RRSP Over-Contribution: Penalty & How To Fix Them

RRSP Over-contribution is one of the most common RRSP mistakes that Canadians make.

Registered Retirement Savings Plan (RRSP) is a great tool for retirement savings because of its tax-sheltering advantages. Unfortunately, CRA regulates this advantage through the annual cap on how much you can contribute.

In this post, we’ll look at the RRSP annual contribution limit, the penalties for RRSP over-contribution and how to fix or resolve RRSP over-contributions.

What is the RRSP Contribution Limit?

The RRSP contribution limit is 18 percent of the prior year’s earned income up to a maximum specified amount, plus any unused contribution room from previous years. The maximum amount changes annually: $27,230 for 2020, $27,830 for 2021 and $29,210 for 2022.

CRA has announced that the RRSP contribution limit for 2023 as $30,780.

Here’s an illustration:

Consider a couple, Matt and Amy, with $100,000 and $150,000 in annual income for 2019 respectively:

Matt can contribute up to $18,000 (that is $100,000 x 18%) to his RRSP in 2020. For Amy, 18% of her income is $32,400 but she can only contribute up to the maximum for 2020 which is $27,230.

And since RRSP contributions can be carried over, they can potentially contribute more than these amounts if they had unused contribution rooms from previous years.

Using the same example, if Matt contributed only $10,000 in 2020, the balance of $8,000 can be carried over to 2021.

To confirm your current year’s RRSP contribution, simply check your last notice of assessment (NOA) or log in to your account with CRA.

Note: Don’t confuse RRSP Contribution Limit with Deduction limit.

They are different and confusing the 2 can be costly.

Check this post to learn more about RRSP Contribution Limit and go here for RRSP Deduction Limit vs Contribution Limit.

What is RRSP Over-contribution?

RRSP over-contribution occurs when you contribute more than your allowed contribution limit, plus a lifetime over-contribution exemption of $2,000.

The $2,000 exemption is to account for small errors. CRA understands that there could be genuine and unintentional errors with RRSP contributions.

All your RRSP contributions, including those made by your employer to your group plan and contributions you made to a spousal RRSP, will be considered.

Here’s an RRSP over-contribution example:

If the contribution limit on your notice of assessment was $10,000 but you made a total contribution of $15,000, the over contribution amount is $3,000.

That is $5,000 minus the $2,000 over-contribution exemption.

Here are some of the reasons why people have RRSP over-contributions

1. Not checking the Notice of Assessment for the deduction limit
2. Not keeping track of all their RRSP contributions, typically because of:
   • Having multiple RRSP accounts at different financial institutions
   • Contributions made by the employer to a group RRSP plan
   • Contributions made to a spousal RRSP. You should know that contributions made to your spouse’ RRSP account will reduce your own contribution room. Also, the tax deduction will be made against your income, not your spouse’s, when you file taxes.

Related Post: Can I have Multiple TFSA accounts?

What are the penalties if you over-contribute to your RRSP?

You may have to pay the 2 penalties below if you over-contribute to your RRSP.

Penalty for RRSP over-contribution

The penalty tax for over-contributing to your RRSP is 1% of any contribution in excess of the $2,000 lifetime exemption. The penalty will be calculated for each month the over-contribution remains.

You can avoid this penalty by withdrawing the excess amount immediately

Penalty for late filing

You are expected to pay the tax owing for the over-contribution and also file a return within 90 days of the end of the year.

The return is made using form T1-OVP, Individual Tax Return for RRSP, PRPP and SPP Excess Contributions.

If you fail to file the return and pay the tax on time, the additional penalties are:

1. 5% of the balance you owe, and
2. 1% of the balance owing for each month that the return is late (capped at 12 months)

Interest Charges

Interests will start accruing from day 91 on the unpaid penalties: that is, penalty for over-contribution and late filing penalty. The interest is compounded daily.

How do you calculate the RRSP over-contribution penalty?

Consider a taxpayer with a contribution room of $10,000 for the 2020 tax period. He made a single contribution of $15,000 in October 2020.

He has an over-contribution of $5,000 immediately but penalty will be due on just $3,000.

The penalty tax for over-contribution will be $30, that is $3,000 x 1%, for each month starting in October to December, for a total tax of $90.

The tax amount of $90 must be paid and the T1-OVP form filed within the first 90 days in 2021. Otherwise, the additional penalties for late filing may be applied.

