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If you’ve accidentally overcontributed to your RRSP, you may 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
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:
If your unused RRSP contributions carried forward from past years exceed your RRSP deduction limit for the current year, that means you have an RRSP overcontribution.
A taxpayer is allowed to overcontribute to their RRSP by up to $2,000 at any time, 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, plus interest.
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 (5% in Quebec, where 14% provincial tax is also applied).
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.
Since an undeducted RRSP contribution will not be deducted, the withdrawal is tax-free regardless of how you make it. In other words, if you decide to just withdraw the overcontribution rather than submitting Form T3012A, any withholding tax can be refunded—eventually. When you file your tax return for the year of the withdrawal, 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 (reported on a T4RSP slip) by making a deduction against it on line 23200 (other deductions). No net income will be included on your return and the withholding tax will be refunded.
Another step that’s required when you overcontribute 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 now says: “If you’d like the CRA to complete the return(s) for you, send us a written request and your account transaction statement(s) … that show the amounts and dates of your contributions and withdrawals for the year(s) in which you have excess contributions.” So, it is not a requirement to fill out the T1-OVP return on your own. The deadline for a T1-OVP return is 90 days after the end of the calendar year (generally March 31, but March 30 in a leap year).
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 plus additional interest 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:
Similar to the T3012A 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.
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, as well as the $2,000 buffer. Taxpayers should check their notices of assessment to make sure their tax return was accepted as filed, confirm any carry-forward amounts, and make sure they have not inadvertently overcontributed to their RRSP.
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Reddit experienced an onslaught this last month (Feb’23) unlike other years, of people freaking out, who start their post stating the fact that they had over-contributed. In fact only a very tiny tiny minority had. Most have either misunderstood or been misinformed. The misunderstandings boiled down to not understanding that …..
a) There is a difference between RRSPs and Pensions. The two systems work on a different time schedule. The only overlap of pensions onto an RRSP is box 52 on the T4 called “Pension Adjustment”. This $ has no impact on RRSP contributions you want to make and deduct this 2023 tax return. (Point g below)
b) The RRSP runs on a calendar year basis, NOT (as CRA claims) on the Mch-to-Feb basis. The cause of this misunderstanding comes from CRA’s permission to make ‘late’ contributions, using Contribution Room available the prior ’23 year, in JanFeb’24, and still deduct it on the 2023 year’s tax return.
c) Since CRA needs to know about ‘late’ contributions, there are two contribution tax slips issued yearly – one for the JanFeb period and the other for MchDec. You must ‘report’ your JanFeb’24 contributions on Sch7 of your 2023 tax return. But you may not be able to ‘deduct’ them.
d) After receiving your last 2022 tax return a year ago, CRA issued a Notice of Assessment with a box called “Deduction Limit”. While CRA cares about what you deduct, most of us care about what we can contribute. The Deduction Limit and Contribution Room are two different metrics.
* If the bottom line of the box is labelled ‘DedLmt’ then you can assume that is also the ContRm.
* If the bottom line is called ‘Unused Contribution”, then your ContRm equals the DedLmt LESS this ‘Unused Cont’n’.
*If the bottom line is called ‘Contribution Room’ then that is what it is.
e) This ContRm is the maximum you can contribute during the MchDec remaining period of the year. So any JanFeb’ contributions should be ignored because they are already known by CRA and incorporated into their calculation. Any room still unused at Dec31’23 can be used for a JanFeb’24 ‘late’ contribution.
f) New yearly contribution room created by 18% of ’23 wages (to a maximum) was added on Jan1’24, whether it was known at that time or not. It will be applied retroactively. JanFeb’24 contributions can use this new ContRm but they cannot be deducted until next year’s 2024 tax return. (I.e. these are different from ‘late’ contributions.)
g) The Jan1 ’24 additional contribution room created (point f) is reduced by the Pension Adjustment (point a) for the prior ’23 year. This is to prevent lucky pension member from gaining tax shelter room from both the pension and RRSP.
I give MoneySense full authorization to republish this next year (changing year #) under anyone’s byline without attribution.