10 August 1995 Internal T.I. 9520746 - RRSP OVERCONTRIBUTION TAX EFFECT ON SPP

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 Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Discussion of amendments to Part X.1 and effect on paragraph 60(v) deduction for Saskatchewan Pension Plan contributions.

Position TAKEN:

Reviewed effect and option to withdraw undeducted RRSP contributions.

Reasons FOR POSITION TAKEN:

Result of amendments - potential 146(8.2) deduction.

August 10, 1995

	HEADQUARTERS	HEADQUARTERS
	Client Assistance Directorate	P. Spice
		957-8953
	Attention:  Ms Sue Blais
	            Correspondence Section
		952074

Minister's Mail Insert 95-04721M

This is in reply to your facsimile transmission of August 8, 1995, in which you asked us to provide an insert for a reply to a letter of June 14, 1995, from XXXXXXXXXX a copy of which was attached to your request. We believe the following comments respond to her concerns.

On July 19, 1995, the Department of Finance released the wording of the proposed amendment to the Part X.1 tax on excess amounts contributed to a registered retirement savings plan (RRSP). As discussed in the February 27, 1995 Budget Speech, the maximum amount of undeducted RRSP contributions which may remain in the plan without tax will be reduced from $8000 to $2000 for the 1996 and subsequent calendar years.

If an individual has undeducted contributions in excess of $2000 that were contributed before the date of the Budget Speech, there is a transitional provision which will exempt such amounts from the tax. The individual, however, must reduce the amount of these excess undeducted contributions to the extent that the individual has RRSP deduction room in 1996 and later years.

The deduction for contributions to the Saskatchewan Pension Plan (SPP) has been integrated with the deduction for RRSP contributions since its inception. As a result, where the RRSP deduction room is reduced, the deduction limit for the SPP may also be reduced or eliminated to the extent that the RRSP deduction room falls below $600.

As you note, with the change in the undeducted contribution tax individuals who have been contributing to the Saskatchewan Pension Plan will be unable to claim a deduction under paragraph 60(v) of the Income Tax Act after 1995 if, in order to avoid the tax, they choose to use their RRSP deduction room to reduce the amount of their pre-February 27, 1995 undeducted RRSP over-contributions. As you also note, amounts withdrawn from the SPP or an RRSP are generally taxed in full whether or not the contributor claimed a deduction for such contributions. There is, however, a provision in the Act which allows an individual to withdraw undeducted amounts from an RRSP on a tax-free basis in certain circumstances, and we refer you to the discussion at page 21 of the enclosed 1994 RRSP and Other Registered Plans for Retirement Guide for further information concerning this provision.

The intent of the tax on undeducted RRSP contributions is to control unintended tax deferrals. Although the deduction limit on RRSP contributions serves to restrict the direct tax benefit, the Part X.1 tax limits the benefit associated with sheltering from tax the income earned in an RRSP. The reduction in the room for undeducted RRSP contributions to $2000 reflects an attempt to balance incentives to encourage individuals to save for their retirement with the goal of benefiting all taxpayers by reducing tax expenditures.

C.B. Darling
Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch