RRSP Over-contribution

On the one hand, it’s great if you can max out your RRSP contribution. You’ll get a nice tax deduction and also be able to shelter any investment gains from the Canada Revenue Agency (CRA) so long as it’s in the account.

But it’s also very important that you don’t inadvertently make a large over-contribution to your RRSP. While the CRA does allow a small lifetime over-contribution, anything greater than that and you’ll encounter some rather unpleasant financial penalties.

A primer on the RRSP contribution limit

Every year, Canadians who file a tax return may contribute 18% of their previous year’s earned income or a specified amount, whichever is less, to their RRSPs. This contribution may then be used as a tax deduction, which reduces your taxable income.

Unused RRSP contribution room carries forward into future years so even if you don’t max out your RRSP in one year, it’s not a problem. You can just use up that room at a later date. You’re also allowed to take the deduction in the year of your choosing.

Keep in mind that when you turn 71, you’re no longer allowed to accumulate contribution room. You’ll have to convert your RRSP into a registered retirement income fund (RRIF), purchase an annuity, or take out all of your money from your RRSP.

You can find out your current contribution limit on your most recent notice of assessment or by logging into the CRA’s website.

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What happens if you over-contribute to your RRSP?

The CRA provides Canadians with a lifetime over-contribution exemption of $2,000. For example, if you have contribution room of $4,000 and put $6,000 into your RRSP, you’ll have used up both the room available plus all of the excess amount.

Although you’re permitted to make the small over-contribution, you’re not allowed to claim it as a tax deduction.

While the CRA allows you to over-contribute by $2,000 over the course of your lifetime, you’ll have to pay a financial penalty if you go over that amount. It’s up to you to make sure you don’t go over the limit.

If you do exceed the over-contribution limit, you’re subject to a penalty of 1% per month on the excess amount. For instance, an individual who makes a contribution $20,000 over the limit will be subject to a fine of $200 per month or $2,400 annually.

Excess contributions remain in the RRSP until they’re withdrawn or until they’re reduced by new contribution room. You’ll be subject to the 1% monthly fine until you accumulate enough new contribution room and the over-contribution is cancelled out.

What to do if you over-contributed to your RRSP

If you expect the following year’s contribution will use up the excess contribution, you can simply pay the 1% tax. To do this, you must submit a T1-OVP form to the CRA. The form is due—along with payment of the penalty tax—no later than 90 days after the end of the year. Failure to file may result in additional penalties.

The other option is to withdraw the excess contribution and ask the CRA to waive the withholding tax. If you go this route, you need to first file what’s known as a T3012A form

Withdrawal amount Withholding tax rate (except Quebec) Withholding tax rate in Quebec
Up to $5,000 10% 5%
$5,000.01 to $15,000 20% 10%
$15,000+ 30% 15%

In Quebec, your financial institution will withhold an additional 16% provincial tax. Also, you may need to pay more tax when you file your tax return depending on your income and the province or territory you live in.

In addition, you’ll also have to file a RC4288 form in order to ask the CRA to waive the financial penalty. With this documentation, you must:

  • Explain why you over-contributed and why it was a reasonable mistake
  • Detail the steps you are taking to withdraw the money

Why it's important to keep track of your contributions

As you can see, the financial penalty for over-contributing to an RRSP is not small. This is particularly true if you don’t realize for months or years that you made a significant excess contribution. Because of these penalties, it’s important for you keep track of all your RRSP contributions. This is especially true if you have RRSP accounts at multiple financial institutions.

Having to pay either the 1% per month tax or declaring the excess amount as income is very costly. It’s better to keep track of what you’ve contributed to your RRSP so you don’t have to pay any penalties at all.