If you make a contribution, now that you have room to do so, think of it as a separate transaction. It will reduce your tax owing which may offset the tax incurred by the withdrawal.

Hi Preet,

Thanks for your reply. The bank did acknowledge that this was their error and they were very apologetic about it and have paid us the 1% penalty fees for the months where the ‘over-contribution’ occured. However, my latest concern as I recently found this out, is that the withdrawal now shows up as income in this tax year and will be taxed again by the government, right? Ideally then, should the bank be paying me this too?

We are planning to re-contribute into the RRSP before the Feb deadline; are we going to make a mess of this situation if we do that? Will we still owe tax on that withdrawal we we contribute to an RRSP in the same tax year?

Thanks again.

P.S. We are meeting with our bank manager in two days to hopefully sort this out, but prior to that would really appreciate your thoughts as well.

If what you say is true, the advice given was incompetent and your bank should reimburse you for any fees or penalties incurred because of their incorrect advice.

In February 2010 my husband and I were new immigrants to Ontario and my husband started work three months after we arrived. By mid of the year, we approached our bank for advise on RRSP’s for him and was told that we could invest up to 18% of his annual income, etc. which we went ahead and started doing. We set up an investment plan where a set amount would go into the RRSP account per pay check until it reached a level we wanted. When we had to do taxes for the year, the tax accountant informed us that by husband was not supposed to contribute to a RRSP as he did not have any contribution room as he only just started working that year (and you needed to file taxes for the year to get the NOA which would say if a room existed and how much). We were told that we would be liable to penalties by the government for over-contributing (which happened for a few months and the bank paid this to us). We were further advised by various people to withdraw the funds. Finally with all the pressure, we withdrew the entire RRSP amount. We were told that there would be withholding tax however we could claim that back when we did taxes (??). Now when researching more on this, I understand that this withdrawal is considered an income for the year we took it out and that it would be taxed as such, which is disappointing as he is in a high income tax bracket. We have since received my husband’s 2010 NOA and it now shows for 2011 he has a contribution room which we can use. We are planning on maximizing the contribution room for 2011, the same year we withdrew the funds from, due to the error of the bank.

My question is, how can we get back the entire amount which was withheld in tax as the real reason for this withdrawal was so that we don’t accrue penalties from the over contribution? Any information you could provide would be appreciated as we are very new in this game.

Thank you.

Even if you space out the withdrawals, the financial institution may elect to use a higher withholding rate on subsequent withdrawals in the same year.

Withdrawals are taken in the calendar year, and you have until Feb 29th of 2012 to make a contribution to count for 2011, correct.

Hope that helps.

As always, check with a tax professional first, but I would say avoid this like the plague. Or save some time and just write a cheque for a donation to the CRA because it’s wasted money.

The withholding at the time of each withdrawal is kind of like a downpayment on the tax that will be calculated and owing when you file your return the following year.

I would check with an accountant for your exact situation for advice – he/she may be able to take advantage of some other credits/programs applicable for those who qualify for disability benefits.

You make reference to the 89 day rule. I was trying to explain this catch to my wife because she wanted to make a 2011 rrsp contribution asap and then shortly withdraw funds from her rrsp to pay down personal debt. My understanding is that her 2011 contrib may be disallowed if she does not allow the required time between the two transactions. Any comments would be appreciated. Dale