RRSPs and the headaches of excess contributions

RRSP’s and the headaches of excess contributions

Using a registered retirement savings plan (RRSP) is a great method of reducing your personal net income and deferring your tax liability to post-retirement, when your income is likely to be in a lower tax bracket. As a reminder, the RRSP limit for 2019 is determined as the lesser of 18% of your earned income in the previous year and the RRSP limit of $26,500, plus any pension adjustment reversals and unused RRSP contributions of the previous year, less any pension adjustments and past service pension adjustments; the deadline to contribute to your RRSP for the 2019 tax year is February 29, 2020.

However, what happens if you contribute too much to your RRSP? The good news is that you can contribute up to $2,000 over your contribution limit without any negative consequences, but once you contribute over $2,000 above the limit, what happens?

In short, there is a penalty of 1% per month on your excess RRSP contributions, payable to the Canada Revenue Agency (CRA). This can easily be resolved by withdrawing the excess amounts from your RRSP, but if you have to pay the 1% penalty, you are required to prepare and file a T1-OVP form with the CRA within 90 days of the calendar year-end (March 30, 2020), which is where the headache begins.

The T1-OVP schedule contains three charts (Parts A, B, and C) broken down monthly to calculate the excess contribution made that is subject to tax for 2019:

  • Part A is required if you made contributions to your RRSP, your employer’s pooled registered pension plan (PRPP), specified pension plan (SPP), or your spouse’s RRSP or SPP in 2019 and was not deducted in your 2018 or 2019 tax return;
  • Part B is required if Part A was completed and you made mandatory contributions to a PRPP or RRSP group plan in 2018 on 2019;
  • Part C combines the information from the previous two parts and summarizes the amount subject to tax in each month.

Before even starting Part A, you are required to prepare another chart asking you to calculate RRSP contributions deducted in the past consecutive years ending with 2018. So to calculate the amount of penalty you have to pay because of contributing an excess amount to your RRSP, you have to complete three complicated charts on a monthly basis with information you may not have readily available, resulting in you having to contact your employer’s finance department. So to avoid this confusing and time-consuming process, contribute an amount within your limit. Be aware of your deduction limit by the following methods:

Check your 2018 notice of assessment or reassessment;
Use CRA’s My Account online feature; or,
Call CRA’s individual tax enquiries and ask about your RRSP information.

Contribute within your limit, as preparing the T1-OVP schedule in itself is already punishment on top of paying the tax on excess contributions

Author

Edwin Ma
Senior Staff Accountant
Ema@welchllp.com