The Canada Revenue Agency has gone fishing for people who have contributed too much to their RRSPs in the past. But it might be netting many who have done nothing wrong.

“There is indeed a project going on right now; 30,000 letters had been sent out as of March 22 and another 30,000 will be mailed in the coming weeks,” says Colette Gentes-Hawn, spokeswoman at CRA headquarters in Ottawa.

Overcontributors who get caught face hefty penalties: the standard 1% a month overcontribution fine plus steep interest and late-filing fees for not submitting the T1-OVP report required within 90 days of the end of a year in which an excess contribution was made.

HEFTY PENALTIES

But the CRA form letter does not make a direct accusation. It states only: “Our records indicate that you may have RRSP excess contributions subject to a tax of 1% per month and that you have not filed a T1-OVP return.”

The mailing includes a summary of contributions and deductions as they appear on the CRA database.

“If people’s records don’t match ours, this is an opportunity for them to clarify the situation,” Gentes-Hawn says. She compares this process to the verification letters that ask people who claimed moving expenses to send in receipts.

Gentes-Hawn says the CRA is checking filings for 2003-05 — within the standard three-year period for reopening a return — but one recipient says his letter involved a contribution made in 1994.

“It is possible that a contribution could have been made before 2003 and triggered a domino effect that was carried through the years,” Gentes-Hawn says. CRA began tracking overcontributions in the early 1990s, after the RRSP rules were overhauled.

Recipients who have not made excess contributions can simply provide copies of their receipts and a letter explaining how each contribution was allocated to one or more years, Gentes-Hawn says.

Toronto chartered accountant David Robinson, a partner in Innes Klayman LLP, suspects the CRA’s net is trapping many innocent “early contributors” who put money into their RRSPs during the first 60 days of the tax year for which they claimed the related deduction.

That’s what he found when he investigated a letter received by one of his firm’s clients. “She was an early contributor for several years in a row,” he says.

SCHEDULE 7 ISSUES

There was one year for which the woman failed to give her accountant a contribution receipt. “People often stash those slips in a desk drawer because they’re not going to claim the deduction until the following year,” Robinson says. “It could be that the CRA’s computer spotted a mismatch between the amount reported on the Schedule 7 that was filed with her return and the higher amount reported by her investment dealer.”

This area is ripe for error, he warns, noting that many individuals and even some professional tax preparers find Schedule 7s confusing. Because RRSP contributions can be made up to 60 days past the calendar yearend, the form assumes the RRSP year runs for 12 months starting in March. There is one line for reporting March-December contributions and another for those made in the following January and February. There is no line for isolating a current year contribution made in January or February.

Suppose you know on Jan. 2 that your 2007 RRSP limit is $10,000 and you contribute that much to your plan that month. Technically, Robinson explains, you should report that $10,000 on the Schedule 7 filed with your 2006 return and claim the deduction on your 2007 return filed one year later, trusting the CRA’s computers to keep everything straight. But many early contributors hold onto their receipts and report the deposits only in the return for the tax year to which they apply.

While Gentes-Hawn would not cite the triggers that generate a letter, Robinson fears early contributors might be unduly at risk.

Based on his investigation, he suspects that CRA’s database stores only the total contribution amount shown on line 245 of a Schedule 7, not the details of when those contributions were made. If so, a robotic filter cannot tell if a contribution made during the January-February “RRSP season” was allocated to the prior year or the current one. IE