Every year taxpayers are caught contributing to their RRSP beyond the allowable limit. Here's what you should do if this happens.
Sometimes we lose track of our RRSP contributions. For example, if you change jobs and now have access to a more generous employer pension plan. Or if you make payments to both a group RRSP at work and a personal account.
Know your ceiling
According to financial services advisor Jean-François Rémillard of Sequito Wealth Management, the best way to find out your contribution limit is to consult My File on the Canada Revenue Agency (CRA) website. Here you will find the total contributions from previous years as well as details about your RAP and REEP. “The contribution limit is also stated in the most recent tax return from the CRA,” he says. However, this information may not be current as the cap mentioned is based on your previous income.
The Financial Security Advisor notes that the maximum RRSP contribution is 18% of income earned in the previous year or the applicable cap for the current year ($30,780 for 2023). In addition, there are unused rights that have accumulated over time.
A penalty of 1%
If you have unfortunately exceeded your contribution limit, do not panic but must act immediately. “First of all, you should know that you are entitled to an overpayment of a maximum of $2,000 without penalties,” explains Jean-François Rémillard. Be careful, because this amount does not qualify you for a tax credit like an RRSP contribution typically does. This $2,000 excess lasts for life and must be deducted from the following year's contribution.
If the excess contributions exceed this amount, we are subject to a contractual penalty of 1% per month, which is why these must be deducted as quickly as possible. You must then submit the T1-OVP form to the CRA and pay the tax due no later than 90 days after the end of the year in which you paid the excess amounts.
The CRA notes on its website that this form must be accompanied by documents showing the exact months in which deposits and withdrawals were made. Please note that RRSP receipts and T4RSP and T4RIF receipts do not contain this information.
Jean-François Rémillard also recommends requesting an investment certificate after the withdrawal in order to have proof that the withdrawal has actually been made. “Pay the tax owed as quickly as possible to avoid accruing interest,” he advises.
Request a cancellation or waiver
You could also try to get the CRA to waive or cancel the taxes you owe on overcontributions. However, the following two conditions must be met: it is due to a legitimate error and you are taking or have taken reasonable measures to eliminate it.
To submit the application, you must complete Form RC-2503 and submit it to the CRA. “It is best to pay taxes promptly and not wait for a response from the credit rating agency. If this turns out to be negative, months of additional penalties could pile up,” warns Jean-François Rémillard.
Excess contributions to an RRSP, PRPP or SPP: canada.ca/en/revenue-agency/services/tax/individuals/subjects/reer-plans-lated/contribute-to-reer-to-rpac-a/follow-excess- Contributions-to-your-rpac-rpac.html