RRSP Overcontribution

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bill
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RRSP Overcontribution

Post by bill »

I've been playing RRSP catch up for years, and in 2016 decided to finally max my contributions. This gave me a big tax refund, which I immediately dumped into an RRSP. When I looked at my Tax statement, I read the first part that said my RRSP contribution limit this year is $27000, based on 2016 earnings. I didn't scroll down to see that based on a pension adjustment, my actual room is only $17000. I wasn't paying attention, and didn't realize this until today - feeling stupid right now. I also contributed $5K in July, taking me to $22K already. Anyone ever dealt with something like this? Assuming I take out the extra $5K immediately, should I write to CRA and explain the mistake? I'm worried that this is going to be a mess from a tax standpoint this year.
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Re: RRSP Overcontribution

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You don't need to write and explain, you just need to pay the penalty (1% of the overcontribution in excess of $2k, per month). The form you need to fill is kind of complicated, so make sure you follow the instructions.

As for removing the excess, it's already December; next month you'll get new RRSP room which may stop the penalties, do some estimates.
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Re: RRSP Overcontribution

Post by bill »

Thanks. I probably need to call CRA and discuss. What I can't figure out is what happens in 2018. If I leave the $ in the account, does it just reduce my contribution room for 2018? I'm assuming I can't deduct the extra $5k in 2017, then would it reduce my contribution room in 2018 as well?

From what I found, there's a form to allow removing excess contributions without paying tax, but it takes a few months to process.
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Re: RRSP Overcontribution

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bill wrote: 03 Dec 2017 09:35 What I can't figure out is what happens in 2018. If I leave the $ in the account, does it just reduce my contribution room for 2018? I'm assuming I can't deduct the extra $5k in 2017, then would it reduce my contribution room in 2018 as well?
December 2017 will be the last month in which you'll accrue a 1% penalty for overcontributing.
January 2018 you'll get new contribution room, which means:
- the penalty will stop accumulating,
- the former overcontribution will become a tax deductible contribution (for the 2018 calendar year, tax return to be filed in spring 2019),
- you're back to regularly scheduled programming.
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Re: RRSP Overcontribution

Post by bill »

adrian2 wrote: 03 Dec 2017 11:54
December 2017 will be the last month in which you'll accrue a 1% penalty for overcontributing.
January 2018 you'll get new contribution room, which means:
- the penalty will stop accumulating,
- the former overcontribution will become a tax deductible contribution (for the 2018 calendar year, tax return to be filed in spring 2019),
- you're back to regularly scheduled programming.
Many thanks, that sounds like this isn't too big of a hassle.
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Re: RRSP Overcontribution

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bill wrote: 03 Dec 2017 12:10 Many thanks, that sounds like this isn't too big of a hassle.
T1-OVP will be a bitch to fill out...
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Re: RRSP Overcontribution

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adrian2 wrote: 03 Dec 2017 15:03
bill wrote: 03 Dec 2017 12:10 Many thanks, that sounds like this isn't too big of a hassle.
T1-OVP will be a bitch to fill out...
Thanks. It's separate from tax return, yes? Tax SW won't fill this out for me I assume.
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Re: RRSP Overcontribution

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bill wrote: 03 Dec 2017 15:30
adrian2 wrote: 03 Dec 2017 15:03
bill wrote: 03 Dec 2017 12:10 Many thanks, that sounds like this isn't too big of a hassle.
T1-OVP will be a bitch to fill out...
Thanks. It's separate from tax return, yes? Tax SW won't fill this out for me I assume.
You're welcome. Yes and yes (I've linked it upthread).
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Re: RRSP Overcontribution

Post by zeno »

It's that time of year again when one of us realizes they've over contributed beyond the 2k buffer.
This thread answers most of my questions. This person will have to fill out a T1-OVP, and their tax filing software (Ufile) won't do it for them.
Does this mean that the return cannot be netfiled? Or can the return be netfiled and the T1-OVP mailed separately? Asking for a friend :wink:
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Re: RRSP Overcontribution

Post by Rysto »

I have overcontributed in the past, and I netfiled my return and filed the T1-OVP separately (along with a cheque for the penalty). It wasn't too terrible.
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Re: RRSP Overcontribution

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Something I have idly wondered about.

DW and I stopped receiving "earned income" several years ago and thus stopped accruing RRSP room. We have used up all accumulated room. We do not plan on doing any RRSP withdrawals or a meltdown for another 15 years (or more).

Can we still voluntarily over contribute the $2,000 each ? I know that it wouldn't earn a tax credit (nor should it) but it would add to the sheltered pot and 15 years is still a long time to compound tax free.

