The Pain of RRSP Over-Contributions
I recently met a new client who had over-contributed to his Registered Retirement Savings Plan (RRSP). This problem can be both costly and time-consuming to fix, so I thought sharing his story would help others avoid the same situation.
The RRSP over-contribution
The client, let’s call him John, came to me to complete his 2022 tax return. While reviewing his Notice of Assessment (NOA) for the previous year, I saw that he had over-contributed to his RRSP by $10,000. Knowing that there is a steep penalty for being over the RRSP limit, I immediately notified the client.
The consequences of going over your RRSP limit
The Canada Revenue Agency (CRA) allows an RRSP over-contribution of up to $2,000 without penalty. However, any excess amount over this threshold is subject to a 1% penalty per month. This penalty continues each month until the taxpayer is back within limits.
In John's case, being over the limit by $10,000 will result in a tax of $80 per month. A whole year of being over by this much would result in a tax of $960. Unfortunately for John, the over-contribution started a few years ago and so the total tax will be even greater.
How did it happen?
John had been diligently contributing to his RRSP, aiming to maximize his tax deductions and grow his retirement savings. Each year he would check his notice of assessment and make the maximum contribution that he was allowed. However, he recently realized that he forgot to claim some of his RRSP contribution receipts in past tax years. After correcting the past tax returns by adding the missed contributions, he was now in a situation where he had contributed too much to his RRSPs.
Fixing the mistake
John will now have to start the process of correcting the RRSP over-contribution. Fixing the over-contribution itself is fairly easy, but calculating the tax with form T1OVP is a time-consuming process. In this case, several years of RRSP contributions will have to be mapped out to figure out when the RRSP contribution limit was first exceeded. Once that is complete, the 1% per month tax can be calculated and reported to the CRA.
How to avoid RRSP over-contributions
Watch your contribution limit: Keep an eye on your annual notice of assessment from the CRA, which shows your RRSP deduction limit for the upcoming year. You can also check your limit online using the CRA's My Account service.
Review your contributions: Check your financial institution's statements and track your contributions throughout the year. This helps you ensure you're not exceeding your limit.
Coordinate accounts: Be careful if you have a group RRSP at work as well as a personal RRSP. Create a plan to use your contribution room without going over your limit.
Claim all RRSP receipts on your tax return: Ensure you report all your RRSP contributions on your tax return. This including contributions made within the first 60 days of the year, which are claimed on the tax return of the previous years.
By staying informed and proactive, you can avoid the cost and hassle of over-contributing to your RRSP. Check out these recent tax updates for retirees.
If you suspect you have over-contributed, consult with a tax professional to help.
