Registered Retirement Savings Plans (RRSPs) are popular retirement savings vehicles in Canada, offering tax-deferred growth on investments. You can contribute to your RRSP or your spouse’s RRSP and claim a deduction for your contribution against your taxable income. However, there are contribution limits, and exceeding them can lead to penalties.
What is an RRSP Over-Contribution?
RRSP Over-Contributions occur when you contribute more to your RRSP (or spousal RRSP) than the allowable deduction limit set by the Canada Revenue Agency (CRA) and the lifetime buffer of $2,000. Your contributions include any direct contributions you make to:
- an RRSP
- a Specified Pension Plan (SPP)
- a Pooled Registered Pension Plan (PRPP)
What is RRSP Deduction Limit and How to Determine It?
Your RRSP deduction limit, also known as your "RRSP contribution limit" is the maximum amount you can contribute to your personal or spousal RRSP in a given year.
RRSPs provide a considerable tax break whenever you contribute; every dollar you contribute reduces your taxable income by a dollar, so it could lead to a significant tax refund at the end of the year.
For this reason, the government limits the amount of money you can contribute, and a CRA RRSP over-contribution can have considerable implications. Each year there is an RRSP over-contribution limit – for 2024, it was either $31,560 or 18% of your earned income for the year, whichever was the lowest.
However, if there were any years when you didn’t make the full RRSP contribution allowable, the surplus amount is carried over to the next year. In theory, then, your RRSP contribution limit could be far higher than the annual contribution limit.
Keep in mind that when you turn 71, you’re no longer allowed to accumulate contribution room. You’ll have to convert your RRSP into a registered retirement income fund (RRIF), purchase an annuity, or take out all of your money from your RRSP.
There are a couple of ways of finding out your RRSP contribution limit for any given year:
- Your annual tax notice of assessment will stipulate how much you can contribute to your RRSP.
- Log into your CRA My Account, which will contain your current RRSP contribution limit.
Any amount you pay into an RRSP that is above that limit is considered an RRSP over contribution.
Why do RRSP Over-Contributions Happen?
There are a few ways in which a registered retirement savings plan over-contribution can happen. The most obvious one is human error. This can happen when:
- the plan holder’s employer makes automatic contributions and is unaware of their limits
- the plan holder is part of a group RRSP and is likewise unaware of their limits
- a company performance bonus is directly deposited into an RRSP, going over the limit
- the plan holder is simply unaware of their limits and unknowingly over-contributes
How Much Over-Contribution to an RRSP Is Allowed?
Thankfully, taxpayers over the age of 19 have a $2,000 maximum lifetime over-contribution limit. This is essentially how much you’re allowed to over-contribute during your entire life, which can act as a buffer in case you mistakenly over-contribute to your RRSP. But this buffer is not tax-deductible. You can take advantage of it but cannot claim it as a tax deduction.
To be clear, you won’t be able to claim a tax deduction for that $2,000 over-contribution, but you won’t face a penalty for it either.
What Happens If You Overcontribute to Your RRSP?
The CRA treats RRSP over contributions seriously and you could end up having to pay a penalty, so it’s important to know how to calculate your RRSP over contribution and also how to fix an over-contribution to an RRSP.
Any RRSP over-contribution amount above $2,000 will be subject to a tax of 1% every month that your RRSP contains this amount. You would therefore need to fill in the appropriate RRSP over-contribution form and make an RRSP over-contribution withdrawal of at least the amount that brings your over-contribution to under $2,000.
For example, if you over-contributed to your RRSP by $3,500, you’d subtract $2,000 and be left with an over-contribution of $1,500.
The 1% penalty means that you’d owe a tax of $15 per month on those excess contributions until they’ve been removed or the CRA waives the penalty.
How to Pay an Over Contribution Penalty?
You would need to fill in the RRSP over contribution form T1-OVP and send it to your tax center. Then, you’d have to pay the tax within 90 days after the end of the year when you made the RRSP over contributions.
The CRA may waive the RRSP over-contribution penalty if:
- You made an RRSP over-contribution withdrawal before the end of the month in which you made the over-contribution.
- The RRSP over contributions were due to a reasonable error.
- You have taken or will take steps to withdraw the excess contributions.
To set this process in motion, you would need to fill in and submit form RC2503. You can’t have an RRSP over contribution carry forward to the next tax year. You would have to withdraw the surplus amount to stop the penalty tax.
How to Resolve an RRSP Over-Contribution and Minimize Penalties
1. Decide whether to withdraw the over-contributed amount or not
Canada Revenue Agency (CRA) may penalize overcontributions above the $2,000 cushion by 1% of the excess amount per month, but you aren’t obligated to withdraw the money.
Plan owners can choose to leave the excess money in the account if the RRSP’s investments earn more than the penalty. Economic conditions and market trends must be right for this to be of real benefit. Plan owners should consult with a professional accountant and be familiar with the workings of the RRSP before taking this route.
2. If you decide to withdraw the money, ask CRA to waive withholding tax.
If keeping the excess of the contribution in the RRSP is not a sound strategy, then make an RRSP over-contribution withdrawal.
