you do, more thought needs to be paid to this as the tax savings could be pretty large if the room is significant. It may even be worth it if you have 30k of room to put that in and take the refund and the remaining 20k and apply that to the mortgage.

We are looking to upsize substantially, not so much the house but the land moving from town out into the country. Our current house is worth approx 200k with about 60k remaining, we will be looking at approx 500-600k when we move. The 60k left on the mortgage is our only debt, we have a very small amount of savings and RRSP's, maybe 25k total. Not sure where that puts us on the debt to equity ratio. I would think our RRSP's will have easily enough room to take the 50k but I'm not sure how that works, can I put it all on the RRSP's? What would that give us for a return? Then apply it to the 60k debt as you indicated?
Member
Jan 2, 2007
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caltran wrote: You absolutely should not take income while she's on mat leave. You need to take the money at least one day before it starts or one day after it ends. If she receives income while she's on her mat leave period then the gov't will ask for money back from her mat leave payments.

Interesting, I was thinking since our income would be lower since she would be on mat leave that it would result in less taxing overall.
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Feb 7, 2008
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Matt723 wrote: Interesting, I was thinking since our income would be lower since she would be on mat leave that it would result in less taxing overall.

It's not as much a taxation issue as it is your wife having income while in Mat leave.

EI is paying her to be on mat leave and will not like it very much if they notice 50k worth of income during that period...
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Jan 2, 2007
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So it looks like so far the best thing I could do would be to take the money now, put as much as I can into RRSP's, take my tax return money and put it on the mortgage.
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Feb 15, 2012
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TripleHelix wrote: It's not as much a taxation issue as it is your wife having income while in Mat leave.

EI is paying her to be on mat leave and will not like it very much if they notice 50k worth of income during that period...

Basically this. They'll just claw all of the EI back so definitely don't take it during mat leave.
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Jan 2, 2007
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wesboag wrote: Essentially yes, but again, are you fine using this money for retirement or is it best spent alleviating debt? From what you have disclosed, you have only 60k left on your mortgage. I’m not sure how old you are, but you appear to be wise with your money. With an income of 50k each (again, knowing your exact incomes as well as each person’s contribution rooms is big here as this will better determine how to allocate the monies to your RRSP's, i.e. just hers, combining yours and hers, spousal RRSP's, etc) from a tax savings it may be your best bet.

With that said though, she most likely will not get the full 50k up front. The company (depending on its accounting department) will most likely withhold a certain amount of taxes, CPP, perhaps EI, etc . So after all is said and done, she may only have $32,000 to work with for her /your RRSP’s. The taxable amount will be added to her income however. Giving her a reportable 100k income (give or take) for the tax year in which she takes it (if she’s working) At 100k, her tax savings on the 50k contribution (she may have less to contribute depending on taxes withheld) would be approximately: $18,025. Meaning, if she took the bonus it would be applied to her income giving her $100k and about $26,913 in taxes owing. With the RRSP contribution she lowers her taxes to $8,887 or by $18,025. Depending how she is taxed on this bonus (or how the company reports it) she may have to be taxed at source on this bonus, the savings or discrepancy will be in the form of a refund after tax filing.

All accounting aside, If she contributes 50k to her RRSP’s at 100k income, she’s looking at a refund around $21,705, which could be applied to your outstanding mortgage balance, if she of course has the room. Next would be to tackle your room.

This is great! Thank you so much for this information. I'll check out where we stand with our RRSP's and I think I'll go down this road and put any refund we receive back on the mortgage next year. We are 30 years old and try to be good with our money, my wife is just completing her schooling and we managed to come out debt free so that was a big goal for us that we reached. We don't have much in the way of savings/RRSP's because of this but we dump any extra money we have on our mortgage and pay accelerated weekly payments which have been doubled for the past 3 years or so. We actually still have some tuition credits to use on next years return as well. I think this plan is the best way to get the most out of this bonus over the long run.

Again, thanks for all your insight into this Wesboag!
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Nov 16, 2008
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wesboag wrote: With that said though, she most likely will not get the full 50k up front. The company (depending on its accounting department) will most likely withhold a certain amount of taxes, CPP, perhaps EI, etc . So after all is said and done, she may only have $32,000 to work with for her /your RRSP’s.
In our company we can put up to a max of 90% of the bonus into the RRSP via payroll deduction. They take 10% for tax, CPP, EI, etc..

if this is available to the OP, they may have the benefit of having $45K in RRSP growing for few extra month.

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