Going over the top

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What to do if you accidentally end up contributing more to your RRSP than you're allowed? Fortunately, the Tax Act acknowledges that mistakes do happen and permits you to overcontribute without penalty by up to $2,000 more than your RRSP contribution limit.

Your contribution limit is simply 18% of your prior year's earned income (up to a maximum of $19,000 for 2007), less any pension adjustment. You are also allowed to contribute any unused room carried forward from prior years.

Be forewarned: The penalty for overcontributing beyond the $2,000 buffer is harsh -- 1% per month on overcontributed amounts.

The easiest way to correct an overcontribution is to simply request a withdrawal from the RRSP issuer. This amount will be subject to withholding tax, which can be recovered later when you file your 2008 tax return.

To avoid having the withholding tax applied you can apply to the Canada Revenue Agency by using Form T3012A "Tax Deduction Waiver on a Refund of Your Undeducted RRSP Contributions" ( www.cra-arc.gc.ca/ E/pbg/tf/t3012a/t3012a-07e.pdf ). You complete Parts 1 and 2, mail it to your tax centre and once the CRA reviews and approves Part 3, it will be returned to you. You then fill in Part 4 and present it to your RRSP issuer in order to withdraw the overcontributed amount without withholding tax..

A question that often arises is whether the overcontribution, when withdrawn, must come from the same account into which the overcontribution was made.

That's what happened to Barbara Vale who, in January, 2001, made an inadvertent $10,000 overcontribution to her RRSP at CIBC. Once she became aware of this, Ms. Vale withdrew most of her overcontribution. The withdrawal was made partly from her CIBC RRSP, to which she originally made the overcontribution, and partly from another RRSP at TD Canada Trust.

The CRA only permitted her to deduct the amount withdrawn from the CIBC plan. Ms. Vale objected and took the matter to Tax Court.

The CRA argued that the withdrawal from the TD Canada Trust plan did not qualify for the deduction because the withdrawal did not specifically "relate" to the overcontribution, which was made into a different RRSP.

The judge disagreed and felt the "broad language used in [the Act] suggests that Parliament did not intend to require a strict tracing of the withdrawal and overcontribution."

As a result, investors have some flexibility in deciding from which RRSP the overcontribution withdrawal will come. This allows you to take asset allocation across all your registered and non-registered plans into consideration before choosing the optimal asset to be withdrawn.

Please visit financialpost.com for a question-and-answer session with tax expert Jamie Golombek