The article “What to do when you overcontribute to your RRSP” was originally published in MoneySense on June 19, 2023. Photo by Ono Kosuki from Pexels.
If you’ve accidentally overcontributed to your RRSP, you’ll pay a tax penalty. Here are your options for promptly correcting the mistake.
“I overcontributed to my RRSP by accident, and I am looking for some advice on how to deal with it. I contributed $3,550 to my 2022 RRSP in October 2022. I then forgot I made this contribution and again in February 2023 I made a $3,550 contribution.
What options to I have to address the over contribution? Can I count my February 2023 contribution towards my 2023 tax return? ” Ryan
How to fix an RRSP overcontribution
This is the time of year that people tend to find out about inadvertent overcontributions to their registered retirement savings plans (RRSPs). If you want to know where you stand, an income tax notice of assessment will show your:
- RRSP deduction limit for the year
- Unused RRSP contributions previously reported and available to deduct this year
- Available RRSP contribution room (#1 minus #2)
If you have more unused RRSP contributions than you have RRSP deduction limit, that means you have an RRSP overcontribution.
What happens if you overcontribute to your RRSP?
A taxpayer is allowed to overcontribute to their RRSP by up to $2,000, Ryan. So, if you have a $3,550 overcontribution, that puts you $1,550 over the allowed buffer. This amount is subject to a penalty of 1% per month.
How do I correct an overpayment to my RRSP?
There are a few steps you need to take.
You should withdraw the excess contribution. If you ask your financial institution for an RRSP withdrawal, they will withhold income tax based on the size of the withdrawal. In the case of a withdrawal of less than $5,000, there is 10% withholding tax.
You can request a withdrawal with no tax withheld by completing Form T3012A, Tax Deduction Waiver on the Refund of Your Unused RRSP, PRPP, or SPP Contributions from your RRSP. However, you must send this to the Canada Revenue Agency (CRA), Ryan, and in the meantime, the 1% penalty will continue to accrue.
You can also choose to take the withdrawal and wait until you file your tax return to recover the withholding tax. When you file your tax return, you can complete Form T746 Calculating Your Deduction for Refund of Unused RRSP, PRPP, and SPP Contributions. This will allow you to offset the RRSP withdrawal income by making a deduction against it. No net income will be included on your return and the withholding tax will be refunded.
Calculating your RRSP overcontribution penalty
Another step is to file a T1-OVP Individual Tax Return for RRSP, PRPP and SPP Excess Contributions. This is the filing used to calculate your 1% monthly penalty. It is a confusing form. The CRA says that you should send your “authorization” and documents (like statements, for example) showing the months of your contributions in the year in question. This seems to acknowledge they know the form is confusing.
In your case, Ryan, there is a penalty of 1% x $1,550 per month—or $15.50 per month—from February until the month of the withdrawal. By comparison, the withholding tax on the withdrawal would be 10%—or $155 in total. In my opinion, it may be better to avoid paying $15.50 per month while you wait for the CRA to approve your T746, which could take a few months.
As a final step, the CRA allows you to request the cancellation or waiver of tax by completing Form RC2503, Request for Waiver or Cancellation of Part X.1 Tax – RRSP, PRPP and SPP Excess Contribution Tax.
You can do so if:
- Your excess contributions on which the tax is based arose due to a reasonable error; and
- You are taking, or have taken, reasonable steps to eliminate the excess contributions.
Similar to the T3012 tax waiver, Ryan, it may or may not be worth completing Form RC2503, depending on the size of the penalty and the facts of the situation, and whether you are paying your accountant to complete the form or spending the time to do it on your own.
You could carry forward the contribution, too
An RRSP contribution made in February 2023 can indeed be used towards your 2023 tax return and 2023 RRSP deduction limit, even though it gets reported on your 2022 tax return. When you file your 2023 tax return, your RRSP deduction limit for the year will become retroactive to January 1, 2023.
RRSP overcontributions happen and that is why there are steps to report and fix the mistake. Taxpayers should check their notices of assessment to make sure their tax return was accepted as filed, confirm any carry-foward amounts, and make sure they have not inadvertently overcontributed to their RRSP.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.