Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues:
Basis for the 1% tax on excess RRSP contributions
Position:
Provided comments on the basis for tax assisted saving for retirement.
Reasons:
Outlines the policy for the imposition for the tax.
Signed on June 9, 2003
XXXXXXXXXX
Dear XXXXXXXXXX:
The Honourable Elinor Caplan, Minister of National Revenue, has asked me to reply to your letter of April 15, 2003, concerning contributions made to a registered retirement savings plan (RRSP).
According to the Department of Finance's March 1988 publication entitled Saving for Retirement: A Guide to the Tax Legislation, the provisions of the Income Tax Act that apply to RRSPs are part of the legislation designed to provide fair tax-assisted retirement savings to all individuals. The basis of this legislation is a uniform, comprehensive limit on tax-assisted saving of 18 per cent of an individual's earnings. This is consistent with the two per cent of earnings per year of service that applies to pension benefits and, in general, should enable individuals to build up retirement savings of about 60 to 70 per cent of their pre-retirement earnings on a tax-assisted basis through contributions to their registered pension plans, RRSPs and deferred profit sharing plans over a career of 30 to 35 years. The tax policy clearly chose to limit the amount of tax-assisted retirement savings, both for reasons of fairness and the cost to the Government. Individuals, however, are free to save additional amounts, to the extent desired, through other forms of investment, although savings accumulate in these investments on a tax-paid basis.
The tax assessed in respect of excess contributions to an RRSP is intended to discourage contributions being made to an RRSP when the contributions exceed the limits set for tax-assisted savings. However, the legislation also recognizes that excess contributions can be made inadvertently to an RRSP and that remedies should be available if this in fact occurs.
Excess contributions that could not be deducted in one year may be left in a plan to be deducted in a subsequent year when additional contribution room becomes available. In this event, the tax on the excess contributions will continue to apply until the contributions first become deductible. Alternatively, the excess contributions may be removed from the RRSP. In this event, the amount withdrawn will not normally be subject to taxation when it is returned to the contributor. Furthermore, the tax on excess contributions will not apply to the amount once it is withdrawn. To request a withdrawal, an RRSP annuitant should complete Form T3012A, Tax Deduction Waiver on the Refund of Your Unused RRSP Contributions, which is available from any tax services office or on the Internet at http://iis-sii.ccra-adrc.gc.ca/ez.indv.tierp/jsp/ezRenderForm-e?bodyId=1231&type=4&group=INDV.
In addition, the Income Tax Act provides that the tax on excess contributions may be waived if the excess contribution was made because of a reasonable error and reasonable steps are taken to eliminate the excess. Requests to have the tax waived should be made through your local tax services office.
The Income Tax Act does not contain any rules particular to costs that may arise as a result of the early redemption of some investments held by an RRSP. A financial institution can waive such costs should it wish to do so.
I trust that the information I have provided will be helpful.
Yours sincerely,
Bill McCloskey
Assistant Commissioner
Policy and Legislation Branch
Wayne Harding
957-9769
May 14, 2003
2003-001646
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