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Friday, August 29, 2014

RRSP Over Contribution

Posted by Tim Stobbs on March 19, 2014

I finished a draft run on my taxes from last year for both my wife and I and realized I have a small problem.  I did much better on contributing to our RRSPs than I thought I did.

On the plus side I should be getting back over $4000 in a refund.  On the down side I believe I have burned through all my backlog of RRSP contribution room and then some.  At first I thought I was fine and then I realized if I claimed all the contribution in the first 60 days of this year on my 2013 taxes I would end up over contributing by just under $200 than my limit.

Now I have two potential solutions to this RRSP over contribution issue:

  1. Don’t claim $200 of RRSP contribution in 2013 and carry it for use in 2014 or
  2. Do nothing and realize I can over contribute by $2000 in an RRSP for a given year.

I had forgotten option #2 existed until I was reviewing some tax websites, so I tempted to just do nothing and take the refund.  After all it will balance out next year anyway.

In the longer term I now have to look at potentially doing something, but I’m not 100% sure I can.  I’m out of back contribution room in my RRSP, but my wife has about $20,000.  Yet she earns so little she doesn’t pay any income tax.  So I’m looking into if she contributes lets say $10,000 to her RRSP that would drive her income to zero and then does that trigger the transfer of her basic income deduction to me?  Thus giving us a tax savings at my marginal rate.  That is all in theory, I need to confirm we could do it.

Yet that plan would have a downside of introducing a zero income year on my wife’s CPP calculation.  Which would be fine if that occurs during a year when she could claim a child rearing provision to her CPP calculation, but otherwise may lower her CPP benefits in the long run. Ah choices in life.

So have you run into any odd situations with your income taxes this year?  If so, please share what it was and how you dealt with it.

Comments

14 Responses to “RRSP Over Contribution”
  1. Canuckguy says:

    “..she could claim a child rearing provision to her CPP calculation”
    The CPP eliminates the 5 lowest earning years(I believe it is 5, might be higher now)for anybody regardless whether children are involved or not. It’s to ones benefit to have those year not included. I retired at 55 and my CPP was not affected in an adverse way while I waited to collect. They have a helpful help line to clarify such things, I suggest you call to confirm.

  2. Jay says:

    Congrats on using all the excess RRSP room!

    Nothing odd, it’s my first year with a dependent though. It’s weird seeing how that works. The first run I forgot I could claim my child…

  3. Alex says:

    This is a timely post for me since I realized that I overcontributed to my RRSP this year too. I discovered a flaw in my tracking system that made me think my RRSP contribution from my last paycheck in February would be invested in March, but I was wrong. So I am in the same boat as you. I too discovered the $2000 overcontribution forgiveness in an online search and I am thinking I will go that route as well.

    Regarding your wife’s RRSP contribution room, can’t you just contribute to a spousal RRSP and receive a tax refund at your marginal rate? http://bit.ly/1hB7oZG
    If not, perhaps you can explain to me why that is not possible?

  4. Andrew Gomez says:

    I am curious Tim as to why there is so much emphasis on your own RRSP? It sounds as though a spousal RRSP might have been more fitting in the big picture.

    Unfortunately the basic deduction will not be carried over. Why not carry forward the deduction? Or better yet, utilize a TFSA?

    Cunuckguy is correct though. There is a “general dropout provision” of 7.5 years for 2013.

    Alex, when you do a spousal contribution the deduction is calculated on the contributor’s tax rate but taxed on withdrawal on the beneficiary’s tax rate. If Tim is expecting a higher retirement income than his wife it would eliminate today’s tax efficiency.

    Kudos to maxing out that contribution room!

  5. Joel says:

    This post is so timley as I have over contributed to my RRSP this year because well I’m a bit of an idiot. As a 1%’r and my wife is a lower income, I was following the basic rule that I should contribute to her RRSP for the reason Andrew mentions above. However, the one thing I forgot to look at was my own deduction limit individually, and not our combined deduction limit. So this year I made my normal contribution to my RRSP up to my deduction limit (18% * Income to a max of $23,820). Then I made a contribution to my wife’s RRSP for like $15K so that I could get the tax deduction from the contribution – WRONG! Ooops, what was I thinking, now I am way over contributed and clearly in the danger zone.

    So I was looking up on the cra website to determine if I have to fill out T1-OVP, http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/cntrbtng/xcss-eng.html. Further, there is a second page to determine if you have to fill out the form here. http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/cntrbtng/t1vp-eng.html

    so now, I might need to bounce this off you guys to see what you think? I will have excess contributions of ~$15K to carry forward to 2014. My 2014 deduction limit will max out at ~$23,820. There are a series of steps to determine if you need to fill out this T1-OVP form and get hammered to the tune of 1% per month on the excess contribution. Clearly bad news.

    Step 1 – Yes, I’ve made contributions that I can’t deduct because I’ve exceeded my own personal deduction limit.

    Step 2 – No – $15K is not more than $23,820.

    Step 3 – No – I’m older than 18.

