Canadians aren't allowed to just max their RRSPs

[K-Dogg]

Last year I maxed out my contribution room on my RRSP with $85,000. My intention was to carry the unclaimed portion forward for as many years as necessary.

I earned $52,000 last year. So trying to use the tax brackets to my benefit, I decided to only claim $10,000 for 2016 and wait until future years to claim the rest.

This is apparently not allowed.

My accountant learned, and shared with me, that since I have "no" contribution room left, any unused portions are counted as over-contributions. And these over-contributions will be taxed!

The CRA has some fancy math where you can only carry forward amounts that are equal or less than you current contribution room.

Since I had no contribution room left, I can't carry that much forward.

Now I have to file a T 3012a form and withdraw about $40,000. I need this form approved by both the CRA and my brokerage so when I withdraw the money my brokerage won't have to keep withholding taxes.

So this is how is looks:

Contributed $85,000
Claimed $10,000

That leaves $75,000

If I withdraw $40,000 I will have $40,000 of contribution room left.
I will only have $35,000 unclaimed which is less than my contribution room so then I'll be good.

But really, what a pain in the ass. And I've never heard of this before. My accountant had never heard of it either! But the offices called the CRA twice and spoke with two different people to get this sorted out. Both of them explained it like this.

So how is it that everyone keeps recommended people to max their RRSPs? The only way I see that working is if you max it every year, but one year behind next year's contribution room so you never run out.

[Le Barbu]

Post this in the following thread: CPA CB you have questions, I have answers

The best thread for Canadian taxes questions around here.

[Prairie Stash]

http://forum.mrmoneymustache.com/taxes/do-your-owm-taxes-canada/

Get a better accountant! Whatever line A of your tax assessment said for RRSP is the MAX you can put in. You can over contribute up to $2000, that's it.

What you should have done is take the TFSA to max, RRSP to get you down to the right bracket, then taxable investment account. An RRSP account is a terrible place to leave money if you don't claim the credits, its the worst financial plan ever. Having a couple years of extra credits isn't that big of a deal; having 8 years is Really Bad. The linked thread discusses investment options of someone similar to you. 

Don't blame the CRA, you had some poor financial planning advice. Your accountant is terrible, I've never heard of an tax accountant who would need to phone the CRA over something so basic. What are you paying him for? Your post had some ambiguity but reading between the line your Line A said $45,000. Line B should now read $35000

[K-Dogg]

Prairie Stash: Apologies if I miscommunicated something. I had 85k contribution room. So I maxed it out not knowing that I can't just carry the unused part forward until I need it. My TFSA is already maxed. And I don't see much difference between holding VXC in my RRSP or my Margin account if I'm planning on using those credits within a few years.

52k is actually quite lower than I've been averaging so I'm expecting to be able to use up those credits within 2-3 years.

I can't blame my accountant. I only use her to file my taxes because I have about 15 tax slips and I need to avoid mistakes like this. She owns a small accounting firm in a very small city and has never come across this issue before (maxing the rrsp but not claiming enough). 

[Prairie Stash]

My accountant learned, and shared with me, that since I have "no" contribution room left, any unused portions are counted as over-contributions. And these over-contributions will be taxed!

The CRA has some fancy math where you can only carry forward amounts that are equal or less than you current contribution room.

Since I had no contribution room left, I can't carry that much forward.

you can only carry forward up to your contribution room, I understood that part. It sounds like you went over though. You started by saying you had 85K in room, then you said that was over the contribution room. Did you actually have a NOA form from CRA with the number $85,00 on it in line A? I'm being blunt to help clear up my confusion, I'm sorry to sound rude.

I think you ran afoul because you didn't account for being one year behind with RRSP contribution room calculations. My 2016 contribution was based on earning up to Dec. 31, 2015, the wages earned in 2016 doesn't create room until 2017. I could be wrong, your story is new to me and I'm trying to wrap my head around it. As an aside $85k requires you to have a lifetime earning of $472,000 assuming you have never contributed before. At 32 years old that's probable, except I suspect this isn't your first year of contribution. The $52k for 2016 means you had some much better years previous to this to accumulate the room (assuming 4 year university and some lower initial years), but its weird since you've been posting for 3 years to think that this is your first RRSP contribution. The story doesn't make sense to me; something's amiss since you obviously had the means to contribute before.

