Francesca Giroux, CPA
For the Lakeside Leader
Each year the Canada Revenue Agency (CRA) sends, with your Notice of Assessment, the amount that you are eligible to contribute to your RRSP. This is calculated based on 18 per cent of your earned income plus any carry forward from years where you did not contribute your maximum. Amounts contributed to your RRSP above your RRSP deduction limit for any given year may be considered excess contributions. Excess contributions occur when your unused contributions from prior years and your current calendar contributions are more than your RRSP deduction limit for the year plus $2,000.00. A tax of one per cent is levied on the excess amount.
There are certain circumstances were the one per cent tax will not apply to the excess contributions:
1. If you withdrew the excess amounts within 90 days after the end of the year in which you had excess contributions;
2. If all of the unused contributions were made from January 1, 1991 to February 26, 1995 and the total of the contribution was $8,000 or less, and no contributions were made between February 27, 1995 and December 31, 2011.
3. If all of the contributions were mandatory contributions made in the year due to participation in a qualifying group RRSP contributions. After reviewing these situations, if you do not apply to withdraw your excess RRSP contributions then you are subject to the tax on excess amount and have to file a completed T1-OVP Simplified Individual Tax Return for RRSP Excess Contributions. The tax owing must be paid no later than 90 days after the end of year in which there were excess contributions to avoid arrears interest. If the return is not filed within 90 days a late-filing penalty of five per cent of the balance owing plus one per cent of the balance owing for each month the return is late (to a maximum of 12 months). If a late-filing penalty was charged on a T1-OVP return for any of three previous years then the penalty for the current year may be higher.
After determining that you owe tax on your excess RRSP contributions you may ask in writing that CRA waive the tax if the excess contributions arose due to a reasonable error and you are taking (or have taken) steps to eliminate the excess contributions. The letter must explain the error made and the steps to be taken; supporting documentation of RRSP account statements that identify when the excess amounts were withdrawn or that they arose due to a reasonable error should accompany the letter.
A common mistake is to contribute your maximum amount without taking into consideration any amounts that you have not deducted on a previous tax return.
Information provided is of a general nature. As each individual or company’s situation is unique, you may wish to consult with your CPA for information specific to your own needs.