Financial Planning Tips: RSP Over-Contribution Penalties

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We had a pretty noteworthy case come out of tax court this year on RSP over-contributions. I want to point this case out because the penalties were not small. This taxpayer was hit with $1,040 plus some penalties in ’04 and $1,099 in penalty tax plus some additional penalties in ’05. The taxpayer used a compassionate plea argument that she was unemployed, had neglected the fact that her RSPs were in over-contribution position, and had hoped for administrative relief from Canada Revenue Agency. The tax court upheld these penalties and said if CRA were to offer administrative relief – which they’re somewhat expected to do, but only when the taxpayer has made reasonable steps to remove those RSPs from their RSP account, or at least minimized the over-contribution position – being unemployed with sort of hopes of a compassionate ruling from CRA … not going to work in this case.

Let’s look at this penalty that they’re talking about. It is severe. The penalty tax on over-contributions is 1% per month on that over-contribution amount. And then they can offer some additional penalties over and beyond that if they haven’t found you making steps to remove the over-contribution. This penalty applies on RSP over-contributions that are in excess of $2,000. Everybody’s allowed an over-contribution of $2,000. Beyond that, you get the penalty tax. It’s important to know what your contribution limit is to figure out if you’re in this penalty position. The best place to find that is from the Notice of Assessment in your tax return. It’s stated on there and it’s called your RSP Deduction Limit Statement. You’d find that on your Notice of Assessment, or if you log into the CRA website and look at your My Tax profile. If you’re in an over-position with your RSP, it’s important for yourself or the client you’re advising to know that there’s two things you have to do: you have to file a form. It’s called a T1-OVP form and this is filed to CRA. It discloses the over-position and calculates the penalty tax. You get to calculate it yourself. The second thing you have to do is you have to remove those excess contributions from your RSP account. You can do that by asking the RSP provider to do a manual withdrawal. If they do that, they’re going to charge a withholding tax which is kind of unfortunate so if you file a T3012A form to your RSP provider disclosing to them that you’re in an over-contribution position, that allows them to refund you the RSP money without withholding tax. Those are the two forms you need to be aware of.

Finally, it’s worth refreshing for ourselves what the RSP contribution limits are. They grow each year, based on the previous year’s income. So in 2011, you get 18% of 2010’s earned income to a maximum of $22,450. In 2012, coming up, we’re going to see RSP limits increasing again and your 18% would max out at $22,970. I hope that helps refresh us where we’re at with RSP contribution limits and gives us that fair warning to watch for these over-contribution positions.

Other titles in this series:

The Pension Gap

Good news regarding Individual Pension Plans

Important changes to RSP contributions 

Important changes to Canada Pension Plan

Registered Education Savings Programs

Small business owners Employee Profit Sharing Programs

Small business owners Individual Pension Plans

Summer Camp Planning

Ian Quigley is a senior consultant with innovative financial advice firm Qube Consulting . He is an expert in investment, insurance and tax strategies and has developed numerous online courses dealing with these subjects. Find Ian’s courses online at ILScorp. All 12 are included in an Annual Life Subscription or are available for individual purchase. Visit ILScorp’s catalog.

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