As for investment account vs. RRSP, its tax savvy. If you think RRSP is good for tax breaks then why not capture the tax breaks from the investment account? The difference between VXC in the two accounts is the amount of tax you'll owe. If you hold it in the RRSP you'll owe more in the future, the RRSP refund is meant to compensate for that fact, it allows you to have growth on the refund to pay the future taxes. If you don't get the refund then you're essentially paying capital gains at double the tax rate you otherwise would without any benefit, why not cut your future tax bill in half?

You said you pay someone to avoid mistakes like this; so what are you paying for if these mistakes are happening? I'm paraphrasing your words, its not meant to be mean. Perhaps its time to move on to a better accountant? Perhaps one that can handle your situation better?

[Le Barbu]

This whole thread reminds me why I always filled my taxes by myself!

Because, it's in my best interest to understand and execute the plan that suit my situation. Then, if I make mistakes, I know exactly who is to blame!

[K-Dogg]

Last year was actually the second year I've contributed to an RRSP. I came into some money last year when my mother passed.

This is a confusing thing I posted and I'm not sure if I explained it well enough.

Any amount you carry forward has to be less than your remaining contribution room. That is where everything hit the fan for me. It goes something like: remaining contribution room minus carry forward. You're allowed 2k wiggle room but anything on the negative side of zero is considered an over-contribution.

So mine is like this:

Contribute 85k
Claim 10k
Remaining contribution room $0
Minus
Carry forward 75k

=-75K

So I've over contributed 75k! And I'm now being taxed at 1% per month. So I need to take out 40k to get myself out of the negative.

I mostly posted this as a warning to others. I had never heard of such a thing and I will pay for the education.

As an aside, not my accountant's fault. She doesn't direct my investing. She just files my taxes.

I had never heard of such a thing before. And obviously I'm new to RRSPs and use a self-directed account.

[Prairie Stash]

I was wondering about the inheritance after I posted, I'm sorry for the loss. I never like to think about inheritances, its not a good reason to have money.

I disagree on the accountant being at fault. The $40 (1 months interest on $40K) is a very expensive lesson and could have paid for 10 years of tax preparation. Attempting to roll over more than the contribution amount shows up on Schedule 7 of the tax form, the accountant knew you were over contributing when they filed. Being negligent is not an excuse, when you get paid to do taxes you are required to know the rules, she committed a mistake and its your choice to continue using someone not well versed with the tax code or find someone who is. The limit is actually a very common thing, RBC conducted a poll (Ipsos Reid) and found 23% of Canadians max out their RRSP contributions. Its uncommon among young individuals, very common among the boomers.

You also share further blame, even with a poor accountant there's steps to protect yourself. You should have a CRA my account set up to find the limit quicker. It also keeps a record of all your contributions, your limits and how its calculated. I get the impression you weren't aware how its done.  http://www.cra-arc.gc.ca/myaccount/

I would highly encourage you to read up on the advantage of the taxable account; its a pillar in my FIRE plans. My taxable account is very well structured and I will likely pay almost nothing in tax; far lower than the taxes I would pay on my RRSP account. By combining them I can get $30k/year tax free in retirement, can you do that with your RRSP account?

I'm coming off as mean, for that I'm sorry. With a few steps you can make life easier for yourself, there's no reason this should have happened and hopefully you won't run afoul of any other rules. Remember, you have this whole forum to ask advice from, there's lots of us here who can support you.

[K-Dogg]

I feel like you're not reading what I'm writing. 1 month's interest on 40k is $400. Not $40. And I just wrote I was currently at an over contribution of 75k.

I have an CRA my account. I also look at the bottom of my NOA every year. Which last year said I have $85,000 contribution room.

Are we on the same understanding of the difference between contribution room and remaining contribution room. I used up my contribution room. Have no remaining contribution room. I did not over contribute to my original contribution room. The only reason it is "over" now is because I didnt claim it all. If there's limit calculator that factor in what you plan to claim next year, I did not know that. I didn't know there was a need to know that.

My accountant did find the problem when she did my taxes. She doesn't direct my investing and had no say in me maxing my rrsps last year.

I have a tfsa, rrsp and margin account. Why are you sticking your nose up to me having an rrsp account? I followed CCP advice and set up my allocations with each account based on his recommendations. I don't need to be reminded I'm to blame. I've been saying that this whole time.

[Prairie Stash]

$40 was a typo, I meant $400. I'm sorry for the confusion.

http://www.taxtips.ca/rrsp/rrspcontributionlimits.htm

As always taxtips has an article that highlights everything. I'm sorry for the confusion, its a very unique circumstance and I struggled to understand how it happened. 

http://www.theglobeandmail.com/globe-investor/advisers-view/what-to-put-in-your-tfsa-whats-best-for-an-rrsp/article21556869/
Now its my turn to ask you to read something. I apologize for the CRA mixup, please let us move forward.

