The Nightmare of RRSP Over-Contributions

Written by:  Gwyneth James MBA CPA, CGA, Senior Partner

For many years, taxpayers have been able to contribute to special investments called RRSPs (Registered Retirement Savings Plans) which are deducted from taxable income, but taxed when they are withdrawn – typically in retirement years. There is a limit on the amount you’re allowed to contribute: 18% of the prior year’s “earned income” to a maximum defined each year (was $25,370 for 2016). Pension plans affect this limit.

Taxpayers occasionally mistakenly make RRSP contributions in excess of their limit. They are not able to deduct the excess amounts from their taxable income, but the funds do benefit from the tax-free nature of these registered accounts – any gains or income earned is tax-free. In this way, they are identical to a TFSA (Tax-Free Savings Account); however, any RRSP Over-Contributions exceeding $2,000 are still subject to a 1% per month penalty – a policy that hasn’t changed since 1995. What’s more, when these Over-Contributions are withdrawn, the taxpayer will likely pay tax on them so there’s already a built-in penalty.

Over-Contributions can be carried forward and deducted from income in a future year, assuming you continue to generate earned income (for ex, from employment, rental properties, or self-employment), but the penalty can still be assessed.

There are several forms involved in the Over-Contribution nightmare: T1-OVP to self-assess the penalty amount, RC4288 to request waiver of the penalty, T3012A to request withdrawal of the over-contribution without tax being withheld, and T746 to deduct any over-contributions you withdrew.

This is definitely an area where CRA (Canada Revenue Agency) has fallen behind in its policy-making. Once TFSAs were introduced in 2009 the penalties and processes for RRSP Over-Contributions should have been amended. Instead they remain in their original complicated and heavy-handed fashion.