Getting penalised for over-contributing to my RRSP

January 21, 2010 6:52 AM

On Canadian taxes, specifically with RRSP contributions.

My employer offers a RRSP defined-contribution scheme where on every paycheque, they will contribute the equivalent of a certain percentage of my pay to a RRSP account offered through the company. I also have another RRSP account where I make occasional lump sum contributions.

The past October, I made a lump sum contribution to the second plan for an amount that should've bought me to just about exhausting my RRSP limits with my final 2009 pay. Unfortunately, I miscalculated somewhere and went way over my contribution room with that lump sum alone.

I filed the first 60 days of 2009 contributions with my 2008 taxes and I plan to file the first 60 days of my 2010 contributions with my 2010 taxes. Taking the contributions made in between, I am still $6K over the contribution room as stated on my last notice of assessment.

Things I think I know from Google and from reading the CRA website, specifically this page:

• The first $2K of excess contributions is not penalised
• There is a penalty of 1% per month on the excess contribution
• Withdrawal from my RRSP would forever eliminate that contribution room and also incur income tax on that amount
• My RRSP contribution room increased by 18% of my 2009 income as of January 1st this year

You are not a tax accountant, nevermind being my tax account, but am I correct in believing that the best course of action is to simply file the T1-OVP and incur the 1% penalty, which would be only for the $4K in the months of October to December?

posted by tksh to Work & Money (6 answers total)

Best answer: Given that withdrawing them now would not get you out from the 1% (per month) tax for 2009, and assuming that this doesn't add up to an overcontribution for 2010 when you take into account the employer's contribution and the first 60 days of 2010, there is no need to withdraw.

You obviously want to avoid this happening for 2010, though, so be careful about the employer contributions. CRA goes after RRSP overcontributors.

I am not an accountant.
posted by jeather at 7:53 AM on January 21, 2010

Response by poster: That's a good point.
posted by tksh at 8:56 AM on January 21, 2010

Note that you can withdraw overcontributions tax free for the two following calendar years (there is some form to do so), though you are still fined the 1% per month while they are in there.

Also recall that there are all sorts of weird rules once you take into account the home buyers plan or education thing, so this doesn't necessarily apply for either of those cases.
posted by jeather at 9:12 AM on January 21, 2010

Response by poster: Fortunately, haven't invoked those RRSP withdrawal plans yet. I didn't realise excess-contributions can be withdrawn tax free after penalty. Do you have a link with more info? Does that eliminate the contribution room?
posted by tksh at 10:05 AM on January 21, 2010

I am not clear what you mean by eliminate the contribution room. The overcontribution has no room, so -- to the best of my knowledge -- you do not have less contribution in years going forward. The form you have to file is T3012a. Here is a discussion from Collins Barrow. I believe but am not sure that the 2000$ room reappears in later years.

You should phone CRA, who will happily explain all the details to you so you won't make any mistakes in filing. They are helpful and you can then depend on what they have told you, in case the internet is mistaken.
posted by jeather at 2:51 PM on January 21, 2010

Response by poster: As I understand it, I'll only have to pay penalty up to but not including January this year because my contribution room increased on the 1st of this year so I'm technically no longer exceeding my contribution room. If I were to withdraw an amount from my RRSP, wouldn't that be akin to a regular withdrawal except for the tax exempt?
posted by tksh at 7:17 AM on January 22, 2010