Canadian RRSP Question

Factual Questions
1

Ok this is a bit complicated, I am getting different answers from CRA on how this works and both my return and my wife’s is stuck in re-assessment hell because of incorrect information I received. I am trying to get this fixed.

For the tax year 2013, my wife maxed out her RRSP limit based on her 2012 notice of assessment. So 20K went in. She then made a “spousal” contribution to my RRSP using my unused room, another 20K. So far so good. She claimed her 20K and no problem, CRA accepted it. I claimed the other 20K as a deduction. So that was my first mistake, was not allowed to do that, she was supposed to claim it as well. Ok, no problem. I was reassessed, removed the 20K deduction on my tax return and gave it back to her on her return. CRA has disallowed the extra 20K on her return because they say she has maxed out for RRSP room limit. OK well, she is using my limit so why can’t she claim it ? How can we not be able to claim a 20K deduction when it went to an RRSP. This is where Revenue is driving me nuts with conflicting answers. The last answer I got is that she can claim the 20k in this years 2014 tax returned as an “unused” deduction that she was not able to claim in the previous year. Is this correct ?

Thanks

2

I am not an accountant/tax specialist.

This page says quite clearly that it’s her limit that counts, so if she was maxed out, the extra 20 grand she contributed to your RRSP was not allowed for 2013.

But contributions done in the first 60 days of the year can apply to the previous year or to the current year.

So if that 20-thousand-dollar spousal contribution occurred in the first 60 days of 2014 (when people typically do their RRSP maxing-out), then I’m pretty sure she should be allowed to claim it on her 2014 return, assuming it fits under the new limit printed on her 2013 notice of assessment (received in the spring of 2014).

But I don’t understand the “unused from previous year” part. If she maxed out for 2013, there was nothing “unused” from that point on.

3

The contributions where made in the middle of 2013 so I know it can’t be applied to 2014. I guess what I am trying to figure out is how can the 20K be claimed as a deduction since they won’t allow me to claim it or her for the 2013 tax year. By unused, I I meant the 20K as a carry forward to 2014 but I guess that only applies if that was done in the first 60 days of 2014. The bank really screwed me on this. I gave them both my notice of assessment and my wife’s for 2012, showed them the limit for her’s and mine and asked if we could put the 20K into her RRSP and in mine as a spousal and claim the deductions. I was told yes. CRA says no. Now we are on the hook for a big tax bill and a 20K rrsp that I can’t used as a deduction anywhere. Hence why I am asking if this is correct ?

4

A spousal contribution is a type of income splitting. If one spouse makes more than the other, the higher earning spouse would contribute to the lower earner’s RRSP. The net effect is that the higher earner gets a bigger deduction at the time of contribution and both pay a lower rate at withdrawal. If your marginal rates are the same and you have the same contribution limit, there is no point in a spousal RRSP.

If your wife split her contribution between her own and yours, you would still have your own limit unused.

5

The bank was dead wrong, I’m afraid. A spousal RRSP contributions from your wife would count against your wife’s RRSP limit. What should have happened is you should have made a normal RRSP contribution, and it would have counted against your limit (and decreased your taxable income). You need to raise a stink with the bank about this. It’s absolutely unacceptable for anybody at the bank who provides financial advice to get something so basic wrong.

What is your wife’s RRSP limit for 2014? If it is less than $18000*, then she is still over her RRSP limit and owes a penalty tax of 1% of the overage amount per month. If that is the case, she needs to get the excess contribution out of the RRSP as soon as possible to stop owing more each month. Unfortunately, there may be nothing that can be done about the penalty tax on the $20K overcontribution last year. There is a provision where you can apply for relief to have the penalty tax waived, but I don’t know what your chances are of actually getting that.

You need to deal with this quickly, especially if your wife is still in an overcontribution situation this year. If the CRA is not satisfied that you took reasonable steps to fix the error once you became aware of it, they will deny your application for relief.

