What to do when you overcontribute to your RRSP

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What happens when you inadvertently contribute too much to a RRSP? Find out if there’s anything you can do to avoid a penalty.

What to do when you overcontribute to your RRSP

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I just read your article on “How do the RRSP contribution carry forward rules work?” Thanks for putting it out there. 

I am new to Canada and have little knowledge about the RRSP system. Would you be able to guide me? I overcontributed by more than $2,000. What is my best option to avoid a penalty?
—Mo

What is the RRSP contribution room?

The room to contribute to your registered retirement savings plan (RRSP) is generated each year, based on your earned income for the previous year. For most people, earned income is employment or self-employment income, but it can also include other sources like net rental income. This year’s RRSP room is 18% of last year’s earned income, up to a limit of $29,210 for 2022. 

RRSP room is cumulative and carries forward each year.

How much is too much?

You are allowed to overcontribute to your RRSP—a contribution in excess of this year’s RRSP room—by up to $2,000. If you have more than $2,000 extra contributed to your RRSP, Mo, you are subject to a penalty. The RRSP overcontribution penalty is 1% of the excess contribution for each month it remains. 

What to do if you over contribute to an RRSP?

If you have an overcontribution, here are the steps to consider. 

The overcontribution should be reported by filing a T1OVP Individual Tax Return for RRSP, PRPP and SPP Excess Contributions. The return is an arduous process but is the primary method for reporting an overcontribution to Canada Revenue Agency (CRA). In the absence of filing this return, CRA may notice, often a year or two later, that an overcontribution was made. If the overcontribution lasts for several years, the 1% penalty and associated arrears interest can really add up.

When you realize you have overcontributed to your RRSP, Mo, you can fill out a T3012A Tax Deduction Waiver on the Refund of your Unused RRSP, PRPP, or SPP Contributions from your RRSP. Once submitted to and approved by CRA, the form can be provided to the financial institution holding the RRSP to withdraw the overcontribution without any withholding tax. However, in the meantime, your overcontribution will continue to attract a 1% monthly penalty tax.

Withholding tax is required otherwise on an RRSP withdrawal, at a rate of 10% up to $5,000, 20% on withdrawals between $5,000 and $15,000, and 30% on withdrawals exceeding $15,000. The federal tax withholding is 5%, 10%, and 15% respectively in Quebec, with 15% provincial tax withheld as well. If you prefer to just take the withdrawal and stop the overcontribution penalty, there will be withholding tax. However, this tax can be recovered when you file your tax return, Mo. 

When you withdraw an excess RRSP contribution, you can fill out T746 Calculating Your Deduction for Refund of Unused RRSP, PRPP, and SPP Contributions when you file your tax return. Since the RRSP contribution will not be deducted, and did not save tax in the first place, the T746 form allows the withdrawal to be tax-free. 

If you notice late in the year that you have overcontributed to your RRSP, you may no longer be overcontributed by January 1. This is because your RRSP room for the year becomes retroactive to the start of the year when you file your tax return. So, if your overcontribution was $3,000 in November—$1,000 in excess of the $2,000 buffer—that may only apply until January 1 when your new RRSP room becomes available. You would have a penalty of $1,000 multiplied by 1%, or $10 for two months. 

There have been CRA cases where taxpayers have disputed overcontribution penalties but are reminded that it is their responsibility to be aware of the rules for RRSPs and tax-free savings accounts (TFSAs) and to avoid overcontributions or be subject to penalties. 

An overcontribution penalty for a single year may not be that significant, but a multi-year overcontribution could result in tens of thousands of dollars of penalties and interest. 

Also, good to know

Taxpayers, who were pension plan members in 2021, will have a pension adjustment reported on their T4 slip that reduces their 2022 RRSP room. This is done so that they do not have an unfair advantage for their tax deferred retirement savings over those without pensions. 

And, finally, check your NOA

I have spoken to many taxpayers who are confused by the RRSP section of their notice of assessment. It is important to review and understand your RRSP room, your pension adjustment if you are in a pension, and how to avoid overcontributing to your RRSP. 

In your case, Mo, you should determine whether to take an RRSP withdrawal now, whether to file the T3012 form or just take a straight withdrawal, and make sure you file the T1OVP and T746 forms next year when you file your tax return.

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.

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