The Companion Advisor:
Avoid RRSP OvercontributionsIf you contribute more than your contribution limit, you will
be subject to a 1% penalty tax per month to the extent that the overcontribution
amount exceeds $2,000. This penalty tax is expensive, ensuring that it is
not worthwhile to make overcontributions above this limit.
You can make an extra one-time $2,000 overcontribution to your RRSP without
being subject to the 1% per month penalty tax on overcontributions. This
will enable you to shelter the income on the $2,000 from tax.
The $2,000 cushion is intended as a protection from inadvertent overcontributions.
Therefore, if you use up the cushion, you have absolutely no margin for
error left. This would usually only be a concern for members of pension
plans, but could also cause problems for other individuals.
Also note that if you decide to take the $2,000 out of your RRSP, the
withdrawal will be taxable without you ever having received the benefit
of a tax deduction for the contribution. Although it is possible to remove
inadvertent overcontributions from an RRSP without tax (an offsetting
deduction is provided), this remedy is not available where the overcontribution
was made intentionally.
There is a solution to this problem. You can deduct any contribution
made in a prior year to the extent it was not previously deducted, provided
you have unused contribution room. Therefore, the $2,000 could be deducted
in a subsequent year by treating it as part of that year's contribution
limit. In fact, you could even deduct it after you reach 71 (which is
the year in which you must collapse your RRSP) if you still had earned
income in the prior year. Of course, if the $2,000 stays in your RRSP
long enough, the advantage of tax-free compounding of income will outweigh
even the disadvantage of having the undeducted amount taxed on withdrawal.
* * *
||Use this link to load a printer-friendly
version of this document.
Have a question regarding
this article? Use our feedback form
to send us a note.
, Fiscal Agents Money Management Newsletter
25 Lakeshore Road, Oakville, On L6K 1C6.