Consider a hypothetical case of a Canadian tax resident living in Ontario and making CAD 100K each year. Suppose they contribute CAD 50K in 2020 to an RRSP. CAD 27230 is the contribution limit for 2020. So an excess contribution of 22770 was made which is 20770 more than an excess contribution of 2000. According to https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/rrsps-related-plans/contributing-a-rrsp-prpp/what-happens-you-over-your-rrsp-prpp-deduction-limit.html 1% of 20770 will have to paid as tax. Is my interpretation correct? Will the 50K then grow tax-deferred in the RRSP?
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1 Answer
1% of your overcontribution will be paid in penalties per month. It's not just a one-time penalty. That continues until you correct the problem by withdrawing to reduce the overcontribution or until your RRSP contribution room catches up.
So, if you never earn money again, you'll keep paying 1% per month in penalties indefinitely. On the other hand, if you earn the same amount of income in the following year, your contribution room will catch up.
You are paying roughly 12% per year. It's possible you could earn enough in your investments to cover this penalty, but it's unlikely.
answered Nov 2, 2020 at 11:20
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Although you pay the roughly 12% per year, your marginal tax rate drops significantly, doesn't it? Also, I suppose there is 0 penalty for an excess contribution of up to 2000, right? So, effectively, one can contribute 18% + 2000 without the 1% charge. Is the excess calculated with respect to the 18% or the 27230? Commented Nov 2, 2020 at 11:45
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1You are not allowed to claim the $22700 as a deduction until you have the room. The 1% is charged on the $20700.– brianCommented Nov 2, 2020 at 19:15
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The 2000 over-contribution buffer is a cumulative lifetime limit. Does this mean you can use it only once, then it's gone and the next yeat you will be taxed on the first over-contributed dollar? Commented Dec 2, 2020 at 23:46