Ckeditor fake linebreaks with pasted text
If you're experiencing weird behavior on the editing side of CKEditor it's probably because of the CSS file being loaded by CKEditor.

CKEditor implements this in a way where it doesn't show up in my firebug. 

I can see the margins and padding when I hover on an element however nothing is shown when it lists the styles effecting the element. This causes the problem above.

How to fix it:

Changing the CSS file works, go to the CKEditor configuration page and select the CSS drop down menu.

Change CKEditor default to Define CSS and enter your own path for the CSS file. 

What I did however was edit the CKEditor default css file. It's located in ../modules/ckeditor/ckeditor/contents.css

I was getting a margin of 20px appearing on the top and bottom of all my elements. There was nothing in contents.css about it, I don't really know where it's coming from. 

But I added the following snippet which fixed it.

p,
h1,
h2,
h3,
ul li {

margin: 0 auto;

}