A combined 4K won't even really be a blip on the radar. But, as I said I am curious. If it were to attract unwanted CRA attention we wouldn't do it either as it wouldn't be worth the hassles.
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Re: RRSP Overcontribution

Post by AltaRed »

But in this case you will be taxed on everything coming out. Are you sure you can do better with that headwind than for example simple cap gains in a non-reg?
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Re: RRSP Overcontribution

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Koogie wrote: 03 Mar 2019 17:22 Something I have idly wondered about.

DW and I stopped receiving "earned income" several years ago and thus stopped accruing RRSP room. We have used up all accumulated room. We do not plan on doing any RRSP withdrawals or a meltdown for another 15 years (or more).

Can we still voluntarily over contribute the $2,000 each ? I know that it wouldn't earn a tax credit (nor should it) but it would add to the sheltered pot and 15 years is still a long time to compound tax free.

A combined 4K won't even really be a blip on the radar. But, as I said I am curious. If it were to attract unwanted CRA attention we wouldn't do it either as it wouldn't be worth the hassles.
Yes you can do it and CRA is fine with it as you are within the rules.

However as AR says, you may be better off tax wise investing the money outside the RSP.
Of course this may depend on what you invest in and your tax rate at the time of withdrawal.
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Re: RRSP Overcontribution

Post by Koogie »

Thank you both for the confirmation. I admit it is probably "skating too close to the edge" for my comfort so we are unlikely to do it.

As to the taxation question, you may well be right. However, that isn't really a calculation I feel that can be done with any accuracy. Far to many assumptions need to be made about the variables.
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Re: RRSP Overcontribution

Post by OptsyEagle »

Contributing to an RRSP and not getting a tax deduction means that the money you used will receive "double" taxation. Very rarely can one overcome the financial negatives created by double taxation.

So no, I would not do that.
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Re: RRSP Overcontribution

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OptsyEagle wrote: 04 Mar 2019 08:39 Contributing to an RRSP and not getting a tax deduction means that the money you used will receive "double" taxation. Very rarely can one overcome the financial negatives created by double taxation.
So no, I would not do that.
In what way do you mean ?

I have the money. It is funds in my hands that have already been income taxed (first instance).

If I keep it unregistered and invest it, I will pay tax on any distributions and a cap gain tax (hopefully) when I sell it in order to spend (second instance).

If I put it into the RRSP, I will not pay any ongoing tax on distributions but will pay tax when the money is withdrawn and spent (second instance).

I fail to see a difference in the taxable instances ?

What is debatable is the level of taxation, timing of taxation, taxation rules now versus the rules later and whether or not sheltering the profits creates more benefit after tax than keeping them non registered.
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Re: RRSP Overcontribution

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Koogie wrote: 04 Mar 2019 10:29
OptsyEagle wrote: 04 Mar 2019 08:39 Contributing to an RRSP and not getting a tax deduction means that the money you used will receive "double" taxation. Very rarely can one overcome the financial negatives created by double taxation.
So no, I would not do that.
In what way do you mean ?

I have the money. It is funds in my hands that have already been income taxed (first instance).

If I keep it unregistered and invest it, I will pay tax on any distributions and a cap gain tax (hopefully) when I sell it in order to spend (second instance).

If I put it into the RRSP, I will not pay any ongoing tax on distributions but will pay tax when the money is withdrawn and spent (second instance).

I fail to see a difference in the taxable instances ?

What is debatable is the level of taxation, timing of taxation, taxation rules now versus the rules later and whether or not sheltering the profits creates more benefit after tax than keeping them non registered.
In the second alternative, you pay tax on the principal component, at the time you withdraw it. The principal has been taxed once, and will be taxed again.

I the first alternative, the principal has only taxed once (before the timeline discussed).
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Re: RRSP Overcontribution

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Koogie wrote: 04 Mar 2019 10:29 If I keep it unregistered and invest it, I will pay tax on any distributions and a cap gain tax (hopefully) when I sell it in order to spend (second instance).

If I put it into the RRSP, I will not pay any ongoing tax on distributions but will pay tax when the money is withdrawn and spent (second instance).

I fail to see a difference in the taxable instances ?
As Adrian said, and I said above, and Optsy Eagle said, the $2000 in capital you contributed to the RRSP (and couldn't take the deduction on) will be taxed again on the way out along with all the growth. In a non-reg, that $2000 remains your ACB and only the gains are taxed as interest, eligible dividends or cap gains. There is no reasonable circumstance I can imagine where you can gain enough in tax deferral to make up for the needless taxation on your base capital of $2000 via the RRSP route.