So how is it that everyone keeps recommended people to max their RRSPs? The only way I see that working is if you max it every year, but one year behind next year's contribution room so you never run out.

Nobody recommends maxing RRSP out, they recommend getting the maximum refund and investing it. The slight difference is the emphasis on receiving the refunds instead of maximizing the contributions. Pretty much all advisors tell you to stop once you've contributed to get down to the first tax bracket.

I'm not meaning to stick my nose up at an RRSP, I have a very nice RRSP that I love dearly. I'm trying to get across there's advantages to all 3 accounts and I believe, with the limited information I have, that an investment account would be better than an RRSP for your money after chipping in $10K to get down a bracket. I still recommend the RRSP, up to a certain amount though, I'm not against an RRSP at all.

In what ways do you consider the RRSP to be better than the investment account?  I'll lay out my details for 2017 and you decide the right tax strategy, these are actual numbers and aren't hypothetical. Other than the very large RRSP contribution you had I'm currently facing the same investment choices as you. My solution is $5500 in TFSA, the rest in investment account, with an emphasis on eligible dividends (as opposed to American/foreign stocks which are in the TFSA/RRSP), what would you do?
Annual income $35,000
RRSP limit        $4000   Previous years maxed it out
TFSA limit        $5500 Previous years maxed it out
Amount available $30,000 - not a typo
Timeline to FIRE    under 10 years

[K-Dogg]

I checked out the links. I don't think they cover what happened to me. But thank you for sharing them.

I must have been misunderstanding these past few years whenever I read "max you tax advantaged accounts first." I figured they meant max the whole thing (for rrsps), not just max it for the year. So thanks for clearing that up!

The only way an RRSP is better than a taxable account is if you can leverage the tax brackets. I haven't made any claims on it being better so I'm not sure why you ask. We're just talking RRSPs because that's the thread topic.

As for your own investments, I do the same as you. But I don't focus on dividends per se, I only buy 3 etfs.

[totoro]

I'm confused because I thought you could do this.  I read some articles on it including:

http://business.financialpost.com/personal-finance/retirement/rrsp/the-difference-between-an-rrsp-contribution-and-deduction

https://turbotax.intuit.ca/tips/the-rrsp-deduction-should-you-use-it-this-year-or-carry-it-forward-2106

https://turbotax.intuit.ca/tips/tax-tip-when-to-hold-off-claiming-rrsp-deductions-6359

http://wheredoesallmymoneygo.com/deferring-your-rrsp-deductions-to-higher-income-years/

[okits]

Like totoro I am also confused by the requirement you describe, below.  Do you have a link to the CRA website that describes this?

Any amount you carry forward has to be less than your remaining contribution room. That is where everything hit the fan for me. It goes something like: remaining contribution room minus carry forward. You're allowed 2k wiggle room but anything on the negative side of zero is considered an over-contribution.

From my understanding of your situation, you should be fine.  Carry forward the $75k in RRSP contributions until it makes sense to deduct them from your income.

[K-Dogg]

You can carry forward contributions.... as long as you have a greater amount of contribution room left. This is what I learned. Because no one ever writes about that in these articles.

That's why I'm taking out $40,000. Once I take that out I'll only be carrying forward $35,000 (contributed and unused). Which is $5,000 less than my new contribution room of $40,000.

It makes no sense to me. I should be allowed to contribute the max and carry forward whatever I want. It must be the CRAs way of ensuring you claim the credits in a timely manner...? I don't know. Anyways I don't want anyone else falling into this trap.


Okits: No I don't have a link. But I did talk to someone at the CRA on Tuesday and he confirmed the same as what my accountant found out.

[Prairie Stash]

The only way an RRSP is better than a taxable account is if you can leverage the tax brackets. I haven't made any claims on it being better so I'm not sure why you ask. We're just talking RRSPs because that's the thread topic.

As for your own investments, I do the same as you. But I don't focus on dividends per se, I only buy 3 etfs.

My vanguard ETF's have dividends, keep the CDN in the taxable account with the CCP strategy. At the low income the dividends are tax free, its pretty awesome. Since I buy/hold the capital gains are deferred till retirement, all tax free. So the taxable account will pay the same tax as the TFSA, you can do the same thing. Paying no tax is great, its as good as getting a refund now at the lowest tax bracket.

