What to do if you overcontribute to your RRSP
You thought you did everything right. You checked your RRSP deduction limit, you topped up your account during the year without exceeding your limit, but then tax time comes around and you find out that you've overcontributed. This is a very common occurrence among Canadians and one that can induce anxiety because of the risk of penalties from the CRA. This post will go over what leads to an RRSP overcontribution and the steps to correct it.
What is an RRSP overcontribution?
An RRSP overcontribution occurs when a taxpayer has undeducted RRSP contributions exceeding their deduction limit for a given year. For example, John filed his 2024 tax return and upon receipt of his notice of assessment from the CRA, he learned that his RRSP deduction limit for 2025 was $20,000. However, between March 1, 2025 and December 31, 2025, John contributed $24,000 to his RRSP, which is $4,000 above his limit. John is now in an overcontribution situation and will be subject to penalties from the CRA.
Note: If John had instead contributed $20,000 between March 1, 2025 and December 31, 2025 and $4,000 in January 2026, it is possible that he may not have overcontributed. Why? