What happens if one exceeds the $2,000 RRSP over-contribution allowance?

Gena Katz, a chartered accountant and principal with Ernst and Young, has the answer.

Gena Katz 5 May, 2003 | 1:00PM
Dear Expert:

We made an error on my wife's self-directed RRSP. We contributed $2,850 to her plan, but her maximum contribution for 2002 was only $400. This was made in December 2002. Her contribution situation for 2003 doesn't look any better, with an estimated contribution limit of less than $500. I can legally use the allowable $2,000 over-contribution. What about the rest?

Expert Answer:

RRSP contributions in excess of an individual's contribution room plus the $2,000 allowed over-contribution are subject to a penalty of 1% per month for each month that this excess remains in the plan. In your case, the amount subject to the penalty would be $450 and it would only be subject to a penalty of $4.50 because the amount will only be outstanding for one month (December).

It is possible to withdraw inadvertent over-contributions by simply taking the money out of the plan and paying withholding tax on the amount. However in this case, as of January 2003, the over-contributed amount becomes eligible as a deductible contribution for the 2003 taxation year. So you might as well leave the money in the plan and claim the contribution on her 2003 tax return.

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Gena Katz

Gena Katz