Every year, taxpayers get caught and contribute to their RRSP beyond the limit allowed. Here’s what you should do if this happens.
Sometimes we lose track of our RRSP contributions. For example, when you change jobs and now have access to a more generous employer pension plan. Or, if you make payments into 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 what your contribution limit is is to consult My file on the Canada Revenue Agency (CRA) website. You can find the total contributions made in previous years as well as the details relating to your RAP and your REEP. “The contribution limit is also indicated on the latest notice of assessment issued by the CRA,” he says. However, this information may not be up to date, since the ceiling mentioned is based on your previous income.
The financial security advisor reminds that the maximum RRSP contribution represents 18% of the income earned the previous year or amounts to the applicable ceiling for the current year ($30,780 for 2023). Added to this are unused rights that have accumulated over time.
A 1% penalty
If unfortunately you have exceeded your contribution limit, don’t panic, but you must act without delay. “First of all, you should know that you are entitled to an excess payment of up to $2,000 maximum without penalties,” explains Jean-François Rémillard. Be careful, because this amount will not entitle you to a tax credit, as is usually the case for an RRSP contribution. This excess of $2000 is for life and must be withdrawn from the following year’s contribution.
If the excess contributions exceed this amount, in this case, we are exposed to a penalty of 1% per month, which is why they must be withdrawn as quickly as possible. You will then need to send 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 mentions on its website that documents indicating the exact months in which contributions and withdrawals were made must be attached to this form. Please note, RRSP receipts and T4RSP and T4RIF slips do not contain this information.
Jean-François Rémillard also recommends requesting an investment statement after having made the withdrawal, in order to have proof that it was indeed made. “Pay the tax owed as quickly as possible to avoid interest accruing,” he advises.
Request a cancellation or waiver
You could also try to obtain from the CRA a waiver or cancellation of the taxes payable for excess contributions. However, the following two conditions must be met: they arise from a reasonable error, and you take or have taken reasonable measures to eliminate them.
To submit the request, you will need to complete form RC-2503 and send it to the CRA. “It is best to pay taxes promptly and not wait for a response from the CRA. If this turns out to be negative, months of additional penalties could accumulate,” warns Jean-François Rémillard.
TO KNOW MORE:
Excess contributions to an RRSP, PRPP or SPP: canada.ca/en/revenue-agency/services/tax/individuals/subjects/RRSP-related-plans/contributing-to-a-RRPAC-a/consequences-excess-contributions-to-your-RRPAC-RRPAC. html