Tax Tip Thursday

I say this all the time but I do not think I can say it enough. Not knowing the CRA regulations will NOT get you off the hook!

I am noticing in general, over the last couple of years, people have been taking advantage of the Registered plans available to them to save money. Specifically, TFSAs, FHSAs, and RRSPs. There are many others, but those are the big 3 that everyone is aware of and use consistently.

The TFSA cumulative Life to date limit of your RRSP moves up every year.

It is a function of your income – 18% of your net income to a maximum of $31,560 for 2024.

You can check your RRSP contribution limit online by logging into your MYCRA account. It will be as up-to-date as your tax returns! So if your 2022 tax return is not completed, your 2023 and 2024 RRSP contribution room will be incorrect!

That last statement is very important! To repeat,

If you haven’t filed your 2022 taxes, your 2023 and 2024 RRSP contribution room will be incorrect.

You must keep up with your taxes if you want correct information about RRSP contribution room!

Don’t Over Contribute

There is a penalty of 1% PER MONTH for each month you are over your limit. A one percent tax doesn’t seem like a lot, but the tax is one percent per month for each month you’re over the limit until the overcontribution is withdrawn — that’s 12 percent per year.

You can try and get the penalty waived if this occurs, but they are less forgiving with RRSPs. There is a significant amount of work and forms to be completed in addition to the withdrawal of the overcontribution.

I have found the biggest issue with overcontribution to RRSPs is that most people do not know they have done it until at least a year after the fact. This is where it becomes problematic, because the penalties have now added up big-time.

The 1st form to be completed is for the actual withdrawal of the over-contribution. This is called a T746 and is relatively straightforward. The complicated (and costly) part is the a T1-OVP which is a document that will outline your contributions and available room monthly. The problem lies in that you cannot complete it until after the year-end of the over-contribution.

For Example

I find the most impactful way to get people to pay attention is to tell some real-life stories.

A taxpayer overcontributed in 2022. They did not do their 2022 taxes until now along with their 2023 taxes – VERY COMMON! The other fly in the ointment on this one was that they changed jobs where the employer was making contributions to an RSP for the employee. This effectively removed any additional RRSP room created for the taxpayer.

They over-contributed by $10k.

We would begin by completing the T746 form and having them withdraw the $10k.

Then we would have to complete the T1-OVP form for 2022 and 2023. That would be 22 months of overcontribution (Mar – Dec 2022 and Jan – Dec 2023). This would result in a penalty of $2,200.

There will also be interest on that, at a rate of 9% right now for the 2 years! So another $400 roughly.

Now we have to wait until Jan 2025 to complete the final T1-OVP for the over contribution that is still sitting in their account for the 1st 3 months of 2024. That will also incur another $300 in penalties and additional interest.

So rough math has this taxpayer about $3k deep in penalties and interest!!

Did you Over Contribute?

It happens. I make a big deal out of the consequences to scare people and try to convince them to stay on top of things so that it doesn’t happen. But, if it’s already happened to you (or if you’re just not sure), it’s never too late to do something about it! The best thing you can do is book an appointment with us today so we can start looking over your documents to identify any problems.

Disclaimer:

This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal or tax advice nor can it or should it be relied upon. All tax situations are specific to each individual. If you have specific tax questions you should book an appointment for a 1 on 1 consultation.