Over-Contributions and Excess Contributions to an RRSP

Walter Harder

RRSP season ended on March 1, so any contributions to be deducted on the taxpayer’s 2021 return must have already been made. These contributions cannot exceed the maximum RRSP contribution for 2021 which appeared on the 2020 Notice of Assessment. So long as the contributions made are less than the maximum allowed, the taxpayer can deduct as much or as little of the contributions made on their 2021 return. Complications arise, though, when the amount contributed exceeds the maximum.

Taxpayers who are over the age of 18 can contribute up to $2,000 more than the maximum without any consequences. These contributions are referred to as “over-contributions.”  However, when contributions exceed the maximum by more than $2,000 (or zero for younger taxpayers), those contributions (referred to as “excess contributions,” are subject to a penalty tax of 1% of the excess amount for each month in which the excess contributions remain in the RRSP.

The Individual Tax Return for RRSP, PRPP and SPP Excess Contributions must be filed by the end of March following the tax year to report and compute the tax payable on the excess contributions. For most taxpayers, the simplified T1-OVP-S form can be used. However, if the taxpayer made mandatory contributions to a PRPP or group RRSP, the more complex T1-OVP form must be used.

The arduous form requires that you compute the excess amount for each month in the year, total the monthly excess amounts and multiply the sum by 1% to determine the tax owing. For each month, you must enter:

• The RRSP contributions made in the month
• Employer made PRPP contributions
• RRSP, PRPP, and SPP withdrawals that will be included in income in 2021

In addition, for each month, you must enter the taxpayer’s annual deduction limit, pension adjustments and pension adjustment reversals.

While the table where you have to make the 145 entries is now condensed to one 8 ½ x 11 sheet, the columns are now so narrow that it is all but impossible to complete this form by hand. Preparers who have licensed a tax form completion software product will find a lot of the arithmetic is done by the software. Those who don’t have the forms product can use the fillable form available from CRA to fit the numbers into the table, but the fillable form does none of the math.

If the taxpayer has an excess amount for the month of December that exceeds the new room earned in 2021, they should be advised to remove the excess amount as soon as possible as the penalty will continue to accrue each month until the excess amount is reduced to zero.

Additional educational resources: Don’t miss this opportunity to take Canada’s most up-to-date and comprehensive Advanced T1 Tax Update Course for Professional Tax Accounting firms and their new and returning staff who will file 2021 T1 Returns. This is Canada’s #1 tax training program for busy practice owners who need to recruit and train staff in time for this tax season.