Are you one of a number of Canadians who has inadvertently overcontributed to your RRSP? If so, you should be aware that the Canada Revenue Agency (CRA) is carrying out a project through which they have contacted taxpayers who 'may' have overcontributed to their RRSPs. Excess RRSP contributions are subject to a penalty tax of 1% per month of the excess contribution.
What are RRSP excess contributions?
Generally, you have RRSP excess contributions when your unused RRSP contributions made to your, or your spouse's or common law partner's, RRSP plan exceed your RRSP deduction room plus $2,000 (the allowable overcontribution). Your unused RRSP contributions and RRSP deduction room can be found on your RRSP Deduction Limit Statement which forms part of your Notice of Assessment.
How does the 1% penalty tax work?
The penalty tax of 1% per month may apply to certain excess contributions you made in 1991 and later years, that are left in the plan. However, if your unused contributions resulted from qualifying mandatory group RRSP contributions or from contributions made before February 27, 1995, you may not have to pay this 1% tax on all your unused contributions.
The 1% penalty tax on RRSP excess contributions applies for each month that the contributions remain in an RRSP or until your excess amount is reduced by new RRSP deduction room. Penalty tax arising at any time in the year is due and payable 90 days after the end of the year. CRA provides Form T1-OVP Individual Tax Return for RRSP Excess Contributions to calculate the tax owing. This form must be filed within 90 days of the year-end. Failure to file may result in penalties.
It is up to the taxpayer to self-assess the penalty tax on excess contributions. However, if CRA becomes aware of the situation, they will send a request to file Form T1-OVP.
What do I do with my RRSP excess contributions?
Where you inadvertently make excess RRSP contributions, you may want to reduce continuing penalties by withdrawing the amount of the excess beyond the permitted $2,000. RRSP withdrawals must be reported in your personal tax return in the year of withdrawal. However, you may be able to claim
a deduction equal to the amount withdrawn if you reasonably expected to be able to deduct the contributions, and you received the unused RRSP contributions:
a) in the year you contributed them, or in the following year; or
b) in the year you received a Notice of Assessment or Reassessment, or in the following year.
The intent is to allow you to withdraw an overcontribution, without any tax consequences, as soon as you realize that penalty tax may arise. You must withdraw from the same type of plan as that to which the unused contributions were made, either your own RRSP or an RRSP for your spouse or common-law partner.
If you overcontributed in 2006 you have until the end of 2008 to remove the excess contributions and have no tax on the withdrawal. The penalty tax of 1% per month still applies during your period of overcontribution.
You can withdraw from an RRSP without withholding tax by completing and filing tax Form T3012A: Tax Deduction Waiver on the Refund of Your Undeducted RRSP Contribution. This form asks the CRA for permission to remove RRSP overcontributions without having tax withheld. Once the T3012A is filed, the CRA is aware of the overcontribution and will ask you to fill out the T1-OVP form to calculate the penalty tax.
If you withdraw RRSPs without Form T3012A, the issuer of the plan must withhold tax of 10%, 20% or 30%, depending on the dollar amount withdrawn. The tax withheld can be claimed on your personal tax return in the year of withdrawal. Since no T3012A form is filed, the CRA may not become aware of the RRSP overcontribution, however, the onus is still on you to file Form T1-OVP and pay the penalty tax.
The rules surrounding excess RRSP contributions can be complicated and the related forms difficult to complete. The CRA is contacting taxpayers who 'may' have excess RRSP contributions. However, receipt of a letter from the CRA does not necessarily mean you are offside of the RRSP contribution rules. Contact your Collins Barrow advisor for assistance if you are concerned about RRSP excess contributions.
Kathy McIntosh is a tax partner in Collins Barrow's Winchester member firm.