Welcome back to our GBA-LLP.ca education series, ‘Special Tax Topics.’ Today’s installment navigates through an often nerve-wracking scenario for Canadian taxpayers – over-contributing to a Registered Retirement Savings Plan (RRSP).
To set the stage, we must first grasp what an RRSP over-contribution entails. Every year, you’re entitled to contribute a specific percentage of your prior year’s earned income to your RRSP, subject to a maximum limit defined by the Canada Revenue Agency (CRA). However, if your contributions surpass your allowable RRSP deduction limit, you’ve over-contributed to your RRSP.
The CRA permits a $2,000 lifetime over-contribution to RRSPs for individuals over 18 years of age. This buffer is designed to minimize penalties for small, inadvertent surpasses, however using this amount results in un-deducted contributions, potentially available for deductions in future years. However, the excess contributions above the $2,000 buffer is not tax-deductible and could attract a 1% penalty tax per month for each month it remains over. Penalties and interest from CRA are also not deductible from your income.
Suppose you’ve over-contributed by more than the $2,000 buffer in your RRSP. In that case, you’ll be required to pay a penalty tax of 1% per month on the over-contribution, until the excess amount is withdrawn or your RRSP deduction limit increases to absorb the over-contribution.
For example, if you’ve over-contributed by $3,000, you’ll incur a penalty of 1% per month on $1,000 (the amount over the $2,000 buffer), which amounts to $10 each month until it’s rectified.
Should you find yourself in this predicament, don’t panic. There are several steps you can take:
Withdraw the excess funds: You can contact your RRSP issuer and request the withdrawal of the excess funds. You’ll need to complete a T3012A form, “Tax Deduction Waiver on the Refund of your Unused RRSP, PRPP, or SPP Contributions from your RRSP,” to avoid withholding tax on the withdrawal.
Absorb the excess in future years: If the over-contributed amount isn’t too large and the 1% per month penalty isn’t significantly burdensome, you could choose to absorb the over-contribution in future years when your RRSP contribution room increases.
It’s important to note that you should file a T1-OVP Individual Tax Return for RRSP, Pooled Registered Pension Plans (PRPP) and Specified Pension Plan (SPP) Excess Contributions form for each tax year you have excess contributions.
In essence, while RRSPs are a fantastic tool for retirement savings and tax management, careful planning and diligence are required to prevent over-contributions. Regularly checking your RRSP deduction limit and keeping track of your contributions can save you from paying unnecessary penalty taxes.
Stay tuned to our ‘Special Tax Topics’ series as we continue to explore and decode the world of tax for you.
Disclaimer: This article is designed to provide general information. It is not intended to be legal or tax advice. We highly recommend you seek professional advice based on your personal circumstances.
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This blog is not meant to provide specific advice or opinions regarding the topic(s) discussed above. Should you have a question about your specific situation, please discuss it with your GBA advisor.
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