RRSP over-contribution strategy gone wrong

How to get out of a sticky situation

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From the September/October 2014 issue of the magazine.

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Photograph by Robert Taylor

Photograph by Robert Taylor

Q: During our working years my wife and I took advantage of Revenue Canada’s rule that allows everyone to be over their RRSP contribution limit by $2,000. Even though we knew we couldn’t deduct the over-contributions, we liked that it was growing tax-free. But now that we’re retired the CRA says we could face a tax penalty. What are the dangers here and how can we avoid this? —Melvin Madden, Brooklin, Ont.

A: Yours is a cautionary tale about using the RRSP over-contribution as a tax strategy, instead of as the wiggle room it was designed for. As retirees you don’t have any employment income to build additional RRSP contribution room, so you risk having to pay tax on that money twice—when you first earned it and again when you withdraw it from your RRSP or RRIF. But you can avoid this, says chartered accountant Ron Graham, by using form T746. “They’ll have to enter the amount withdrawn in the current year and designate how much of the withdrawal is to be assigned as a Refund of undeducted RRSP contributions.” Then report the deduction on line 232 of your income tax return and—ta-da!—no double tax.

Bruce Sellery is a frequent guest on financial television shows and author of Moolala. Do you have your own personal finance question? Write to us at ask@moneysense.ca

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