RRSP Over Contributions – No Mercy
Do you know your RRSP Contribution Limit?
As we are coming up to the end of the year, many people are considering topping off their RRSP’s to maximize their 2019 tax deductions. However, we continually see some people who over contribute. In that case what happens?
For every dollar the RRSP is overcontributed (over the $2,000 overcontribution cushion), the CRA will charge you 1% per month as a penalty. That works out to 12% per year if overcontributed over a full year which is most likely way over any RRSP earnings in that period. This is designed as a penalty tax to discourage taxpayers who over contribute.
The Contribution Limit
RRSP contribution room for the current calendar period is calculated based on the prior years’ earned income X 18% less RRSP contributions already made less any “pension adjustment” which is a grind on RRSP limits due to registered pension plan contributions. In other words, it’s a retroactive calculation. Keeping track of the limit, contributions made, and “pension adjustments“ is extremely complex. Even relying on the CRA Notice of Assessment can be misleading as the contribution limit they report is not inclusive of previous excess RRSP contributions.
Due to the complexities, mistakes often occur. What happens when they do?
Generally, taxpayers can plead with CRA to reduce or eliminate penalties in cases of honest mistakes or reasonable errors. However, in a recent tax case, the taxpayer pleaded with CRA for “discretionary relief” on over contributions due to the fact that the taxpayer did not file several years of tax returns based on his accountants advice (as there would have been no taxes owing). The court ruled that this does not satisfy the requirement of a “honest mistake or reasonable error”. The taxpayer was therefore subject to over $62,000 in penalties and interest (plus court costs).
Taxpayers need to monitor their RRSP contribution limits and ensure their investment advisors are competent and aware of this requirement. Taxpayers need to file all their tax returns and information returns on time so that they can keep track of running balances such as RRSP Contribution Room. In our firm, we communicate to our clients the RRSP limits to mitigate these types of issues.
ROMANOVSKY & ASSOCIATES LLP
CHARTERED PROFESSIONAL ACCOUNTANTS
Keith M.J. Anderson* BCom, CPA, CA-IT, CITP
Chartered Professional Accountant and Chartered Accountant (Canada)
CA-Designated Information Technology Specialist (Canada)
Certified Information Technology Professional (US)
* Professional Corporation