What will happen to the amount of money I contributed exceeding my RRSP limit and will I pay a penalty?

To help anymore who might be in the same situation as me I will post the results of my research and my conclusion as an answer.

To resume the situation, I contributed more than my 2020 deduction limit to my RRSP in 2020. The CRA has a page just for that called What happens if you go over your RRSP deduction limit? In this page it says the following:

If you contribute more to your RRSP [...] than your RRSP deduction limit allows, you will have an excess contribution.

So from that first statement we can assume I do have an excess contribution. The next statement is this :

Generally, you have to pay a tax of 1% per month on excess contributions that exceed your RRSP/PRPP deduction limit by more than $2,000 unless you:

• withdrew the excess amounts
• contributed to a qualifying group plan

If you have to pay this 1% tax, fill out a T1-OVP

This is not 100% clear. Are the 2 reasons listed the only ways to be exempt of the tax? Because I did not withdrew the excess amounts or contributed to a qualifying group plan I will assume that I need to fill out the T1-OVP for now.

The T1-OVP form can be found here. In the first page of the form you can find the following line:

For more information concerning excess RRSP contributions, see "Tax on RRSP, PRPP, or SPP excess contributions" in Guide T4040, RRSPs and Other Registered Plans for Retirement.

The T4040 can be found here. It says to follow the six-step process described in Chart 4 to determine if you have to fill out the T1-OVP form. Chart 4 is called "Do you have to fill out a 2020 T1-OVP return?". The content of the section is the same as a page the CRA has called Determine if you have to fill out a T1-OVP. Very interesting to note that there are some minor and major differences in the 2 pages.

So to recap there are 2 places on the CRA website that have a very detailed chart with steps about when you need to pay the tax on your excess. The T4040 seems more official than the "Article" as it is an actual publication with a "code" and you can also download it as a pdf. I will use the T4040 as a reference and highlight the differences with the article.

(T4040)If your 2020 RRSP deduction limit includes a net Past Service Pension Adjustment (PSPA) for 2020 or your unused RRSP deduction room at the end of 2020 was a negative amount, fill out a 2020 Form T1-OVP

(Article)If your 2020 RRSP deduction limit includes a net Past Service Pension Adjustment (PSPA) for 2020 or your unused RRSP deduction limit at the end of 2019 is a negative amount, fill out a T1-OVP

It makes more sense that the actual year should be 2020 here. And for my current situation it was not negative so I start the steps process.

Step 1: Does one of these situations apply to you?

• You contributed amounts to your RRSP [...] from January 1, 1991 to December 31, 2020, that you did not and will not deduct on line 20800 on your 2020 [...]

That is true in my case. I contributed 28k which is bigger than my deduction limit for 2020 of 16k so I can not deduct all of it. The contributed amounts not deducted are the excess 12k.

Step 2: RRSP deduction limit more than the total of unused RRSP contributions

• Is your 2020 RRSP deduction limit from your latest notice of assessment, notice of reassessment, or T1028, Your RRSP Information for 2020, is more than the total of your unused RRSP/PRPP contributions (including gifts) made from January 1, 1991 to December 31, 2020, plus the total RRSP and PRPP contributions (including gifts and employer PRPP contributions) made during 2020?

(Article)made from January 1, 1991 to December 31, 2019, plus the total

This is true for me again as I contributed more (28k) than my 2020 RRSP deduction limit (16k). I'm not 100% sure what should be included in the "unused RRSP contribution made from 1991 to 2020 (or 2019 if you follow the article)" but it does not really matter for now because we are over the limit with only our contribution anyway.

Step 3 is about being under 19 in 2020 so we will skip it

Step 4: The total of unused RRSP, PRPP or SPP contributions is less than your RRSP deduction limit

• Are your unused RRSP, PRPP, or SPP contributions (including gifts) made from January 1, 1991 to December 31, 2020, less than the total of your 2020 RRSP deduction limit from your latest notice of assessment, notice of reassessment, or T1028 plus $2,000?
• If no, go to Step 5.
• If yes, you do not have to fill out a 2020 T1-OVP.

This is the most interesting step. It is still not clear what they are referring to with "unused RRSP contribution made from 1991 to December 31, 2020" but it can't be higher than my 2020 RRSP deduction limit from my latest notice of assessment. Assuming it is the extra 12k, this is lower than the 16k deduction limit.

Will there be penalty fee on that amount? Most likely not based on the CRA own documentation

What will happen to the amount of money I contributed exceeding my RRSP limit? It will be marked as "Unused RRSP contributions" on your next notice of assessment.

File your taxes with all rrsp contributions in the correct places, ie $23000 in 2020 contributions and $5000 in the first 60 days of 2021. Note that banks report this to the CRA and if you try and put the $5000 on next years tax return the CRA will have already added it on the 2020 contributions in their records.

You are over $23k - $16K(room) - $2k(allowed over) = $5k. If, after filing, the CRA tells you to fill out T1-OVP, then do it. Always use the forms for the correct tax year as the dates will be correct, looking at old documents will give you the wrong dates.

Expect to pay 1% * $5k * n months in penalty sometime in the next few years. Say the money was over for 4 months or some average combination like that then you would owe $200. I don't know when they start charging interest but it might add 2 or 3 dollars.

edit, For next year you are allowed to deduct the $12k carried forward without making anymore contributions. You correctly calculated you could contribute an extra $6k, but don't forget you are allowed $2k over so it's actually $8k.