It can be an easy mistake to over contribute to your TFSA or RRSP especially if you have an amount automatically contributed each month. If you find that has happened to you there are some basics that you should know to remedy this situation.
The penalty for RRSP over contributions is 1% per month for each month that you are over the limit. The CRA does allow you a $2000 grace amount for over contributions but that amount is not tax deductible. The best way for you to correct an overpayment is to withdraw the amount, though it will be subject to taxes. You will be able to claim an offsetting deduction if you meet certain conditions (link to CRA Website). The main condition is that you make sure the the over contribution is withdrawn in the year that it was made, the year in which you receive an assessment for the year of contribution, or in the year following each of these years.
If you meet the conditions for offsetting deduction you can have withholding tax waived on the withdrawal by filing form T3012A. If you don't do this then the tax withheld at source can be claimed as tax paid on your tax return. It is very important to keep track of your RRSP contributions and make sure that you withdraw any over contribution so as to penalties that may arise.
Over contributions to TFSA's happens often especially when people have multiple accounts in different banks and they lose track of those accounts over time. As the limits allowable have varied depending on the year it can become really confusing to contributors. Two common mistakes are:
TFSA over contributions are 1% per month over the term of the over-contribution until the year end based on the highest excess amount for the month. There is no $2000 grace amount as with a RRSP and penalties for over contribution must be paid by June 30th.
For more information on TFSA contributions see the CRA's TFSA Guide (RC4466) which also provides you with a RC343 worksheet for you to keep track of your contributions and withdrawals. It is also important to review your notice of assessment that you receive from the CRA which states how much contribution room that you have in your TFSA and RRSP for the current year. It is a good idea to compare the CRA amounts with your own records. In addition you can get a copy of your contribution history from the CRA's My Account service.
From an article by Denise Deveau
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