RRSP overcontribution rules

Zoomer | January 1st, 2006

Q – I made an overcontribution to my RRSP when the limit was $8,000 and haven’t been able to use it. Am I now going to have to pay the 1% per month penalty because the overcontribution limit has decreased to $2,000? There must be some allowance for people who made the
contribution when the rules were different, I hope. – R.G.

A – It’s taken you a long to get around to asking this question. The rule change on the contribution limit became effective with the 1996 tax year. But yes, there is a special rule that covers people like yourself who made an $8,000 overcontribution when it was allowed. The following excerpt from Gordon Pape’s 2002 Buyer’s Guide to RRSPs explains how it works.

“If you had more than $2,000 in excess of your limit in your RRSP on February 26, 1995, you’re permitted what the government refers to as an ‘additional allowance.’ This is the difference between $2,000 and your actual overcontribution, to a maximum of $6,000.
“If, for example, you had made an $8,000 overcontribution to your RRSP prior to February 26, 1995, you’re the beneficiary of the full $6,000 additional allowance.
“There’s only one problem. You haveo get rid of this extra amount in your RRSP as soon as you can. How? By drawing on the additional allowance to satisfy your allowable deduction limit in future years.
“Suppose you enter 2001 with a $6,000 additional allowance. Your 2001 deduction limit is $4,000. You may not actually contribute any money to your plan; rather, you must first use the $4,000 to reduce your $6,000 additional amount. Once that is done, you’ll have a $2,000 overage remaining, which must be reduced in the same way in 2002. Only when the additional amount has been written down to zero can you add new funds to your RRSP.
“You are allowed to claim a tax deduction every time you reduce the additional amount. So even though you won’t actually add money to your RRSP in 2001, you can claim a $4,000 deduction when you file your return for the year. That represents the total by which the additional amount is reduced.
“There is no time limit for drawing down your additional amount. The rule is simply that you can’t add new money until you do. If you’re in a situation where you’re not making any new RRSP contributions (perhaps because you’ve retired), the additional amount can remain in your plan without penalty. So you’re under no obligation to withdraw an $8,000 overcontribution made prior to February 25, 1995, even if you won’t be able to claim a deduction for the excess.”


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