RRSP overcontributions

You’re permitted to overcontribute a cumulative lifetime total of $2,000 to your RRSP without incurring a penalty tax (this limit is increased to $8,000 for anyone who had an overcontribution prior to February 27, 1995). An overcontribution is not deductible from income in the current year, but the advantage lies in the fact that you can put additional cash into your RRSP where it can compound on a tax-deferred basis for as long as it remains in the plan. Overcontributions may be deducted in a subsequent year when your actual RRSP contribution is less than the maximum allowed. A penalty tax of 1% per month applies to the amount of any overcontribution in excess of $2,000 (or $8,000 where that limit applies). The CRA has recently become more stringent in assessing taxpayers who have overcontributed to their RRSPs. If you think you’re in an overcontribution position, you should contact your tax adviser to determine the steps you need to take. The calculation of the penalty tax and the filing of the forms to withdraw the excess amount is not part of the normal engagement to prepare your personal tax return.

Tax tip: Consider using your $2,000 overcontribution when you quit working. The earned income you have in your final year of employment will entitle you to an RRSP deduction in the following year.