I got rid of my $2000 over-contribution the year I retired, and still had deduction room.
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Re: RRSP Overcontribution

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AltaRed wrote: 04 Mar 2019 10:51 As Adrian said, and I said above, and Optsy Eagle said, the $2000 in capital you contributed to the RRSP (and couldn't take the deduction on) will be taxed again on the way out along with all the growth.
Not entirely correct. The T1OVP can be used to withdraw the $2,000 overcontribution without taxes and without penalties. I haven't looked at the form in a while, but I believe it hasn't changed and has no time limit. The calcs essentially allows you to withdraw any overcontribution (including the first $2000), and then calculates the penalty on everything beyond the $2000 limit. The profits on that $2000 will be taxed as regular withdrawals.

Essentially, if you start and carry-forward a $2000 at 25, you should be able to withdraw it at 70 without penalty under the current rule. You will be single-taxed on only the growth. You only get double-taxed if you inadvertently forget and withdraw it as a regular RRSP/RRIF withdrawal.
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Re: RRSP Overcontribution

Post by AltaRed »

A new revelation (twist) I was not aware of. Takes away the unnecessary extra taxation on the $2k, but probably still not worth the nuisance value of deferred tax on the growth.
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Re: RRSP Overcontribution

Post by Koogie »

I see. The eventual withdrawal I hadn't thought of obviously but it seems that might be a moot point anyway.

Still, doesn't seem like an overly productive course of action.
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Re: RRSP Overcontribution

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The T1-OVP is a form they use to determine how much money one owes from over-contributing to their RRSP. The $2,000 over-contribution allowance is specifically subtracted out. So I doubt the T1-OVP would help fix this. There is a T3012 form but I think everything has to be removed within one year AND you have to attest that you believed you would be able to deduct it.

Anyway, using a "mistake" form to fix something that was not supposed to be a mistake is not something I would do. The over-contribution allowance is to cover mistakes. It use to be for $8,000 and when so many idiots started using it (the idiots being the financial advisors advising them) the government lowered it to $2,000. My advice. Keep it for mistakes.
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Re: RRSP Overcontribution

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OptsyEagle wrote: 04 Mar 2019 13:41 My advice. Keep it for mistakes.
+1 :thumbsup:
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Re: RRSP Overcontribution

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OptsyEagle wrote: 04 Mar 2019 13:41 The T1-OVP is a form they use to determine how much money one owes from over-contributing to their RRSP. The $2,000 over-contribution allowance is specifically subtracted out. So I doubt the T1-OVP would help fix this.
Yes. You are correct. I was mistaken.

It's actually simpler than that. The $2000 just stays as undeducted until your last year of employment, at which time you finally deduct it avoiding double taxation. It is the Schedule 7 that one can follow line by line to confirm. No need to withdraw it.
longinvest wrote: 04 Mar 2019 15:37
OptsyEagle wrote: 04 Mar 2019 13:41 My advice. Keep it for mistakes.
+1 :thumbsup:
Agreed. I'm not carrying an overcontribution. In the scope of things, with $200-300k of inflation-adjusted TFSA room and much more in RRSP room over one's lifetime, exploiting a non-indexed $2,000 overcontribution is the equivalent of stopping to pick a penny off the sidewalk.
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Re: RRSP Overcontribution

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I thought it was fairly dumb when it was $8,000, but I do remember some reasonably good articles by Financial Advisors who thought that it was a great idea, seeing how they would receive a commission for the investment, as well. I doubt the strategy was any different, when it went to $2,000 but somehow when the commission dropped by around 75%, it was not overly advised anymore.

Let's face it. The government lowered it to take away the benefits of using it, for anything other then mistakes.

The Gov't thought they should take a little responsibility for the confusion around RRSPs. I have no idea why. They are quite simple. Just remember that last years income but not all of last years income only earned income, is used for this years contribution room and the 1st 60 days of the new year will work for the tax year of the year before, but don't forget any unused contributions not used in previous years, can be deducted this year or carried forward to next year. If you don't remember how much, there are a couple confusing lines on your NOA labeled A and B that might help. Remember to subtract your pension allowance, which is not the amount you contributed to the pension, but more what you benefitted from it. That gets really messed up if you purchased past service pension credits. Also any contributions to a spousal plan are contributions that you deduct but contributions your spouse makes to their plan are deductions they deduct. Lastly, don't forget you owe some money to the HBP when you bought your house 11 years ago. Any questions.
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