  • The number is $18000 because each taxpayer is allowed to exceed their RRSP limit by $2000 without paying a penalty.
6

Thanks for the response. The BMO rep is a FMA, PFP |Financial Planner |Investment & Retirement Planning. I expected him to give me the correct advice. I have emailed him and called him and not getting any straight answers. I found out about the 1% penalty for over contribution so we had to take the funds out. The same bank issued a T4RSP receipt but in my name. I though that if it was taken out of a spousal RRSP, the income attribution rules say it goes back to my wife income not mine. So my taxes are screwed up for this year as well. CRA does not care about the rules, they go by the receipts the bank gives them. I guess I will need to the BMO Ombudsman to get this fixed.

7

IANATaxAccountant, but I’ve dug into RRSP shit over the years…

A “spousal RRSP” is basically a savings plan that A contributes to but it belongs to B. For contribution and tax deduction purposes, it is another RRSP that A owns and she contributes to. For withdrawal purposes much later, the money belongs to B and is attributed to his income.

The purpose of a spousal RRSP is to use the high-income spouse’s RRSP room to create a fund belonging to the low income spouse. If you’re using your own RRSP room, you have a plain RRSP in your own name.

(Note the proviso that - you must not withdraw that money that went in for 5 years, or else it is attributed to and taxable as income for contributor A, not recipient B; this is so that you don’t just transfer income to the other spouse.)

So as far as CRA is concerned, for deduction purposes, the spousal RRSP is just another RRSP your wife contributed to. What your really wanted to do, is have your own RRSP completely in your name, make a contribution of $20,000 to it, you claim the deduction, and you get the refund.

If you withdrew the funds before the 5 years were up, then yes, the money should be attributed to her income, not yours. But!!! If this is a “SPOUSAL RRSP” and you had more than $20,000 in there for more than 5 years before the withdrawal, then you took those oldest funds out, not the most recent contribution - and therefore the contribution is still in there, and still counts against RRSP stuff that she put in.
SO… DID YOU HAVE MORE THAN $20,000 IN THE PLAN FOR MORE THAN 5 YEARS, OR DID THE BANK MAKE AN INCOME ATTRIBUTION MISTAKE? That’s the $20,000 question.

Disposable income is common property; who cares if you pay the rent and she puts the money in your RRSP, or you spend all your disposable cash on RRSP contributions and she pays the groceries and rent. The only question is who claims the deduction… and DON’T go over your limit.

What you should have done is she takes the money out of her own personal RRSP, so it gets attributed to her. (Yeah, she loses that money, it sucks - she never was entitled to the deduction for $40,000 only $20,000). If it’s not too late, you can still do it, but for 2013 fiscal year I suspect after Feb. 28 is too late. If you withdrew in 2015 from the spousal while sorting your taxes, it’s probably not too late to dump some more into your own (not spousal) RRSP to offset your misattributed withdrawal (if you have the room). Alternatively, you could open a spousal RRSP for her so you put the money in, get the deduction, but she “owns” the money eventually.

You either put the money in your RRSP (and save some to pay the difference in tax rates); or pay the tax but put the remainder in a TSFA for her.

By messing up these contribution tricks, you have opened yourself up to a nice tax bill.

But basically -

  • She overcontributed, has to pay penalty, unless she can withdraw from her RRSP (not the spousal) now to make it right. (Too late?)
    You got money attributed to your income from the withdrawal. Do you have the room to dump it back in, is it too late? You would lose $20K of room but not pay the tax penalty

Considering marginal income rates tend to be 35% to 42% if you are bothered by these details, an extra $7,000+ tax is a pain; perhaps a penalty is better than losing the savings.

8

Oops, I lied…

Going back and checking - the spousal RRSP limit is 3 years, not 5.
The withdrawal is attributed to the most recent - not oldest - contribution.
(So it cannot be used as a revolving income splitting)

However, a spousal RRSP is any RRSP designated as such (she contributes against her income, but it belongs to you)
It is not just an RRSP that belongs to you.

So if this really was a spousal RRSP, not your personal one, and the contribution was in 2013, the bank is in error, the withdrawal income MUST be attributed to her.

If it was your personal RRSP, not spousal, the initial $20K should be attributed as your contribution not hers; she would not be in over-contribution.

Are we missing something?

9

No disrespect intended, but this is exactly why we spend a few hundred dollars on an accountant to do our taxes. If a person can afford to put $20,000 to $40,000 into savings in one year, then an accountant that knows the CRA rules is well worth the expense.