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RRSP Overcontribution

Would like to hear some opinions on the following

Taxpayer has overcontributed by 9700.00 this year, Also bought a home and withdrew 16000 thru HBP, repayment not required until 2020. Next years RRSP limit is 18000.

We could repay HBP 7700, leaving 2000 as overcontributed which would be used up on filing 2019 taxes.

We could leave full amount overcontributed, Taxpayer would be subject to the 1% penalty but would be able to claim fully on 2019 tax return. This makes more sense to me, the tax savings of the rrsp contribution will far outweigh the 1% penalty.

Any thoughts on this are appreciated

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That taxpayer should read S204.1 (et seq) carefully.
T1 OVP could potentially yield very large results when worked through properly.

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Walt,
that’s a 1% per month penalty not a 1% per year. huge difference to end results.
$9700 over per month is $97. for 12 months is a penalty of $1,164.
vs an estimated average 3% interest on a RRSP (depending on terms etc) will only yield $291 per year.
So In my opinion, you are better to use the overcontributed amount to paydown the HBP early.
Hope this helps.
Happy Easter.

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Apart from the 1% per month penalty tax, other considerations might include;

  • If the $9,700 was contributed within 90 days of the HBP withdrawal (and the FMV of the funds remaining in the clients RRSP after the withdrawal is not at least $9,700) the RRSP contribution can not be deducted anyway.

  • While the tax savings on a $9,700 RRSP deduction next year may outweigh the 1% per month penalty tax, you also have to factor in that the client will need to make $9,900 in RRSP repayment contributions over the next 15 years for which they will receive no tax benefit for.

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I’m not so sure I agree with your statement @snoplowguy. Maybe you’re saying the same thing as this and maybe not. Eligible HBP withdrawals are those that were contributed at least 90 days before the HBP withdrawal date. It is not so much whether or not the RRSP can be deducted as it is whether or not the contribution was made 90 days in advance and the funds could have been withdrawn in the first place. It is up to the financial institution to limit what they will allow you to withdraw under the HBP. They know the rules.

As for previous comments under this thread, I’m of the opinion that you have less of a problem than you think. You said you have an overcontribution of $9,700. You also say the 2019 RRSP contribution limit is $18,000. Therefore, you are only offside until Jan 1, 2019. The penalty will be 1%/month for the months in 2018 (and before that, if applicable) times the overcontribution amount in excess of $2,000. What is done is done and it is not getting worse with each passing day (or month). This is according to my understanding of this whole T1-OVP business.

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It would make total sense for the financial institution to be the HBP cops. The CRA, however, doesn’t seem as fixated with whether the funds are eligible to be withdrawn as they are on whether or not contributions made within that 90 day period are deductible from income.

https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/rrsps-related-plans/what-home-buyers-plan/withdraw-funds-rrsp-s-under-home-buyers-plan.html

Your RRSP deduction may be affected by your participation in the HBP

If you participate in the HBP, certain rules limit the deduction of your RRSP contributions made during the 89 day period before you withdrew funds under the HBP. Under these rules, you may not be able to deduct part or all of the contributions made during this period for any year.

During that period, you cannot deduct the amount by which the total of your contributions to an RRSP is more than the fair market value of that RRSP after the withdrawal.

The same rules apply if you contributed to your spouse’s or common-law partner’s RRSP during the 89 day period before that individual made the withdrawal from the same RRSP under the HBP.

In other words, for contributions made to an RRSP in the 89 day period to be fully deductible, the value of that RRSP after you withdrew funds must be at least equal to those contributions.

To determine the part of the contributions you or your spouse or common-law partner made to an RRSP that are not deductible for any year, you can use the calculation that follows.

Well, thanks for clarifying that Wayne. I was not aware of that subtle limitation. In essence, you have to make sure that what you are left with after the HBP withdrawal is worth at least as much
as the amount contributed within the 90 day window. I guess that does kind of make sense. If that wasn’t the case, it would really mean that you are in fact withdrawing some of the funds that were contributed within the 90 day window, unless you could differentiate
the components of the RRSP and support what is valued at what. In the end, I think this would be a difficult thing for CRA to police and I think it would be very rare to get stung with this. Knock on wood!