The RRSP vs. investment account is the elephant in the room. While we focus on the immediate $400/month penalty the post isn't discussing the future tax bill. So while the over contribution is important, I'm wondering if you want to lower your future tax bill? I see an opportunity for you, that's the reason for hijacking. When respondents see something the OP missed its good form to alert the OP, its the unexpected benefit of posting, sometimes you get feedback that can help in unforeseen ways.

I also respond to catch mistakes in my own understanding. I view posting as an opportunity to learn, perhaps you can challenge my strategy and I can refine it.

[totoro]

By CRAs own information you should be able to make a contribution if you have the room and only deduct what you want and carry the rest forward: http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/cntrbtng/nnsd-eng.html

In any event, it is good that the T 3012a exists so you won't have any penalty. 

The math must be fancy.  I don't understand the formula or where it is even.  I'm in the same boat due to some pre-emptive planning in the event that the rules on capital gains changed as I had a disposition - which they didn't - so I don't need the extra deduction anymore.  I'll call them and confirm too.

[totoro]

>the post isn't discussing the future tax bill

I don't expect to have much of a tax bill myself.  My plan is to use the RSPs up first in early retirement.  I may be incorrect but most people here are planning on exiting early and should be able to withdraw the RSPs at very low rates pre-pension.  Am I missing something?

[Prairie Stash]

>the post isn't discussing the future tax bill

I don't expect to have much of a tax bill myself.  My plan is to use the RSPs up first in early retirement.  I may be incorrect but most people here are planning on exiting early and should be able to withdraw the RSPs at very low rates pre-pension.  Am I missing something?

A combination of RRSP and taxable accounts in early retirement to get $30,000/year tax free. If you spend less then transfer the excess into TFSA. If you spend more, then you'll start paying taxes. The low spend rates commonly found here are ideal for taxable accounts in ER, save the TFSA till age 69 to get the OAS and GIS.
 
For myself it would be impossible to have the RRSP account large enough, given the 18% contribution room, to retire early enough. By making judicious use of the tax refunds at higher income rates, then coupling reinvestment into taxable accounts, my tax bill is currently low and will be nothing in FIRE. I also use my spouses tax situation to my advantage, a low income spouse is gold, income splitting at its finest. I pay all the bills, she invests all her income and by the power of attribution rules (a different thread topic)all the dividends are tax free in her hands. Its plausible we'll have $40-$50K/year in retirement tax free, without touching the TFSA. The reason its not higher is I'll be pulling more from my RRSP, the limits for tax free are lower from RRSP.

After I hit $300,000 total in my RRSP that means $12,000/year withdrawals, that's the entire tax free amount. That's the point where putting money into RRSP is tax neutral if the refunds were deducted in the under $45k tax bracket. If you have a spouse it might make sense to do spousal RRSP still, just  food for thought. Or you might decide the flexibility from the investment account is better. Pulling from the RRSP is far too simplistic ;)

[totoro]

I phoned CRA.  They said I'm allowed to carry forward contributions that I don't use as a deduction.  I contributed 26k last year and only want to use 5k as a deduction and this is fine and I don't have 26k remaining in contribution room.  The agent said the only time the 1% fee is charged is when you over contribute by more than 2k - not when you don't use your contribution as a deduction.

They indicated that there must be some information missing in your post in order for the 1% fee to apply.  Not sure about that but I'd go back and triple check with CRA because it appears that you should be able to carry forward as much of that 85k contribution as you want - as all the articles state.

[okits]

Thanks for checking and reporting back, totoro.  I contributed up to my limit earlier this year and am planning to carry it forward. 

K-Dogg, I hope further investigation clarifies whether you are subject to any penalties or not (hopefully not!)

[K-Dogg]

I can't find anything about this online. I'm going to talk to my accountant on Tuesday.

[lostamonkey]

I think your accountant doesn't know what she is taking about.

Let me see if I have this right (ignoring new room from 2016 income):

Your 2016 contribution room on January 1, 2016         85,000.00
Your 2016 deduction limit for 2016                             85,000.00
Your 2016 contributions                                             85,000.00
Your elected deduction for 2016                                 10,000.00
Your 2017 deduction limit                                          75,000.00
Your 2017 contribution limit                                              0.00
Your 2017 contributions carryforward                         75,000.00

You are fine because your 2017 contributions carryforward does not exceed your 2017 deduction limit.

