Registered Retirement Savings Plans (“RRSP”) are a tax deferral vehicle. If you put money into your RRSP, you normally take an equal deduction off your income in the year the contribution was made.
If you earn $100,000 of income, and you contribute $10,000 to your RRSP, your taxable income becomes $90,000.
Since there are large tax benefits from the use of an RRSP, the Canada Revenue Agency (“CRA”) regulates them very seriously. So, what happens if you over-contribute to your RRSP?
RRSP Over-Contribution Penalty
If you go over your RRSP contribution limit, the CRA will normally give you a grace amount up to $2,000. If you’re over by less than $2,000, you should be OK. If you go over the $2,000 mark, then you get hit with a 1% penalty per month that you are over-contributed. This penalty also applies to non-residents of Canada for tax purposes who contribute to their RRSP.
Normally taxpayers have no idea they are over-contributed, and it takes the CRA years before they notice. So, most RRSP over-contribution assessments are for large amounts because of the amount of time that has passed. This can have financially devastating consequences on taxpayers.
RRSP Over-Contributions – What if I Notice Before CRA?
If you review your RRSP contributions, and you believe you are over the limit, you may come forward to fix the issue. A specific tax return known as a T1-OVP is required to be completed, and filed.
This T1-OVP will calculate the amount of your penalty. If it is filed late, there will be late filing penalties issued as well.
If the CRA has not discovered your overcontribution issue, you may be eligible for a voluntary disclosure to remove any late-filing penalties and get a break on the interest.
RRSP Over-Contributions – Can I Get Out of the Penalty?
The short answer is yes, it is possible for the CRA to remove the penalty assessed against you. You need to file a specific type of taxpayer relief request explaining why the over-contribution, or excess contribution was due to a reasonable error. You also have to take reasonable steps to eliminate the over-contribution, or excess contribution. This means you basically have to take money out of your RRSP so you are no longer above the limit.
If your relief request is rejected, you do have the ability for a second level review. If that is rejected, you may file a judicial review application. This is where you bring the issue in front of a Judge who determines whether the CRA’s ruling was reasonable or not.
It is important to note that the Judge is not reviewing the decision to see if it is right, or fair, but only if it’s reasonable. That is why it is imperative to get advice before you file your first, and second request.
Conclusion
Here at SpenceDrake Tax Law we will review your RRSP over-contribution issue, and we will work to get your penalty removed. We are able to calculate your over-contribution, so you know exactly how much needs to be removed from your RRSP. If a voluntary disclosure is possible to remove some of the penalties, we will assist with that as well. Give us a call today to learn more.
Jeff Kirshen, BA, JD(US), JD(CDN)
Partner & Tax Lawyer
Disclaimer
Each article/blog post is only meant to provide general information. It is posted on a specific date. Laws and rules change. Please know that it may be out of date. It is not meant to provide legal advice, and it does not provide legal advice. It cannot be relied on. Every tax situation is unique, and that may mean situations differ from this article/blog. If you have legal questions, please consult a lawyer.