Registered Retirement Savings Plans (RRSPs) can be a great
retirement planning tool for many Canadians, but they may also be
costly for the unwary. If you have over-contributed to your RRSP,
certain problems can arise.
A penalty tax is applicable, even though the over-contribution
has never been deducted from taxable income. This tax is due to the
fact that the income earned on your over-contribution is earned
within a registered plan; therefore, the income accumulates in your
RRSP tax-free until withdrawn. The penalty tax is equal to 1% per
month of the over-contributed amount. This tax is not calculated on
your annual personal income tax return, but on form T1-OVP, which
is due by March 31 of the following calendar year. The form is
applicable the moment you have over-contributed regardless of
future corrections to the amount. It is important to note that the
liability to pay this tax can never be statute-barred if a T1-OVP
is not filed.
The CRA does have the authority to waive the tax where the
taxpayer can demonstrate the over-contribution was inadvertent and
steps were immediately taken to correct the problem. This waiver is
entirely at CRA’s discretion.
The second problem with an over-contribution is the possibility
of double tax. If subsequent years’ RRSP room will not be
sufficient to allow for the eventual deduction of the contribution,
then you may pay tax on the amount twice; first when you earned the
income and again upon the eventual withdrawal of the funds from
Upon realization of your over-contribution, there are three
avenues you can take. The first is to determine whether the
following year’s RRSP room will be sufficient to use up the
over-contribution and determine if you are willing to wait until it
corrects itself (the penalty tax will still apply while
over-contributed). If applicable, you should also ensure you stop
your (or your employer’s) automatic RRSP contributions to
allow for the absorption of the over-contribution to ensure you do
not have an ongoing problem.
The second option is to withdraw the funds immediately. The
withdrawal of funds will result in tax being withheld and the
issuance of a T4RSP slip. This withdrawal must be reported as
income in the year of withdrawal; however, you may be able to
deduct it in the year of withdrawal by filing form T746 with your
tax return, resulting in a tax neutral situation. The immediate
withdrawal is the important step here as this deduction is only
allowed when the amount is withdrawn in the year of contribution or
the following year, or in the year of assessment of the tax return
in which the over-contribution was made or the subsequent year. You
are not allowed to make a series of over-contributions and
The third alternative of course, is to do nothing, which is
frankly, never a good idea.
Care should be taken to fully understand the RRSP room available
to you. If you find yourself over-contributed, you must weigh which
option is best suited for your individual situation.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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