This is what the process will be like:
- fill up Part 1 of Form T3012A. This is entitled as the Tax Deduction Waiver on the Refund of your Unused RRSP, PRPP, SPP, or RRIF Contributions in (appropriate year). Take this to your RRSP administrator to calculate the amount they can refund without withholding tax
- in Part 2 of the form, write down which RRSP account to withdraw the over-contribution from and which account to transfer it to
- attach proof of the contributions; this can include certified copies of receipts. Send four copies of the forms to the CRA
- once the CRA approves the waiver, you will receive three signed copies
- send these signed copies to the financial institution handling the RRSP
The institution handling the RRSP should provide you with two copies after completing the withdrawal of the over-contributed amount
If the withholding tax is insignificant, you simply may withdraw the over-contribution. The withholding tax will be included in your annual tax return.
If the over-contribution is large, withdraw it in amounts of less than $5,000 to reduce the withholding tax.
3. Request the CRA to waive the 1% monthly excess contribution tax.
The CRA is likely to approve the request, but only if:
- a reasonable error caused the excess contributions
- you are withdrawing or have withdrawn the excess contributions
To make a request, use Form RC4288 Request for Taxpayer Relief – Cancel or Waive Penalties or Interest. You may also write a letter to the CRA explaining:
- why the error was made, and why it’s reasonable to have the penalties waived
- steps or measures you have taken to fix the excess contributions. Include copies of the appropriate documents (like the RRSP statements) proving that you have withdrawn the excess funds, and any letters explaining the error.
4. Submit Form T1-OVP for the RRSP Excess Contributions
If the CRA finds that:
- the unused contribution room has a negative value
- you got money as a gift in your RRSP
- you contributed to your spouse or partner’s RRSP without getting a tax deduction
the plan owner must then obtain, fill up, and submit Form T1-OVP to the CRA. This form is the Individual Tax Return for RRSP, PRPP, and SPP Excess Contributions.
WARNING: Payment is due 90 days after the end of the tax year. Starting on day 91, CRA charges compound daily interest on unpaid tax or penalties, a late filing penalty of 5% of the balance owing, and 1% of the balance for every month a return is late.
5. Complete Your Annual Return
Submitting your tax return is required if you choose to pay the withholding tax on the over-contribution.
- Fill out form T746 Calculating Your Deduction for Refund of Unused RRSP Contributions.
Enter the amount on Line 11 of the T746 on Line 232 of the return.
TIP: Complete a separate T476 for each year of overcontributions.
- Write the amount in Box 20 of your T4RSP Statement of RRSP Income slip on Line 129 of the return.
- Submit the T746 and T4RSP with your return.
- If you didn’t pay withholding tax and have already filed the T1-OVP, complete your return as usual.
If you did not pay the withholding tax and filed the T1-OVP already, then complete your tax return as normal.
How to Prevent Future Over-Contributions to The RRSP
1. Understand Your Contribution Limit
Check Your Notice of Assessment
- CRA My Account: This tool provides real-time information on your RRSP contribution room, including any carry-forward amounts.
2. Track Your Contributions
- Maintain a Contribution Log
- Check Statements Regularly
3. Plan Contributions Carefully
- Spread Contributions Throughout the Year
- Adjust for Employer Contributions
4. Adjust for Pension Contributions
- Pension Adjustment (PA)
5. Use Contribution Room Carry-Forwards
- Unused Contribution Room:
6. Stay Informed About Changes in Limits
7. Consider Professional Help
8. Set Alerts and Reminders
9. Review and Adjust Annually
By following these strategies, you can effectively manage your RRSP contributions and avoid over-contributing, thereby maximizing the benefits of your retirement savings plan without incurring unnecessary penalties.
RRSP over contribution FAQs
What happens if you go over your RRSP contribution limit?
You’ll be charged a monthly 1% tax for the amounts that are above your RRSP contribution limit plus the $2,000 buffer. You can stop the penalty charge by withdrawing the excess RRSP contribution.
Can I carry forward RRSP over contributions?
No, you would need to withdraw the amount of your over-contribution to stop the penalty charges.
Are you charged for RRSP over contributions under $2,000?
If this is the first time you’ve made RRSP over contributions, you won’t be charged a penalty for over contributions up to $2,000, though you won’t receive a tax break on that amount. If you have previously made over contributions of $2,000, you will be charged a penalty.
Conclusion
If you think you may have overcontributed your RRSP, you need not worry too much about this issue, unless the over-contribution is a substantial amount. The best strategy to adopt if this occurs is to check the RRSP account or NOA regularly, immediately withdraw any excess amount to minimize penalties and most importantly seek advice from a professional tax accountant to determine the next steps that are most appropriate for you. Feel free to reach out to Filing Taxes at 416-479-8532. Schedule an NTR engagement appointment with us and take the first step toward proper management of your finances.
Disclaimer: The information provided on this page is intended to provide general information. The information does not consider your personal situation and is not intended to be used without consultation from accounting and financial professionals. Salman Rundhawa and Filing Taxes will not be held liable for any problems that arise from the usage of the information provided on this page.