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 on 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.
Knowing Your RRSP Contribution Limits
Your RRSP Contribution Room fort the tax year is 18% of your earned income, up to an allowable maximum limit. Need to know your contribution limit? If you’re a CRA My Account holder, it’s as easy as signing in to 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. If you would like to do the calculations yourself, please note that the limits are 18 percent of your prior year’s income, with a maximum fiscal yearly limit.
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.
- The $2,000 cushion is only available to you if you are 19 years of age or older.
- 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.
- You can find your deduction limit from your “My Account” service, Notice of Assessment, or by the tax information phone services.
- 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. Use the T3012A form to withdraw the excess amount and waive the taxes on the excess amount.
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 RRSP 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.”
TurboTax software can help you download your RRSP information through AFR to determine your excess contribution amount. Consider TurboTax Live Assist & Review if you need further guidance, and get unlimited help and advice as you do your taxes, plus a final review before you file. Or, choose TurboTax Live Full Service* and have one of our tax experts do your return from start to finish.
*TurboTax Live™ Full Service is not available in Quebec.
References & Resources
- Claude Ayache, CPA, CMA; Keats, Connelly, and Associates; Toronto, Ontario