Could You Be Facing an RRSP Over-Contribution? 0

Posted On May 2, 2024, by Angela Delaney

What Happens When You Over-Contribute?

Individuals aged 18 and above are allowed a $2,000 lifetime over-contribution allowance to their RRSPs. This provision by CRA serves to reduce penalties for minor, unintentional surpasses. In reality, utilizing this allowance leads to contributions that cannot be deducted in the current tax year, but are potentially eligible for deductions in subsequent years. Any contributions exceeding this $2,000 buffer are not tax-deductible and are subject to a 1% penalty tax per month for each month they remain over the limit. Furthermore, penalties and interest imposed by the CRA cannot be deducted from your income.


A Penalty? How Much?

If your RRSP over-contribution exceeds the $2,000 buffer, you will face a penalty tax of 1% per month on the surplus until either the excess amount is withdrawn or your RRSP deduction limit increases due to annual re-calculation.

For instance, if your over-contribution is $3,000, you will be subject to a monthly penalty of 1% on the amount exceeding the $2,000 buffer, which equates to $10 each month until resolved. After your current year’s taxes are filed, your RRSP contribution room is adjusted to reflect the prior year’s employment income. Meaning that January 1st of the current year, your RRSP contribution room likely increases. This specific example, if it increased by more than $1,000, you would not longer be over-contributed, effective January of the current year.


Resolving an Over-Contribution

If you encounter this situation, there is no need to panic. Here are the steps you can consider:

  • Withdraw the excess funds: Request a withdrawal of the surplus funds from your RRSP provider. In order to avoid the withholding tax on the withdrawal, you will need to fill out a T3012A form, titled “Tax Deduction Waiver on the Refund of your Unused RRSP, PRPP, or SPP Contributions from your RRSP”.
  • Absorb the excess in future years: If the over-contribution is manageable and the 1% per month penalty is not onerous, you might opt to absorb the surplus in subsequent year(s) when your RRSP contribution room is recalculated annually based on your prior year’s tax information.

Remember, for each tax year with excess contributions, it is essential to submit a T1-OVP Individual Tax Return for RRSP, Pooled Registered Pension Plans (PRPP), and Specified Pension Plan (SPP) Excess Contributions form.


Prevention is Key

Though RRSPs offer valuable benefits for retirement planning and tax optimization, it is crucial to exercise foresight to avoid over-contributions. Consistently monitoring your RRSP deduction limit and keeping careful records of your contributions can spare you from incurring avoidable penalties.

Disclaimer: This article serves to offer general information and does not constitute legal or tax advice. We strongly advise seeking professional guidance tailored to your individual circumstances.

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