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April 11, 2011 8:25 AM   Subscribe

Canada tax: Question about timing of RRSP contributions. Did we mess up?

Following our bank's advice, on 6 January this year my wife and I both contributed $ABCDE to our respective RRSPs, so we can use the cash as part of the Home Buyers' Plan. Our bank manager calculated based on our salaries and pensions what we would be able to put in without any penalties.

We want to use the tax refund as part of our deposit. But when filling in our 2010 tax return with TurboTax, we're being told we overcontributed.

We have our Notice of Assessments for 2010. My wife's RRSP limit for 2010 was about 20% of $ABCDE. My own was the price of a double-double.

So what happens now? Do we put our contributions in our 2010 tax return in TurboTax and carry it forward somehow (how? where?)

Or do we not mention it and wait until we fill in our 2011 tax refund to enter the RRSP contribution, when (I assume) our RRSP limits go up? Will we have to wait until next year to get the refund?

I'm new here, and don't understand how RRSPs work. This is such a simple question, but neither of us can find proper answers online...YANMA, but do you have any ideas?
posted by randomination to Work & Money (6 answers total)
 
You can put them the part that's over your limit on your 2011 return, but given that you're already maxed out for this year and you'll still have 80% left to deduct, you probably won't have enough room next year, either. You won't pay penalties for over-contributing, you just won't get to deduct that money. If you had your notice of assessment, why did you not know you couldn't contribute that much? Maybe your banker was explaining the limits for withdrawing from the RRSP for a first-time homebuyer, not the limit to contribute (which they couldn't know without your notice of assessment).

Remember, that you can only take out so much from your RRSPs for the home purchase (22k? something like that), so anything else you put into your RRSP will have to stay there or you may have to pay income tax on this when you take it out.

Anyway, you should ask your banker, but I don't see that you have anything to lose here by pulling anything above your contribution limit out of your RRSPs since you'll have to pay income tax on it either way.
posted by If only I had a penguin... at 8:37 AM on April 11, 2011


You can put them the part that's over your limit on your 2011 return, but given that you're already maxed out for this year and you'll still have 80% left to deduct, you probably won't have enough room next year, either.

What's probably worth emphasizing is that as we're new residents and we were outside of the country until 2009, our RRSP limits started near zero. I'm expecting one year's full salary from 2010 for the both of us to help us up to that limit and give us room.

But we can't claim that right now, yes? Or no? Or something?
posted by randomination at 8:41 AM on April 11, 2011


Something similar happened to me a few years back, in a similar house-buying scenario. If I remember correctly, I over contributed , so that I had to carry it forward, as you put it. I declared everything the first year, claimed the max I could for that year and the overcontribution was carried forward over a few years (Revenue Canada keeps track of all of this). There might be a limit but I don't know what it is. As randomination said, talk to your banker...
posted by bluefrog at 9:39 AM on April 11, 2011


For 2010, deduct only the amount that you are permitted. Because you actually purchased the investment in 2011, you can put the rest towards your 2011 income. But you are going to want to make sure now that you're not going to be over your 2011 limit, which, assuming you are not part of a company pension plan, is going to be the lower of 18% of your income or $22,450. There is a $2000 cushion beyond that for which you do not have to pay penalties for excess contributions, but if you each put in $25,000 for the Home Buyers' Plan, then you may have to pay a penalty of 1% per month. The other thing to consider is that the money will be double-taxed - because it's beyond your contribution limit, it will be taxed in 2011, then it will be taxed again when you withdraw it in 2050 or whatever. The way to avoid this is to withdraw the excess from your RRSP before the year is out and transfer it to another investment.

Also keep in mind that for the Home Buyers Plan, your investment must have been in your RRSP for 3 months - you can't put it in and withdraw it immediately.

You may find this page and the links from it useful.

You may also need to fill out a Schedule 7 form because "You will not be deducting on your return for 2010 all of the RRSP contributions you made from March 2, 2010, to March 1, 2011."

Honestly, tax makes my head hurt. A call to the CRA or the bank wouldn't hurt to find out if simply transferring part of your invesment funds into a non-RRSP account wouldn't make this all go away.
posted by Dasein at 10:17 AM on April 11, 2011


we're being told we overcontributed

Phone up Revenue Canada, and make sure this is true. It is possible that, since this is your first Canadian Tax year (oh, the joy!), TurboTax isn't giving you the correct answer. I've had very good luck talking to the folks working the phones at RC. I have less confidence in turning to your bank's representative, since, in my experience, these folks are often under-qualified and under-experienced.

So what happens now? Do we put our contributions in our 2010 tax return in TurboTax and carry it forward somehow (how? where?)

You deduct only the amount of contributions you have room for (in tax year 2010). The balance will be available for deduction for tax year 2011. Yes, you will have to wait until next year to get the refund. AFAIK, you will be able to withdraw the 25K$ for home downpayment, even if you haven't deducted it all.

But we can't claim that right now, yes? Or no? Or something?

Nope. That room will exist for tax year 2011.

Finally, especially if you are considering a large debt load, consider hiring the services of an independent, fee-only financial advisor. Avoid using the bank's 'advisors' as their skill set and compensation scheme leaves much to be desired.
posted by bumpkin at 10:20 AM on April 11, 2011


Thanks everyone! I think Schedule 7 seems the way to go here...
posted by randomination at 6:25 AM on April 12, 2011


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