Canadian Tax: how to resolve RRSP Over-Contributions

If you (or your employer for pooled registered pension plan (PRPP) purposes) contribute more to your RRSP, PRPP or SPP, or your spouse’s or common-law partner’s RRSP or SPP than your RRSP deduction limit allows, you will have an excess contribution.

Based on CRA, you have to pay a tax of 1 % per month on excess contributions that exceed your RRSP/PRPP deduction limit by more than $2,000 unless you:

  • withdrew the excess amounts
  • contributed to a qualifying group plan

If you have to pay this 1 % tax, fill out a T1-OVP, 2019 Individual Tax Return for RRSP, PRPP and SPP Excess Contributions return and send it to your tax centre. You will have 90 days to fix the over-contribution and pay the 1% penalty on your over-contribution. Failure to day so, another penalty comes into play:

  • 5% of your balance owing, plus
  • 1% of your balance owing for each month that your tax return is late, to a maximum of 12 months

How can we correct the RRSP over-contribuiton situation?

If you find out the RRSP over-contribution within the year

If you’re over the $2,000 limit, be sure to withdraw the excess amount ASAP. Though you’ll need to include the withdrawal as income on your tax return, you can claim an offsetting deduction as long as:

  • You reasonably expected to claim a deduction for the contribution, either in the year you made the contribution or the year before.
  • You didn’t make the contribution with the plan to withdraw it later and deduct the offset amount.

To make sure your financial institution releases the funds without withholding tax, ask the Canada Revenue Agency to certify the excess contribution amount using Form T3012A. Without this form, the tax will be withheld by your bank. Then when it comes time to file your tax return, use Form T746 to claim the offsetting deduction, and a credit for the tax withheld.

If you find out the RRSP over-contribution after the caldender year is over

There is one way to reduce the penalty for the year if you have leveraged the Home Buyer’s Plan (HBP) to purchase your home and still have money to pay back into the plan. Part of your RRSP contribution can be designated to the HBP plan and in doing so, it reduces your RRSP contribution which can prevent you from over-contributing in the end.

You will have 90 days to file the T1-OVP form and correct the situation. You will have to pay the 1% penalty on the over-contribution amount. You do not have to withdraw money as the year is complete. However, you do need to ensure the following year is not in danger of over-contribution either. The excess contribution you made is now rolling over to the new year and you may need to reduce your contribution for the year.

If it’s a new year but you don’t expect an income to cover the excess contribution, you will need to withdraw and pay the penalty. That’s the worst-case scenario.

Pay the tax within 90 days after the calendar year and avoid late-filing penalties or interest charged.

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