RRSP Over Contributions
A Registered Retirement Savings Plan (“RRSP”) is a tax deductible way of funding your retirement. Contributions made are deductible from your income, which lowers the overall amount of taxes you are going to pay that year. Withdrawals from the account are taxable, so the RRSP is known as a tax deferral mechanism rather than tax avoidance.
RRSP Limits
The Canada Revenue Agency (“CRA”) details your RRSP contribution limit on your notice of assessment. It is 18% of your past years income, up to a maximum of $25,370. If you did not contribute the full amount in one year, the unused contributions are carried forward and may be used in future years to defer taxes.
Additionally, taxpayers may contribute an extra $2,000 to their RRSP without penalty each year, but should be aware that the extra $2,000 is not tax deductible in the year.
Penalty
If a taxpayer over-contributes to his or her RRSP by more than $2,000, CRA charges a penalty of 1% of the excess amount per month as a penalty. You must complete a T1-OVP within 90 days after the end of the calendar year. There is a late filing penalty of 5% of the balance owing if not done on time. The T1-OVP form is a tax return accounting for the excess RRSP contributions, and it calculates the penalty owed by the taxpayer.
Withdrawing the Excess
If you are still in the year of over-contribution, you may be able to withdraw the excess contribution without withholding tax and without penalty. Taxpayers must complete Form T3012A, which calculates the amount that can be withdrawn without having to pay withholding tax to the CRA. Should CRA approve the form, taxpayers then provide it to the institution holding their RRSP, and remove the excess contributions. To attempt to not have the penalty charged, taxpayers must complete and file a Taxpayer Relief Request.
After Paying the Withholding Tax
If CRA does not approve Form T3012A, or you did not submit the form and simply withdrew the excess then the institution would have withheld some funds for the purpose of paying withholding tax. If this is the case then taxpayers must complete Form T746 which accounts for the withheld amount in your current years tax returns.
Navigating the RRSP over-contribution process can be very difficult. Contact R&A Tax Law, we have the experience necessary to assist you through this maze.
CRA Resources
T4040 RRSPs and Other Registered Plans for Retirement Guide
How to Claim Contributions on your Tax Return
Case Law
Levenson v. Canada (Attorney General), 2016 FC 10 – Judicial Review for denial of request to cancel penalty
McNamee v. The Queen, 2009 TCC 630 – RRSP Excess Contribution Calculation
Detailed case law analysis may be found here.
**Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.
Kendal Steele