RRSP overcontribution woes

Statistics Canada data released in September 2017 shows that clients are embracing retirement savings accounts. According to the data, nearly two-thirds of Canada’s 14 million households made some form of retirement contribution in 2015. About 40% of households contributed to a TFSA, 35% to an RRSP and 30% to a registered pension plan. Almost 10% of households contributed to all three.

But no matter which tax-deferred plan your client chooses, it’s imperative that we help to ensure they don’t contribute more than is allowed.

Overcontribution overview

For TFSAs, contribution room is $5,500 for 2017, plus any unused room from prior years. As a result, a Canadian resident who was at least 18 years old when TFSAs were introduced in 2009 would have total TFSA contribution room of $52,000 if they had never contributed. Any TFSA withdrawals increase available contribution room beginning the following calendar year. The overcontribution penalty is 1% per month for unintentional overcontributions. (A deliberate overcontribution to a TFSA would be considered an advantage for tax purposes, leading to a penalty tax of 100% of any income or gain attributable to the overcontribution.)

RRSP contribution room is more complicated because it’s based on personal earnings history. Since it’s cumulative, it can go back decades. For 2017, the RRSP contribution limit is 18% of the previous year’s (i.e., 2016) earned income—up to a yearly maximum of $26,010 for 2017—less any pension adjustment, plus the cumulative unused contribution room carried forward from prior years.

It’s important to keep track of available contribution room, lest a person find herself subject to nasty penalty taxes for overcontributing—even if done accidentally. The penalty for overcontributing to RRSPs is 1% per month on the overcontributed amounts, which is equal to 12% annually.

The penalty tax is calculated on Form T1-OVP, “Individual Tax Return for RRSP Excess Contributions.” The T1-OVP form must be filed within 90 days of the end of each year in which an excess RRSP contribution (beyond the lifetime $2,000 permitted overage) arises. Late-filing this form can lead to additional penalties.

A real-life example

A Toronto taxpayer received a tough lesson in the consequences of overcontributing when he appeared before the Tax Court (Chiang v The Queen, 2017 TCC 165), as detailed in a decision released in August 2017.

CRA reviewed Edward Chiang’s RRSP contributions for the 2004 through 2013 taxation years, and assessed him an overcontribution penalty tax totalling about $8,500. To make matters worse, CRA also found Chiang liable for late-filing penalties totaling nearly $1,400. These penalties were for not filing the T1-OVP returns to report and pay tax on his overcontributions for each tax year from 2004 to 2013.

The Tax Court decision acknowledged that while it appears Chiang “paid reasonable and careful attention to the Registered Retirement Savings Plan (RRSP) Deduction Limit Statement that was attached to his Notice of Assessment for each taxation year, and ensured that […] the amount of his RRSP contribution for a particular year did not exceed the limit specified in the Deduction Limit Statement for that year,” he nevertheless appeared to be in an overcontribution situation by 2004.

Chiang said he prepared his own income tax returns using a commercial software program. According to Chiang, “due to some glitch or other malfunction in the software,” he failed to deduct RRSP contributions he made in 1995 and 1999 on his return. Thus, his total available RRSP contribution room, as calculated on Schedule 7 of his tax return, was overstated. In other words, he thought he had more available room than he actually had.

The judge found that “rather than there being a glitch in the software, the amount of the intended deduction was not entered on Schedule 7.” This innocent mistake resulted in an RRSP overcontribution, the resultant penalties and late-filing fees.

The judge was extremely sympathetic to the taxpayer’s situation, writing: “It is my impression that [the taxpayer] is a conscientious taxpayer who was, in the context of his RRSP, reasonably endeavouring to contribute and deduct the appropriate amount each year.” His errors were “due to innocent and reasonable inadvertence.”

Notwithstanding this, however, the judge still ruled that Chiang was responsible for the RRSP overcontribution penalties. When it came to the late-filing penalties for failure to file the T1-OVP forms each year, however, the judge was more forgiving.

As Chiang “had conscientiously tracked his RRSP contributions and was genuinely of the view that he had not made any overcontributions to his RRSP […] based on his understanding, there was no need to file” the T1-OVP forms each year.

The judge therefore cancelled the $1,400 in late-filing penalties since Chiang “reasonably believed in, and was operating under, a mistaken set of facts […] and his failure to file [the forms] resulted from a reasonable error of fact, so as to be excused.”

As advisors, we can play an important role in helping to make sure that our clients don’t end up accidentally overcontributing to their registered plans. Help them keep track of their contribution room and flag any discrepancies between CRA’s records and their own.

Jamie Golombek

Tax & Estate

Managing Director, Tax and Estate Planning, CIBC Private Wealth Team Jamie Golombek is Managing Director, Tax and Estate Planning with CIBC in Toronto. As a member of the CIBC Private Wealth team, Jamie works closely with advisors from across CIBC to support their clients and deliver integrated financial planning and strong advisory solutions. He joined the firm in 2008 after 12 years with a global investment company, where he was involved in both internal and external consulting on all areas of taxation and estate planning. Jamie has also worked for Deloitte as a tax specialist in the Toronto office, where he specialized in both personal and corporate tax planning. Jamie is quoted frequently in the national media as an expert on taxation. He writes a weekly column called “Tax Expert,” in the National Post, has appeared as a guest on BNN, CTV News, and The National, and for several years was a regular personal finance guest on The Marilyn Denis Show. He received his B.Com. from McGill University, earned his CPA designation in Ontario and qualified as a US CPA in Illinois. He has also obtained his Certified Financial Planning (CFP) and Chartered Life Underwriting (CLU) designations. In 2023, Jamie was named a CPA Ontario Fellow. The FCPA is the highest distinction that can be bestowed upon a CPA who brings distinction to themselves and to their profession through leadership and achievement in their professional, community or personal lives. Jamie is a past chair of the Investment Funds Institute of Canada’s Tax Working Group. He is also a member of CPA Ontario, the Illinois CPA Society, the Estate Planning Council of Toronto, the Canadian Tax Foundation and the Society of Trust and Estate Practitioners. For nearly two decades, Jamie taught an MBA course in Personal Finance at the Schulich School of Business at York University in Toronto.