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Dollars and Sense: RRSP Tax Bites

By Sheila Nelson, CA

Wednesday, April 18, 2007 03:45 AM

The Canada Revenue Agency (“CRA”) has embarked on a program to tax those individuals with an over-contribution to their RRSP’s.  Although this tax has always existed, it is not until recently that the CRA has decided to apply it.  Possibly, their computer systems are now to a point where they can pick this information out easily.
As a tax preparer, I am always on the lookout for this problem.  In fact, the tax program we use gives a diagnostic if there is a perceived over-contribution.  However, I haven’t seen much of it lately, possibly because the contribution rates have been steadily climbing: a maximum of $18,000 in 2006 and $19,000 in 2007.
However, it does occur in situations where, for example, there is a buy back of past service.  It seems to take the government a little while to catch-up with all its paper work with the result the contributor may make an RRSP contribution in a year when their contribution limit is zero or even negative.
Another example I have seen is an employee with a fairly rich work pension plan, resulting in very little, if any, room for an RRSP contribution.  Again, an investor may make a contribution anyway, resulting in the penalty tax.
Your RRSP contribution is limited to your “deduction limit” (see your latest personal tax notice of assessment for this amount) plus $2,000.  If the amount you can contribute in 2007 to your RRSP is $10,000, the maximum contribution you can make in 2007 is $12,000.
Any over-contribution to your RRSP will attract a tax of 1% of the excess for each month that over-contribution exists.  So, what can you do?
-You might want to consider taking the over-contribution out of your RRSP account.  There are special forms to do this.
-Are you going to be able to use this contribution in future years?  If so, pay the penalty tax and use it as soon as you can.
-If you made the contribution in the first 60 days of the year, remember it can be used either for the current year or last year.
-Consider applying for a waiver of tax if the over-contribution arose as a result of a reasonable error and reasonable steps are being undertaken to eliminate the over-contribution.
Sheila Nelson is a  Chartered Accountant and Partner   at Chan Foucher LeFebvre LLP
Visit  their website at
opr you can reach Sheila by e-mail   

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My advice is to keep your receipts longer than 7 years. RCA are on fishing trips these days and are going back as far as 1993 & 1994.

Thankfully, my memory is better than the young people RCA hired to chase down this money. I'm old enough to remember when the over contribution limit on RRSP's was $8,000. Most of the employees at RCA today don't. Don't let them bully you. Great reason to have a Financial Advisor or an Accountant who knows the rules. Chester