What Limits

Has anyone else been penalised for making contributions to an RRSP in their first year here? I have just been informed about this by the Canada Revenue Agency and it looks like I will have to withdraw all my contributions (at a huge loss) and pay a fine of 1% per month.

Anyone with any advice, professional or otherwise would be most welcome

Thanks

andrewrb143

From TD Canada:

"If after receiving your statement from CRA, you find that you've made contributions in excess of your contribution limit, there is a "safety net". Over-contributions can remain in your plan without penalty as long as the excess balance is $2,000 or less. (If your over-contribution exceeds $2,000, you may be assessed a penalty of 1% per month on the excess amount.) While you won't get a tax deduction for any over-contribution in the year it is made, you can claim it as part of your contribution limit in subsequent years."

Also, did the CRA advise that you have to withdraw the amount? AFAIK you can keep the money in the RSP, subject to the 1% penalty/per month over the $2000 safety net.

mjwalker007

Hi What Limits,

With the RRSP in Canada, you can contribute up to a certain amount into your RRSP, based on your previous years earnings.

The current year's RSP contribution limit is 18% of your previous year's "Earned Income" to a maximum of $21,000 (2009) plus any unused contributions carried forward from previous years.

If you have only just moved to Canada and have no previous years earnings, you will have no contribution room and therefore you will be penalised the 1% per month for over contributing.

Unfortunately it does not work like the ISA in the U.K where you have a certain annual limit which is not dependent on your income, the limit on an RRSP is based on your previous years ''Earned Income"

Out of interest ,where did you open your RRSP, and did they advise you of the rules knowing that you may have recently just moved from the U.K. ???

What Limits

My RRSP is provided through my employer who also make a contribution based on mine (thank you very much). It seems that they were unaware of the impact of this discriminatory regulation. I am taking advice also from a tax/rrsp advisor retained by my employer so eventually we will have to amend policy.

Thanks for the feedback so far.

JonboyE

I don't see why it is discriminatory. It is just the rules, and they apply to everyone.

triumphguy

No - everyone is right. RRSP contributions are based on previous year's earnings, plus any unused contribution room.

Is the loss due to fees, the penalty or the market? Do you have to sell the funds and cash out or could you just transfer them in kind to a non-rsp account with the same institution? If so, you could then invest them in RSPs when you do have contribution room.

But it's not discriminatory - it applies to everyone.

What Limits

So is it correct to say that a born and bred Canadian cannot contribute to an RRSP in their first year of employment because they have not established a contribution head-room?

My losses are due to the market, fees, penalties and the future losses because I will lose out on 1 whole year of contributions.

Ben W Bell

Yes that is correct. In my first year me and my employer paid into a standard managed savings account rather than an RRSP, and after the first year we switched it all to an RRSP.

Novocastrian

Yes.

triumphguy

If you sell X in the RSP and buy X in the non-rsp you won't lose.
You also won't have future losses, because the money is invested.
When you have contribution room you can place the investment back in the RSP. To avoid fees while doing this, when you transfer out of the RSP account and transfer "in-kind" (if possible) to open or non-rsp make sure you get the FEL 0% account.

You will still have DSC fees (if applicable) and the over-contribution penalty is 1% per month.

So, you don't have to have an investment loss. Act quickly to avoid the penalty adding up.

jimf

This looks like something I will have to investigate with my employer sooner rather than later.

I started work in Alberta this year and joined the company retirement plan. The arrangement is I pay a % contribution which goes into an RRSP and the company pay double that contribution which goes into a DPSP (deferred profit sharing plan). There are various funds with Sun Life to choose from. (I don't know what the significance of the DPSP is but all the contributions are used to purchase units in the Sun Life funds.)

Some postings make reference to a $2,000 overcontribution allowance. Does this mean that I could safely contribute $2,000 in 2009 without penalty and claim the tax relief in 2010? This would cover say 2% contribution on $100,000 earnings.

I'm only intending to make the minimum contribution necessary to get the full employer contribution for now. At some point I'll have to review this as its certainly not enough to provide sufficient retirement income. One concern I would have about paying in more money is the portability of the RRSP. I'm guessing that Canada (and most likely other countries) will provide tax breaks on contributions but claim the tax refund back if the money is moved out of the country.

triumphguy

Correct! Though there may be reciprocal arrangements between countries to offset this

shelley748

You can always open a Tax Free Savings account which has a max of $5000 per annum per person- so if you and your wife opened one and you wanted to put in $5000 each you could.

JonboyE

Contributions made to a DPSP affect your RRSP contribution room. On your T4 there will be an amount called a pension adjustment in respect of the DPSP that reduces your RRSP contribution room.

That should work OK.

If you leave Canada you can leave the money in the RRSP and it will continue to grow tax free. If you collapse the RRSP, or take out a lump sum, when you are tax resident in Canada the whole amount you withdraw is added to your taxable income in the year of withdrawal. If you collapse the RRSP, or take out a lump sum, when you are non-resident in Canada for tax purposes the government keeps 25%. However, if you are tax resident in the UK you can receive periodic pension payments from your Canadian RRSP/RRIF with no Canadian tax deducted. This is a provision of the tax treaty. A little planning goes a long way sometimes.

jimf

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