Overcontributed to Your RRSP? How to Fix It and Avoid Penalties

How to fix an RRSP overcontribution

Discovering an unintentional RRSP overcontribution is common at this time of year. To understand your position, check your notice of assessment. It will show three key items:

1. Your RRSP deduction limit for the year
2. Any unused RRSP contributions carried forward from previous years
3. Your available RRSP contribution room (your deduction limit minus unused contributions)

If the amount you carried forward exceeds your deduction limit for the current year, you have an RRSP overcontribution that needs attention.

What happens if you overcontribute to your RRSP?

Tax rules allow a $2,000 buffer of overcontribution to your RRSP without immediate penalty. Since you’ve overcontributed by $3,550, Ryan, you are $1,550 beyond that $2,000 allowance. That excess is subject to a penalty tax of 1% per month, plus any applicable interest, until the excess is removed or otherwise resolved.

How do I correct an overpayment to my RRSP?

There are a few steps you can take to correct an overcontribution.

The most direct option is to withdraw the excess amount. Financial institutions typically withhold tax on RRSP withdrawals: for withdrawals under $5,000, the usual withholding is 10% (5% in Quebec, plus provincial tax applied separately in Quebec). If you prefer no tax withholding at the time of withdrawal, you can ask the CRA to waive the withholding by filing Form T3012A, Tax Deduction Waiver on the Refund of Your Unused RRSP, PRPP, or SPP Contributions. The form must be submitted to the Canada Revenue Agency, and while you wait for approval the 1% monthly penalty will continue to accrue.

Because the excess contribution has not been deducted from income, the actual withdrawal is not taxable income once properly reported. If you withdraw without a waiver and tax is withheld, you can recover that withholding when you file your tax return for the year of the withdrawal. Completing Form T746, Calculating Your Deduction for Refund of Unused RRSP, PRPP, and SPP Contributions, lets you claim a deduction that offsets the withdrawal reported on the T4RSP slip. The result should be no net taxable income from the withdrawal and a refund of any withholding tax.

Calculating your RRSP overcontribution penalty

If you have excess contributions subject to the 1% monthly penalty, you (or the CRA on your behalf) must file a T1-OVP, the Individual Tax Return for RRSP, PRPP and SPP Excess Contributions. That form calculates the monthly 1% penalty and can be confusing to complete. The CRA offers to prepare the return for you if you send a written request and provide account statements that show the dates and amounts of contributions and withdrawals for the years involved. The T1-OVP filing deadline is 90 days after the end of the calendar year (typically March 31, or March 30 in a leap year).

In your situation, Ryan, you are $1,550 over the $2,000 exemption. That means a 1% penalty on $1,550, which equals $15.50 per month, beginning in February and continuing until you withdraw the excess or otherwise resolve it. For comparison, if you withdraw the $1,550 and 10% withholding tax is applied, that would be $155 withheld up front. Given the ongoing monthly penalty and any interest, it may be more cost-effective to withdraw the excess promptly rather than waiting for waiver approvals that could take months.

The CRA also permits requests to cancel or waive the Part X.1 tax on excess RRSP contributions by filing Form RC2503, Request for Waiver or Cancellation of Part X.1 Tax – RRSP, PRPP and SPP Excess Contribution Tax. You can request relief if the excess arose from a reasonable error and you are taking, or have taken, reasonable steps to correct the situation. Whether it’s worthwhile to pursue a waiver depends on the size of the penalty, the specifics of your case, and whether you’ll pay a professional to file the forms or handle them yourself.

You could carry forward the contribution, too

The contribution you made in February 2023 can be applied to your 2023 RRSP deduction and used on your 2023 tax return, even though it was reported on your 2022 return by your financial institution. Once you file your 2023 return, your deduction limit for the year will be applied retroactively to January 1, 2023, and any eligible contribution room can be used.

RRSP overcontributions are relatively common, which is why the rules include a $2,000 buffer and several remedies. To avoid surprises, taxpayers should review their notice of assessment to confirm their reported carry-forward amounts and available contribution room, and check that their tax return was processed as filed.

Read more from Jason Heath:

• “My financial advisor overcontributed to my TFSA—now what?”
• Selling stocks at a loss in a TFSA: What it means for your contribution room
• How do the RRSP contribution carry forward rules work?
• How much to take out of your RRSP in your 60s