    Step 4 – This is the tricky one.. “Your unused RRSP contributions (including gifts) made from January 1, 1991, to December 31, 2013, are less than the total of your 2013 RRSP deduction limit from your latest notice of assessment or notice of reassessment plus $2,000.” If the answer is yes, you do not have to complete a 2013 T1-OVP. I think the answer to this one is Yes because $15K is less than $23,820 + $2,000 = $25,820.

    So I’m thinking that perhaps I won’t need to withdraw the contribution (I may still get dinged for interest charges).

  6. Bobby V says:

    With income splitting for retired couples in effect, it reduces your emphasis on contributing to a spousal RSP. In fact, the cynic in me says it’s better to keep it in your own in case of a divorce later on in life.

  7. Andrew says:

    A couple of queries related to your wife claiming and RRSP deduction herself

    1) I thought CPP contributions were calculated based on employment income, not taxable income (i.e. RRSP deductions are not considered). So not sure if CPP is an issue in this situation?

    2) I also was of the thought that the basic personal amount was a credit, not a deduction. So is worth 15% (federal) regardless of marginal tax rate?

    Or I could have my wires crossed!

  8. Tim Stobbs says:

    Oh, very good questions and discussion. Thanks everyone.

    A few general comments, actually the majority of the contributions were to my wife’s spousal RRSP ~90%. The second is regarding CPP, you have to recall I’m already planning for several $0 income (or very low) years during our early retirement period. So we will blow through the basic removal for both of us easily. Hence adding additional $0 years does become a bit more significant of a issue if I can’t shield them with the child care dropout.

    @Alex – Not a bad idea, but it won’t work. If I make a spousal contribution it come off my RRSP contribution room and I get the tax credit, but the RRSP withdrawal will come out as under my wife’s name. If she tries to do it, it works in reverse and it doesn’t provide any tax relief to me and puts more money in my hands at retirement…again it doesn’t help.

    @Andrew G – Re: TFSA – good idea, but we max those out last year. I only have the $5500 each this year which we will blow through in a few months. In the end we are going to have to start up taxable accounts again sooner than I thought to have a place to park the savings.

    @Joel – I think step 4 is asking if you have enough unused contribution room + $2000 (the over contribution limit) to cover your $15,000 extra. If the answer is no, then I think you need to pull out the extra $15,000 contribution.

    @Andrew – Re #1 -Oh, good point I should clear that up about employment vs taxable for CPP. Thanks for the idea. Re #2 – I think technically you are correct, but it doesn’t matter in this case, the amount gives a tax credit big enough to make sure low income people don’t pay any tax. You don’t pay ANY tax on the first ~$11,000 of income. My wife hasn’t paid any income tax in years…just CPP contributions since her income is so low.

    Thanks everyone.

  9. Mookie says:

    “if she contributes lets say $10,000 to her RRSP that would drive her income to zero and then does that trigger the transfer of her basic income deduction to me?”

    Hi Tim, I’m in this exact same situation, and yes, if you drive her income to zero, her basic income deduction goes to you. Playing with the numbers, in my particular situation, I get 20% back for every dollar I claim of her RRSP deduction, until her income hits zero. The excess contribution she made will be saved and claimed next year.

  10. Edward says:

    I over contributed by $122 this year. I entered my full RRSP contributions into UFile but entered to only use my maximum deduction limit. The over contribution showed up on the very bottom of my “Notice of Assessment” as “You have $122 (B) of unused RRSP/PRPP contributions available for 2014. If this amount is more than amount (A) above, you may have to pay a tax on the excess contributions.” (It’s definitely a lot less than (A) and probably would be for almost anybody who accidentally put in a little more than they should’ve.)

    So… I guess it’s really no big deal. I’m just going to ignore it and contribute to my assessed limit for 2014 as I normally would.

  11. Andrew Gomez says:

    Joel: I’m interested in your step 2. The question is what is your 2012 NOA deduction room vs. unused contributions up until Dec 31, 2013. Assuming you had at least $15k of deduction room from previous years (in addition to your max contribution for 2013). You would not be required to do T1-OVP and could carry forward the deduction.

    Bobby: This is true, however you do lose some flexibility due to the fact that regular RRSP withdrawals only qualify for pension income splitting as an annuity. In a spousal RRSP it is only subject to attribution rules so one could withdraw in lower income years. The cynic in you does have a point as well.

    Andrew: CPP contrtributions are calculated on employment income. Still, with the dropout provision it is possible it may not be included in the benefit calculation.

    Tim: If your wife is not paying any income tax I don’t see much reason for her to contribute to RRSP. Why not make some unregistered investments in her name that will generate a taxable income, then offset that with RRSP contributions? Have you considered other strategies to increasing your refund?

  12. Stephanie says:

    Andrew: due to attribution rules in canada, you cannot hand your lower income spouse money for them to invest and be taxed on. The higher income spouse would still be taxed on the income from this investment, from what I understand.

  13. Stephanie says:

    Ps if you google “attribution rules canada” you will find more info on this.

  14. Andrew Gomez says:

    Thanks Stephanie! Yes I did mention in my post that withdrawals would be subject to attribution rules which is over a three year period (also known as the three year rule). From a planning perspective, this still allows for more flexibility on making tax efficient withdrawals.

    I use this approach with my clients. Particularly ones with stay at home spouses.

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