RRSP Over-Contribution: Penalty & Resolution

Retirement savings plans offer a tax-advantaged way to stash money away for retirement. If you contribute to a Registered Retirement Savings Plan (RRSP), you have the flexibility to control how you invest your money. There are certain rules on how much you can contribute to your RRSP.

If you find out you’ve made an RRSP over-contribution, you will need to correct it. You have wiggle room before you have to pay a penalty. Contributions up to $2,000 of the allowed maximum won’t get you penalized.

What is an RRSP over-contribution?

According to Canadian tax law, anything in excess of your deduction limit plus $2,000 is considered an RRSP over-contribution. While you get a $2,000 buffer, the amount is not tax-deductible.

It’s important to remember that your direct contributions to an RRSP are only part of what is counted by the Canadian Retirement Agency (CRA). In a given year, the CRA considers all contributions to Specified Pension Plans (SPP) and Pooled Registered Pension Plans (PRPP) toward your annual total.

To figure out if you’ve over-contributed to your RRSP, check your CRA account. You should get a notice of assessment that shows you have exceeded the limits and owe taxes on the excess contributions.

If you don’t know your contribution limit, check your notice of assessment tax statement from your previous tax year. Another way to check is by logging into the CRA "My Account" online portal.

Want to calculate it yourself? The limit is 18% of your prior year’s income with a maximum cap of $31,560 for 2024.

Penalty for over-contributing to an RRSP

If you end up with an RRSP over-contribution in excess of the $2,000 buffer, you may owe taxes. The CRA will charge you a 1% penalty, assessed monthly, for each month you‘re over the limit.

There are ways to minimise your penalty and avoid paying taxes on the extra amount. The CRA has a formula that will help you estimate how much tax you owe on your RRSP over-contribution.

The CRA can cancel or waive the tax on your excess contributions if you meet certain requirements. The steps below will guide you through the process for correcting an RRSP over-contribution.

How to fix an RRSP over-contribution

There are several ways to address your RRSP over-contribution:

• Pay the penalty

• Withdraw the excess amount

• Show that the contributions were to a qualifying group plan

Here’s how each option works.

Pay the penalty

Ready to simply pay the penalty? This is what you need to do:

1. First, you will need to identify the year you made the RRSP over-contribution by logging into your CRA "My Account" portal. Gather all of your RRSP contribution records for the year in which this occurred and all subsequent years. These can be found on the notice of assessment you receive from the government after filing taxes. Alternatively, check your digital statements from the "My Account" portal. Include information about your employer’s contributions to your pension.

2. Get the notice of assessment the government sent you after you filed taxes the previous year to check your RRSP deduction limit. This information will come in handy when calculating your RRSP contributions and comparing them against your deduction limits for that year.

3. Fill out the T1-OVP, Individual Tax Return for RRSP, PRPP and SPP Excess Contributions return to pay the 1% tax penalty. Send the completed form to your tax center.

If you want to avoid penalties or charges for late filing, you will need to pay the tax within 90 days. If you do not pay the penalty within the specified time period, you will incur further charges for late filing.

The next penalty is steeper, with a 5% charge of the balance plus 1% of your balance for each month that your tax return is late with a cap of 12 months. Expect this amount to be higher if you owed a late-filing penalty on your T1-OVP return for any of the prior three years.

Keep in mind that interest compounds daily on unpaid tax calculated on your T1-OVP return and on unpaid late-filing penalty charges. The CRA calculates interest starting on the 91st day of the following year.

Withdraw the excess amount

The CRA also allows you to withdraw the excess contributions and appeal the tax. You will need to show:

• The excess contributions were because of an honest mistake on your part

• You’re taking steps to withdraw the RRSP over-contributions

You will need to write a letter to the CRA asking for a cancellation or a waiver of the tax. Here’s what you need to include in your letter:

• A formal request to cancel or waive the tax

• Copies of your RRSP, PRPP, SPP, or Registered Retirement Income Fund statements that show when you withdrew the excess contributions

• Paperwork or documentation that shows your over-contribution was because of a reasonable error

The withdrawal in income should be included when filing your tax return. If you thought you can claim the total amount of your RRSP contribution on your taxes fair and square without trying to game the system, you can claim an offsetting deduction.

Complete form T3012A and send it to the CRA to certify the amount of the excess contribution. If the form is certified, you can withdraw the excess with no withholding tax applied. Keep in mind that the over-contribution penalty accrues until you withdraw the funds.

Show that the contributions were to a qualifying group plan

The CRA allows you to carry over unused RRSP allowances from previous years. This means that your annual contribution may exceed the annual contribution maximum by that amount.

For example, provided you could contribute money to your RRSP in past years but didn’t end up taking advantage, you can catch up. The difference between what you contributed and the maximum you were eligible for are added to your current year’s limit.

Did your income go up? This also changes your contribution limit cap. Money transfers between pension plans do not count against your limit; contributions to PRPPs and SPPs do.

The bottom line

If you find you have made an RRSP over-contribution, the best thing you can do is take immediate steps to correct it. Keep tabs on your CRA "My Account" online portal and check your contributions against the maximum allowed for the current year.

You can appeal with the CRA to waive the tax if you made an honest mistake. They will review each case of over-contribution and consider cancelling or waiving the tax. However, you will be subjected to excess contribution penalties up to the day you get your certification from the CRA.