Principal Issues: [TaxInterpretations translation] 1) What is the impact of a withdrawal on the J element of the algebraic formula in subsection 204.2(1.2)?
2) When does the Part X.I tax end?
Position: 1) In general, a taxable RRSP withdrawal reduces undeducted RRSP premiums and, as a result, the cumulative excess amount in respect of RRSPs.
2) There is no 1% tax payable under subsection 204.1(2.1) for a particular month when, at the end of that month, there is no cumulative excess amount in respect of RRSPs.
Reasons: Legislation
XXXXXXXXXX 2010-036702 Catherine Ayotte, Notary, M.Fisc. July 11, 2011
Dear Sir,
Subject: Withdrawal of excess RRSP contributions
This is in response to your letter of May 4, 2010 in which you asked us for information regarding the tax consequences related to excess contributions to a registered retirement savings plan ("RRSP"), as well as their withdrawal. In particular, you would like an explanation of the impact of an amount withdrawn from an RRSP on element J of the algebraic formula in subsection 204.2(1.2) of the Income Tax Act (the "Act"). In addition, you wish information about when the Part X.1 tax ceases.
Please note that, unless otherwise indicated, all statutory references herein are to the provisions of the Act.
The situation described in your letter appears to be an actual situation involving a specific taxpayer. As stated in Information Circular 70-6R5, 2002, it is not the practice of the Directorate to comment on proposed transactions involving specific taxpayers otherwise than through advance rulings. If your situation involved a specific taxpayer and a transaction, you should submit all relevant facts and documents to the appropriate Tax Services Office for their opinion. However, we can offer the following general comments which may be helpful to you.
By virtue of subsection 204.1(2.1), an individual who, at the end of a particular month, has a "cumulative excess amount in respect of registered retirement savings plans” must, in respect of that month, pay a tax under Part X.1 equal to 1% of that excess. The definition of "cumulative excess amount in respect of RRSPs” is found in subsection 204.1(1.1) and at any time in a taxation year is the "undeducted RRSP premiums" at that time less the result of a calculation under paragraph 204.2(1.1)(b). Generally, that calculation includes the addition of several items, including the "unused RRSP deduction room" within the meaning of subsection 248(1) at the end of the preceding taxation year and the contribution room (note Footnote 1) for the year, plus an amount of $2,000.
The term "undeducted RRSP premiums" used in the calculation of the cumulative excess amount in respect of RRSPs is defined in subsection 204.2(1.2) and applies only for the purposes of certain provisions of Part X.1. That amount represents the undeducted premiums, at a particular time in a taxation year, that the individual has paid into RRSPs. That amount is calculated according to the following formula: H + I - J. Element J of this definition represents the amount by which the total of the following amounts exceeds any amount deducted under paragraph 60(l) in computing the individual’s income.
- Any amount the individual received in the year and before that time out of the RRSP and included in computing income for the year.
- Any amount the individual received in the year and before that time from a registered retirement income fund and that is included in computing the individual’s income for the year.
The term "unused RRSP deduction room" used in computing the cumulative excess amount in respect of RRSPs is defined in subsection 248(1) and has the same meaning as in subsection 146(1). Generally, a taxpayer's unused RRSP deduction room at the end of a taxation year is equal to the unused RRSP deduction room at the end of the preceding year plus the contribution room the taxpayer generated during the year minus, among other things, the premiums paid by the taxpayer that were deducted pursuant to subsection 146(5) or (5.1) for the year.
Since the income tax under subsection 204.1(2.1) is calculated monthly, at the end of the month, we are of the view that the time for calculating the cumulative RRSP excess under subsection 204.2(1.1) and undeducted RRSP premiums under subsection 204.2(1.2) is at the end of each month. Consequently, when an individual has a cumulative excess amount in respect of RRSPs in respect of registered retirement savings plans, the withdrawal of the excess reduces the amount of the undeducted RRSP premiums under subsection 204.2(1.2) and thereby the cumulative excess amount in respect of RRSPs in respect of registered retirement savings plans for the months ending after the date of withdrawal.
