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RRSP Over-Contribution? What Next?

Thursday March 23, 2023

When it comes time to file your taxes, you may realize you have made an RRSP over-contribution. It’s an easy mistake to make. If you have over-contributed to your RRSP, there are immediate steps you can take to minimize penalties and interest.

RRSP contribution limit
RRSPs are a great way to reduce your taxable income and potentially build a significant retirement fund. Every year, you have an RRSP contribution limit that is equal to the lesser of 18% of your earned income or an annual maximum (which was $29,210 for 2022, and is $30,780 in 2023). Your contribution limit can be increased by carrying forward unused amounts from previous years.

If you are unsure what your contribution limit is:

  • check your Notice of Assessment from the previous tax year
  • check online using the CRA My Account online portal
  • calculate it yourself – your annual limit is 18% of your previous year’s pre-tax earned income or the annual maximum. Earned income is calculated by adding employment earnings, self-employment earnings, and certain other types of income—including the rental of real property, alimony, and taxable maintenance. It is reduced by subtracting specific employment expenses, business or rental losses, and alimony and maintenance payments.

In addition to contributions made to your RRSP, certain contributions made to a specified pension plan (SPP) or a pooled registered pension plan (PRPP) are also included in determining your total RRSP contributions for any given year.

Penalties for an RRSP over-contribution
Generally, RRSP contributions that exceed your contribution limit by more than $2,000 are subject to a penalty of 1% per month for each month that the contributions are held in an RRSP account.

You may be able to avoid paying the 1% RRSP over-contribution penalty if:

  • you can show that the over-contribution was made to a qualifying group plan
  • you immediately withdrew the amount and asked the CRA to cancel or waive the 1% penalty on your over-contribution

Asking the CRA to cancel or waive the 1% penalty on your RRSP over-contribution
You can ask the CRA to consider cancelling or waiving the 1% penalty on an over-contribution if the following conditions are met:

  • the excess contribution was the result of a reasonable error and,
  • you are taking, or have taken, reasonable steps to withdraw the excess contribution from your RRSP account.

The request must be formally submitted in writing and you will need to explain exactly how and why the over-contribution occurred and why it should be considered a reasonable error. You will need to provide supporting documentation to back up your claim, including copies of your RRSP, PRPP, or SPP statements to show when you withdrew the over-contribution.

File a T1-OVP return to pay the over-contribution penalty
If the over-contribution was not the result of a reasonable error (or you don’t believe you can successfully argue that it was) you may choose to simply withdraw the over-contribution and pay the penalty, especially if the amount is small and was only held for a brief period of time.

If the over-contribution was made late in the year and you’re confident that you will have enough room to accommodate the amount in the upcoming year, you may decide to not withdraw the over-contribution and just pay the penalty until contribution room opens up again.

Or, if the investment is doing really well, you may decide that the over-contribution penalties are worth paying.

Regardless of the reason, to pay the 1% penalty you must file a T1-OVP, 2022 Individual Tax Return for RRSP, PRPP and SPP Excess Contributions and make the payment within 90 days after the end of the calendar year in order to avoid late-filing penalties and interest charges. A simplified version of this form is also available.

Failure to file your T1-OVP return on time will result in a late-filing penalty equal to 5% of the balance owing plus an additional 1% of the balance owing every month, to a maximum of 12 months. Interest on unpaid late filing penalties—as well as on any unpaid tax calculated on your T1-OVP return—will be compounded daily beginning on the 91st day of the following year.

Waiving withholding tax
When you withdraw an RRSP over-contribution, it will need to be included in income as a regular RRSP withdrawal when you file your tax return. If the withdrawal was made within a short time after the year of contribution, you can claim an offsetting deduction. If you want to avoid tax withholding on the withdrawal, you will need to complete form T3012A and send it to the CRA to certify the amount of the over-contribution. If the form is certified, you can withdraw the over-contribution without any withholding tax applied. Note that the over-contribution penalty will continue to accrue until you withdraw the funds.

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