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Friday, April 24, 2015

The Money Management Newsletter - Bulletin

The Money Management Newsletter - Bulletin

How to fix RRSP overcontributions
By Jessica Bruno, December 5, 2014
Why read this?
  • You have an RRSP
  • You’ve exceeded your contribution limit
What’s an overcontribution?

If you have undeducted RRSP contributions exceeding your deduction limit by more than $2,000, you’ve overcontributed.

What to do

STEP ONE: Decide whether or not to withdraw the money.

Canada Revenue Agency (CRA) may penalize overcontributions above the $2,000 cushion by 1% of the excess amount per month, but you aren’t obligated to withdraw the money, says Sandy Kirkwood-Pearce, owner and president of Sleegers Kirkwood-Pearce. “If the investment is doing really well, the consequences of the overpayment penalty […] might be overshadowed,” she says.

STEP TWO: If you decide to remove the money, ask CRA to waive withholding tax.

  1. Use Part 1 of Form T3012A Tax Deduction Waiver on the Refund of your Unused RRSP, PRPP, SPP, or RRIF Contributions made in ___ (year) to calculate the amount the RRSP administrator can refund without withholding tax.
  2. Under Part 2, designate which RRSP to withdraw the money from, and a destination account.
  3. Attach proof of the overcontributions, such as certified copies of receipts, and send four copies of the form to CRA.
  4. If CRA approves, it will return three signed copies of the form.
  5. Send the copies to your financial institution.
  6. Once the withdrawal is done, the institution will return two copies.
TIP: Filling out the T3012 may not be worth the time, or the accountant’s fees, if there’s little tax to be withheld, says Karen Slezak, a tax partner at Crowe Soberman LLP. “Withdraw the overcontribution and don’t worry that there will be some withholding tax,” she says. The tax withheld will count toward your annual tax return. Take the money out in batches under $5,000 to minimize withholding tax, Slezak adds.

STEP THREE: Ask CRA to waive the 1% monthly excess contribution tax.

- CRA may approve your request, if:

  1. your excess contributions arose due to a reasonable error; and
  2. you’re withdrawing, or have withdrawn, the excess contributions.
- To make a request fill out Form RC4288 Request for Taxpayer Relief – Cancel or Waive Penalties or Interest or write to CRA explaining:

i. why the error was made, and why it’s reasonable; and

ii. any steps you’ve taken to eliminate the excess contributions. Include copies of supporting documents, such as RRSP statements, that show you have withdrawn the excess funds, and any correspondence related to the error.

STEP FOUR: If CRA assesses the unused contribution room as a negative amount, you received gift money in your RRSP or you contributed money to your partner’s RRSP without claiming a tax deduction, you may have to submit Form T1-OVP Individual Tax Return for RRSP Excess Contributions.

  1. Determine whether you should submit the form with CRA’s T1-OVP quiz.
  2. If necessary, complete Form T1-OVP.
  3. Send CRA the form and outstanding tax.
WARNING: Payment is due 90 days after the end of the tax year. Starting on day 91, CRA charges compound daily interest on unpaid tax or penalties, a late filing penalty of 5% of the balance owing, and 1% of the balance for every month a return is late.

STEP 5: Complete your annual return.

  • If you paid withholding tax:
    • Fill out form T746 Calculating Your Deduction for Refund of Unused RRSP Contributions.
i. Enter the amount on Line 11 of the T746 on Line 232 of the return.

TIP: Complete a separate T476 for each year of overcontributions.

  • Write the amount in Box 20 of your T4RSP Statement of RRSP Income slip on Line 129 of the return.
  • Submit the T746 and T4RSP with your return.
  • If you didn’t pay withholding tax and have already filed the T1-OVP, complete your return as usual, says Kirkwood-Pearce.