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Over-contributions
to RRSP's
are more common than you think:
For the 2006 tax year, Canada Revenue Agency notified more than
100,000 Canadians about over-contributions to their Registered
Retirement Savings Plans (RRSPs).
The Federal Government sets out guidelines each year for the amount
Canadians can contribute to their Registered Retirement Savings
Plan (RRSP). You can find out your total deduction limit on your
Notice of Assessment from the last tax year. The government does
allow you to over contribute to your RRSP by up to $2,000 without
being penalized.
If you have
over contributed, you are subject to a one per cent penalty tax
for each month you are in excess. You need to complete a T1-OVP
Individual Tax Return for RRSP Excess Contributions to calculate
the amount of over contribution and penalty tax. This form must
be filed with the taxes remitted within 90 days of the end of
the year.
If you find yourself in an over contribution position, you should
try and withdraw the excess amount as soon as possible. Although
you must include the withdrawal in income on your tax return,
you can claim an offsetting deduction as long as the following
conditions are met:
- You reasonable
expected to be able to claim a deduction for the contribution,
either in the year you made the contribution or the year before;
and
- You did
not make the contribution with the intention of later withdrawing
it and deducting the offsetting amount.
However, you
must make the withdrawal no later than the year after the year
in which you received a Notice of Assessment or Reassessment for
the year in which you made the over contribution.
You can ask
CRA to certify the amount of the excess contribution using Form
T3012A. The form allows your financial institution to release
the funds without withholding any tax. Even without the T3012A
form, you can still withdraw the excess but your financial institution
will withhold the tax. In this case, you can use Form T746 when
you file your tax return to claim the offsetting deduction and
a credit for the tax withheld.
You will still
be subject to the penalty tax for the months in which an excess
contribution existed. However, you can request a waiver of the
tax if:
- The excess
amount arose as a consequence of a reasonable error; and
- You can
demonstrate that you are taking reasonable steps to
eliminate it.
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