By virtue of subsection 204.3(1), an individual who is required to pay the 1% tax under subsection 204(2.1) must file a T1-OVP 20--Individual Tax Return for RRSP, PRPP and SPP Excess Contributions within 90 days after the end of the taxation year. If an individual makes a withdrawal that eliminates their cumulative excess amount in respect of registered retirement savings plans, no tax under subsection 204.1(2.1) will be payable for the months ending after the withdrawal. However, the individual still must file Form T1-OVP and pay the tax for the months in which the individual had a cumulative excess amount in respect of registered retirement savings plans. Subsection 204.3(2) provides that subsection 162(1) applies. Consequently, failure to file the T1-OVP return may result in a penalty of 5% of the tax payable, plus 1% of the outstanding balance per full month of delay, up to a maximum of 12 months. (footnote 2)
In the situation where subsection 146(8.2) does not apply and a contribution excess is withdrawn, you indicated that the balance of the unused deductions is not adjusted on the notice of assessment for the year of withdrawal and subsequent years. Consequently, you seem concerned that we could argue that the Part X.1 tax will not cease with the withdrawal of the overcontribution.
Amount A under "2010 RRSP Deduction Limit Statement" of the 2009 taxation year's Notice of Assessment indicates the RRSP deduction limit under subsection 146(1) for the 2010 taxation year. The calculation of the A amount also indicates the unused RRSP deduction room as defined in subsection 146(1) for the 2009 taxation year. The RRSP deduction limit is required to establish the maximum amount that a taxpayer may deduct under subsection 146(5) or (5.1). In addition, an amount withdrawn from an RRSP and included in computing the taxpayer's income does not change the RRSP deduction limit or the unused RRSP deduction within the meaning of subsection 146(1).
In that regard, subsections 146(5) and (5.1) provide, in substance, that a taxpayer may generally deduct in computing income for a taxation year the lesser of
- the total of the premiums paid to the taxpayer’s RRSP or to the taxpayer’s spouse or common-law partner’s RRSP after 1990 and within 60 days after the end of the year to the extent that they were never deducted in the calculation of the taxpayer’s income for a previous taxation year and
- the “RRSP deduction limit” for the year
That deduction can be claimed either in the year the taxpayer pays premiums to the taxpayer’s RRSP or in a subsequent year. Subject to subsection 146(8.2) and (8.21), the amount withdrawn from an RRSP that is included in computing the taxpayer's income does not reduce the total of the premiums paid to the taxpayer’s RRSP or to the taxpayer’s spouse or common-law partner’s RRSP for the purposes of subsection 146(5) or (5.1).
Consequently, the amount B of your Notice of Assessment under "2010 RRSP Deduction Limit Statement" indicates the total premiums the taxpayer paid to the taxpayer’s RRSP or to the taxpayer’s spouse or common-law partner’s RRSP after 1990 and within 60 days after the end of the year that the taxpayer did not deduct in computing the taxpayer’s income under subsection 146(5) or (5.1). That amount should not be confused with the term undeducted RRSP premiums in subsection 204.2(1.2) used in the calculation of the cumulative excess amount in respect of registered retirement savings plans, but which does not apply for the deduction under subsection 146(5) or (5.1).
Best regards,
Louise J. Roy, CGA
Manager of the Financial Sector and Exempt Entities Section
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 The term "contribution room" refers to letter B of the algebraic formula in the definition of "unused RRSP deduction" and the definition of "RRSP deduction limit". That element also represents the letter B in calculating the cumulative excess amount in respect of RRSPs in paragraph 204.2(1.1)(b).
2 For more information, see Guide T4040-RRSPs and Other Registered Plans for Retirement, available on the CRA's Web site at: https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4040/rrsps-other-registered-plans-retirement.html