Client Over-contributed to a RRSP?
By Richard Tebb
Relationship Management Team
Canadian Western Trust
Don't worry; it's a fairly common oversight.
However, the urgent issue is dealing with it correctly and quickly to avoid the 1% per month tax penalty set by Canada Revenue Agency ("CRA") on excess contributions. Here are some general guidelines to assist you.
If you or your client are in this position review Form T3012A and T746 and consult with an experienced tax professional or accountant before taking any action as individual circumstances may affect the outcome. CRA states, there must be a reasonable assumption that you could have fully deducted all contributions in the year that they were made, or the previous year, and that you or your client did not make the contributions with the intention of withdrawal.
First, have you or your client actually over-contributed?
- Check the latest notice of assessment for deduction limits including any unused contribution room carried forward from 1991 and later years.
- Are any contributions designated as repayments under the Home Buyers Plan or Lifelong Learning Plan? If so, they will not be considered as a contribution.
- How much has been over-contributed? CRA allows a maximum $2000 over-contribution, assuming you are over 18 years of age.
- Did you make contributions in the first 60 days of the current year? If so, you can keep it in your RSP carrying forward the excess amount to be applied to next years taxable income.
In the event there is an actual over-contribution CRA states the annuitant must withdraw the excess amount. Remember, this withdrawal is considered income and must be reported as such. However, an offsetting deduction may be available. There are two distinct ways to make the withdrawal.
- Complete CRA Form 3012A [http://www.cra-arc.gc.ca/E/pbg/tf/t3012a/t3012a-04e.pdf] If you choose to complete the 3012A, it must be sent to CRA for certification and then to the issuer of your RRSP. Your withdrawal will then be processed with no tax withheld.
- Simply request a withdrawal of your unused contribution directly through the issuer of your RRSP. If you choose this method, the issuer of your RRSP will withhold tax, but you may claim an offsetting deduction.
In both cases you will need to report the amount withdrawn as income on line 129 of your Income Tax Return.
- If you filed a T3012A claim the offsetting deduction on line 232 of your return, attach a copy of the T3012A and the related T4 slip to your return.
- If tax was withheld from the payment, you would claim that amount on line 437 of your return, then complete CRA Form T746 [http://www.cra-arc.gc.ca/E/pbg/tf/t746/t746-04e.pdf] to calculate the eligible amount of your deduction and claim that amount on line 232 of your return.