A registered retirement savings plan (RRSP) is a common retirement plan that allows you the flexibility of controlling the investments in the account. You can contribute to your own RRSP until age 71. You can also contribute to the RRSP of a spouse or common-law partner until they turn 71. The Canada Revenue Agency sets limits to how much a taxpayer can contribute to an RRSP. If the ceiling is breached, penalties can ensue – and specific actions need to be taken to resolve the situation.
Defining the Limits
Need to know your contribution limit? If you’re a CRA My Account holder, it’s as easy as signing into the online portal. You may also view your past balances, contributions, HBP/LLP information, and past contribution receipts.
The CRA also informs you of this limit on your notice of assessment. In case you need to calculate it yourself, though, note that limits are 18 percent of your prior year’s income, with a maximum of $27,230 for fiscal year 2019.
Defining Excess Contributions
Canadian tax laws define excess contributions to an RRSP as any contributions that exceed your deduction limit (noted on your assessment or reassessment) plus $2,000. While $2,000 of penalty-free excess is allowed, note that amount is not tax-deductible. Also important to remember:
- Certain contributions to a specified pension plan (SPP) and a pooled registered pension plan (PRPP) are considered contributions to your RRSP under Canadian tax laws and are counted in determining total contributions to the plan in a given year.
- Lastly, the $2,000 “cushion” can be reduced for reasons including if you have a negative RRSP deduction limit that may be due to a Past Service Pension Adjustment (PSPA) amount.
Considering Unused Contributions
Although a deduction limit is set each tax year for contributions to an RRSP, not all taxpayers use the full deduction annually. If you did not claim your limit in prior years, the unused contributions are carried forward. Your latest notice of assessment will include these amounts in your personal limits.
- If your contributions for the current year, when combined with unused contributions, exceed your deduction limit by more than $2,000, you may owe tax on the excess: namely, a one percent monthly penalty, assessed for each month the excess exists.
- You may not have to pay this penalty in cases including if you withdrew the excess amounts or if all your contributions were qualifying group RRSP contributions.
Settling the Tax
If your CRA My Account balance or notice of assessment shows that you have exceeded the limits and owe taxes on excess contributions to an RRSP, then resolving the situation involves filing a tax form and paying the penalty tax or asking the CRA for a waiver.
- To report and pay the tax, file the Individual Tax Return for RRSP Excess Contributions, Form T1-OVP.
- To ask for a waiver, you must show that the excess contributions were an honest mistake and that you are making an effort to remove the over-contributions.
The CRA will ask you to explain why you contributed too much. If you removed the excess, provide documentation, such as statements from your RRSP showing the withdrawals.
Maximizing Your Returns
Note that you may only deduct RRSA funds from your income starting the second year in which you work in your job (and will be reporting it on your tax form in the third year you’re working in that job). Reporting any funds before that constitutes a disallowed excess. Still, notes Claude Ayache, a certified tax professional at Keats, Connelly and Associates, “it’s advantageous for you to deduct right from the beginning of the second year, rather than the end, in order to benefit from a full year of capital appreciation. If you make the deduction at the beginning, you give your money a year to potentially grow, which allows for a greater benefit, as interest and dividends in RRSPs aren’t taxed.”
References & Resources
- Canada Revenue Agency: Determine if You have to Complete a T1-OVP
- Canada Revenue Agency: Excess Contributions
- Canada Revenue Agency: How Much Can I Contribute and Deduct?
- Canada Revenue Agency: MP, DB, RRSP, DPSP, and TFSA limits and the YMPE
- Claude Ayache, CPA, CMA; Keats, Connelly and Associates; Toronto, Ontario
- Noel Hendrickson/Photodisc/Getty Images