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RRSP tips to keep the taxman off your back

If you've exceeded your RRSP contribution limit for 2010, be prepared to pay the taxman - and the sooner the better.

The Canada Revenue Agency has improved its system for tracking registered retirement savings plan contributions in recent years, making it much easier to catch those who go over their limits, says Peter Coles, a tax research and training specialist at H&R Block. "You used to be able to get away with it forever in ignorance, but that isn't the case now," Mr. Coles says.

You risk being charged a 1-per-cent penalty tax for every month you are in an over-contribution position.

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That's what happened to one of Mr. Coles' clients, who exceeded his contribution room by putting money into his wife's RRSP. "He thought he could contribute to hers based on her limit, and that was a mistake," Mr. Coles says. "You can contribute to a spousal plan, but the amount you contribute has to be based on your own limit."

If you do find yourself in an over-contribution position, withdraw the excess money as quickly as possible, Mr. Coles says. You can request a waiver of the penalty tax if you can demonstrate "reasonable error" and prove you are taking reasonable steps to eliminate it.

Mr. Coles offers a few additional tax tips for those who contribute to or withdraw from their RRSP this year:

Know the deadlines

The deadline for making an RRSP contribution that can be deducted on your 2010 tax return is March 1, 2011. If you turn 71 in 2011, you must convert your RRSPs into a form of retirement income before the end of the year or be taxed on the fair market value of the plan. Be sure to discuss your options with a tax professional.

Stay within your limit

The maximum limit for RRSP contributions in 2010 is 18 per cent of your income, to a maximum of $22,000, plus any previous contribution room. Check your 2009 Notice of Assessment from the Canada Revenue Agency for your 2010 RRSP limit.

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Learn the exceptions to the rules

Contributions up to $2,000 in excess of RRSP limits can be made without being subject to a penalty tax. However, you cannot claim a deduction for the excess amount. While RRSP withdrawals are taxed, the Home Buyers' Plan and Lifelong Learning Plan allow you to withdraw money from your RRSP without penalty as long as they are paid back within certain time frames. If the money is not repaid, it will be considered income.

Know how to fix an over-contribution

If you over-contribute by more than $2,000, you are subject to a 1-per-cent penalty tax for each month you are in excess of that. You have to complete a T1-OVP Individual Tax Return for RRSP Excess Contributions to calculate the amount of the over-contribution and penalty tax. This form must be filed, and the tax remitted, within 90 days from the end of the year. (That deadline is March 30, 2011, if there was any excess in the plan at the end of any month in 2010).

Beware of withholding tax

When you request a withdrawal from your RRSP, the financial institution is required to withhold a certain percentage of tax based on the amount of the withdrawal: 10 per cent on amounts up to and including $5,000; 20 per cent on amounts over $5,000 up to and including $15,000; and 30 per cent on amounts over $15,000. The amount withheld at source is not usually sufficient, so make sure you set enough money aside to cover your final tax liability.

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About the Author
Report on Business Community Editor

Dianne Nice is community editor for Report on Business and writes about social media. Previously, she was The Globe's online editor for Careers and Personal Finance and has written about these topics for Report on Business and Globe Investor. More

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