[K-Dogg]

That's how I understood it when I contributed. But she said they learned different from the CRA. I can't find anything about what she said online. I emailed her but it's a long weekend so I won't hear back til next week.

[K-Dogg]

My accountant sent me this to help clarify. It seems that she is correct. We can't carry forward more than we have in contribution room.

[lostamonkey]

Nope, she is incorrect.

From your link:

"Generally you have excess contributions if your unused contributions from prior years and your current calendar year contributions are more than your RRSP deduction limit shown on your last notice of assessment."

The link says deduction limit NOT CONTRIBUTION LIMIT. Your deduction limit is $75K and your contributions from prior years are $75K therefore you do not have an over contribution.

[Le Barbu]

She have it wrong, sorry!

[K-Dogg]

Guys, I think you're incorrect.

I googled:

From the cra website: (You can find your registered retirement savings plan (RRSP)/pooled registered savings plan (PRPP) deduction limit, often called your "contribution room")

From Google front page: (The RRSP deduction and contribution limit is 18 percent of your earned income to a maximum value each year. The maximum RRSP contribution limit for 2013 is $23,820. Unused contributions are carried forward each year, so if you didn't maximize your RRSPs last year, you can add the unused amount to this year's limit.)

It's the same thing.

[lostamonkey]

Guys, I think you're incorrect.

I googled:

From the cra website: (You can find your registered retirement savings plan (RRSP)/pooled registered savings plan (PRPP) deduction limit, often called your "contribution room")

From Google front page: (The RRSP deduction and contribution limit is 18 percent of your earned income to a maximum value each year. The maximum RRSP contribution limit for 2013 is $23,820. Unused contributions are carried forward each year, so if you didn't maximize your RRSPs last year, you can add the unused amount to this year's limit.)

It's the same thing.

No, it's not the same thing. See link:

http://www.ge-solutions.ca/rrsp-contributions-vs-deductions.html

You really should either talk to a different accountant or atleast post in the "Canadian Taxes" thread.

[okits]

Guys, I think you're incorrect.

I googled:

From the cra website: (You can find your registered retirement savings plan (RRSP)/pooled registered savings plan (PRPP) deduction limit, often called your "contribution room")

From Google front page: (The RRSP deduction and contribution limit is 18 percent of your earned income to a maximum value each year. The maximum RRSP contribution limit for 2013 is $23,820. Unused contributions are carried forward each year, so if you didn't maximize your RRSPs last year, you can add the unused amount to this year's limit.)

It's the same thing.

It's not.

The amounts are the same if you've always deducted everything you contributed.  But, for example, in year 6 your contribution limit is $50k and your deduction limit is $50k, and you contribute $50k but only deduct $25k, in year 7 your contribution limit is 18% last year's employment-and-rental income, but your deduction limit is $25k + 18% last year's employment-and-rental income.

Look at the part of your Notice of Assessment where RRSP contributions are detailed.  Read the guidelines and do the calculations.  Unless there's more to your situation you are okay to carry forward the $75k.

[K-Dogg]

This is what two people from the CRA told my accountant. And I talked to a guy there who said the same thing. I'll try the Canadian taxes thread tomorrow.

[Le Barbu]

This is what two people from the CRA told my accountant. And I talked to a guy there who said the same thing. I'll try the Canadian taxes thread tomorrow.

https://forum.mrmoneymustache.com/taxes/can'eh'dian-tax-you-have-questions-i-have-answers/msg1476148/#msg1476148

[Heckler]

I'm not looking to debate, but I'm seeing a gross misunderstanding of the term "carry-forward".

http://boomerandecho.com/rrsp-over-contribution-limit-and-carry-forward-rules/

[Le Barbu]

I'm not looking to debate, but I'm seeing a gross misunderstanding of the term "carry-forward".

http://boomerandecho.com/rrsp-over-contribution-limit-and-carry-forward-rules/

d

This is what I always kneew. You can "carry-forward" indefinitly all unused RRSP room. Then, when you contribute, you can deduct whatever you want and report the "unused" contributions.

[K-Dogg]

Thanks for that. Yeah too many terms.

[SweetLife]

I would highly encourage you to read up on the advantage of the taxable account; its a pillar in my FIRE plans. My taxable account is very well structured and I will likely pay almost nothing in tax; far lower than the taxes I would pay on my RRSP account. By combining them I can get $30k/year tax free in retirement, can you do that with your RRSP account?

Prairie Stach I am ALLLL EARS :) do you have your strategy posted somewhere??? I would like to soak up this information !!! Grins...