This will be 5% on the $90 owing, and 1% every month afterwards.

In summary, the penalties will be

• Penalty for over-contribution: $90
• Penalty for late filing: $90 x 5% + $90 x 1% per month.
• Interest starts accruing from the 91^st day.

What to do if you over-contribute to your RRSP

So how do you fix an RRSP over-contribution?

In general, there are 2 ways to fix an RRSP over-contribution

1. Leave the excess and pay the penalties

This option could be attractive depending on the specific circumstances. For example, if the over-contribution happened towards the end of the year and you know the penalty will not be much.

If the new contribution room in the new year will cancel out the over-contribution, then you can decide to leave the excess amount in your RRSP.

Simply pay the tax penalty within 90 days after the end of the year and file form T1-OVP, Individual Tax Return for RRSP, PRPP and SPP Excess Contributions.

2. Withdraw the excess amount immediately

The second option to fix an RRSP over-contribution is to make a withdrawal immediately.

But since the withdrawal will not be a qualifying withdrawal, your financial institution will withhold tax. The tax varies depending on the over-contribution amount and your province.

Withdrawal Amount	All Provinces (Except Quebec)	Quebec
$5,000 and below	10%	20%
$5,001 to $15,000	20%	25%
Above $15,000	30%	30%

You can deal with the withholding tax in 2 ways:

• pay the withholding tax and claim it as a credit when you file your tax at the end of the year
• Ask CRA for a waiver.

To do this, you will need to fill form T3012A Tax Deduction Waiver on the Refund of your Unused RRSP, PRPP, or SPP Contributions from your RRSP.

You can also ask CRA for a waiver of the tax penalty. See below for how to go about this.

How to waive the tax penalty on excess contribution

CRA may be able to waive the penalty on RRSP over-contribution if you meet 2 conditions:

• The excess contribution is due to a reasonable error
• You have taken, or are taking, reasonable steps to eliminate the excess contributions

The request will be made in writing to CRA. In the letter, you need to include:

• An explanation of how the over-contribution occurred and why it is a reasonable error
• Documents to support your argument that the excess contribution was due to a reasonable error
• Documents, correspondences, or any other paperwork to show the steps you are taking, or have taken, to correct the error. If you have withdrawn the excess amount, include a statement or document to show the withdrawal.

The letter should be sent to a tax office close to you.

You may also be able to ask for a waiver under the Taxpayer Relief Provisions.

What about TFSA over-contributions?

The penalty for over-contributing to a TFSA is also 1% of the excess amount, calculated monthly. However, unlike with RRSP, there is no $2,000 buffer or exemption amount.

That is, if you had a TFSA contribution limit of $10,000 but you contributed $15,000, the 1% monthly penalty will be calculated on the full over-contribution of $5,000.

TFSA over-contributions usually happen when people withdraw funds in a year but then recontribute the money in the same year.

Or they withdraw from one TFSA account and recontribute to another – in this case, the right approach is to request a direct transfer from the current financial institution to the new one.

The best way to avoid TFSA contributions is to track your contributions through the year. Check this post for a TFSA contribution tracker.

Related Post: 9 Costly TFSA Mistakes to Know and Avoid

Keeping track of your RRSP contributions

Here are some ways you can keep track of your RRSP contributions to avoid over-contributions:

• Review your notice of assessment every year to confirm your contribution room for both your RRSP and TFSA. You can also get the information any time by logging to your CRA’s my account.
• Use CRA’s RC343 Worksheet to keep track of all your contributions and withdrawals for the year.

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Some FAQs on RRSP Over-contribution

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Conclusion

It is good advice to always try to maximize the contribution room of your registered accounts to take advantage of the tax-free compounding.

But over-contributing to your RRSP can be costly because of the penalties.

Finally…

• You should try to appeal for a waiver of the penalties if you believe you made an honest mistake.

• If you decide to pay the penalties, make sure you do so within the first 90 days of the new year to avoid additional penalties and interest.

• More importantly, always check your notice of assessment and keep track of all contributions to your registered accounts to avoid the penalties.

Related Posts about RRSPs:

• RRSP Contribution Deadline and Limit (2021)
• Unused RRSP Contributions (2021)
• RRSP Contribution Year (How it affects RRSP Deadline)