Have You Over-Contributed to Your RRSP?

You’ve wisely been contributing as much as you can to your RRSP, well aware that some Canadians aren’t saving enough for retirement. But is it possible you may have contributed more than the Canada Revenue Agency allows?

It’s easier than you may think to contribute more than your annual contribution limit, which is different for everyone and changes each year because it’s based on your income and your past contributions. On your Notice of Assessment there is a section called “Your RRSP Deduction Limit Statement.” It shows the deduction limit for the year (A). The next sentence says “You have ____ (B) of unused RRSP contributions available for the year. If this amount is more than amount (A) above, you may have to pay a tax on the excess contributions.” Amount (B) is contributions you have already made to your RRSP but have not deducted on a tax return. So you should not contribute more than (A) minus (B).

You may have misread your Notice of Assessment, which tells you how much you are permitted to contribute each year. You may have forgotten to include amounts automatically contributed to your RRSP at work. You may forget that you contributed to your partner’s spousal RSP account.

If you have over-contributed to your RRSP by more than $2,000, you may be required to pay a penalty on the excess amount, which will be calculated monthly as 1% of your over-contribution (minus the allowable $2,000 over-contribution). So if you have over-contributed by $10,000, your monthly tax penalty will be $80 ($10,000 – $2,000 = $8,000 × 1% = $80).

As soon as you realize you have over-contributed, consider your options. The CRA may also discover the over-payment and notify you. Talk to your financial advisor and/or accountant, because the action you take may depend on your particular situation. You may decide to withdraw the funds or you may leave them in your RRSP and pay the over-contribution penalty.

Leaving the funds in your RRSP and paying the monthly penalty may make sense in your case if the funds are well-invested and earning more than the penalty. If you go this route, you will need to keep a watchful eye on your investments to make sure this strategy continues to work for you. Leaving the funds in your RRSP might also make sense if it is near the end of the calendar year and you will have additional contribution room available at the beginning of the coming year.

If you decide to withdraw the funds, you still have a couple of options, and of course there is some paperwork involved.

Option 1 is the quicker remedy, and if you act quickly, the CRA may waive the over-contribution penalty.

When you withdraw the funds from your RRSP, your financial institution is required to withhold income tax on the withdrawn amount. You will likely need to complete form T1-OVP, Individual Tax Return for RRSP Over-contributions. This form will support a tax deduction for the amount withdrawn from the RRSP. When you file your tax return, you must include form T746, Calculating Your Deduction for Refund of Unused RRSP Contributions, to ensure that the withdrawal won’t be taxed twice (under a T4RSP, Statement of RRSP Income, and because of the lack of a tax deduction for the contribution).

With Option 2, you will need to submit form T3012A, Tax Deduction Waiver on the Refund of Your Unused RRSP Contributions, to request that the RRSP withdrawal not be subject to withholding tax. The CRA will return form T3012A once it decides whether to approve your request for a refund of the funds you over-contributed. You then send the form to the financial institution that holds the RRSP account in question, as disclosed on the T3012A.

You must still file form T1-OVP, as described above. Pursuing this option takes longer than Option 1 and you will therefore pay a higher penalty.

To request that the CRA not penalize you, fill in form RC4288, Request for Taxpayer Relief–Cancel or Waive Penalties or Interest, after you have submitted a T1-OVP and any payments due. In making a decision, the CRA will assess whether the over-contribution was the result of a reasonable error and will consider whether you have taken reasonable steps to correct the problem (that is, withdrawn the funds or made plans to do so). Explain how the over-payment happened and include any supporting documentation. If the CRA rules in your favour, it may refund penalties you have already paid.

Time is of the essence in all this – if you have not paid any over-contribution tax penalty owing within 90 days of the end of the tax year, the CRA will start charging interest on outstanding amounts, along with a late filing fee.

Determining the best course of action in your situation can be complex, and understanding which forms you need to complete is not always straightforward. Working with an accountant who is familiar with your complete financial picture is your best bet. The award-winning advisors and accountants at DFS Private Wealth are experts in dealing with complicated tax situations and will help you navigate an RRSP over-contribution. Call them today – the sooner you sort the issue out, the better.

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