Year End RRSP Review:  Overcontributions?

How many times have you prepared a return for a client who has made an RRSP contribution (either to their own or their spouse’s RRSP) but really should not have?

If the investment was in excess of contribution room plus $2000, a monthly penalty tax of 1% of the excess contribution will be charged.  This can be avoided or minimized  when astute professionals with sound client relationships make RRSP contribution reviews a part of the year end interview process.

The object, of course is to remove the excess as soon as possible.  Even if clients are not subject to this penalty, there is merit in removing the contribution if there is little benefit from claiming the contribution.  That money can be better deployed in other tax-efficient investments, like a TFSA, for example.

How to get your money back.

There are two ways to get undeducted RRSP contributions back:  you can file form T3012A Tax Deduction Waiver on the Refund of Your Unused RRSP, PRPP, SPP, or RRIF Contributions made in 2014 with the financial institution and eventually get the money back with no withholding taxes deducted.  The major problem with this process is that the withdrawal has to be approved by CRA and so processing of the form may take several months.

The other option is to ask the financial institution to refund the undeducted contribution without CRA permission.  The process is much faster, but the financial institution will be required to withhold income tax.  Withholding rates will be 10% for withdrawals of $5,000 or less; 20% for withdrawals between $5,000 and $15,000; and 30% for withdrawals of more than $15,000.  The taxpayer will get a credit for the withholding when the tax return is filed.

Exempting the Withdrawal from Tax.

No matter which method is used, the taxpayer will receive a T4RSP showing the amount of the withdrawal.  If the T3012A form is not used, the T4RSP will also show the withholding tax.  Include the income shown on the T4RSP on the tax return (and  claim a credit for the withholding tax).

However, so long as the taxpayer has not claimed a deduction for the contribution (and either expected to be able claim a deduction for the contribution or, at least, did not make the contribution intending to withdraw it before deducting it) then a deduction for the amount withdrawn can be claimed.

To do this,  complete Form T746 Calculating Your Deduction for Refund of Unused RRSP, PRPP, and SPP Contributions and claim a deduction for the withdrawal on line 232 of the return.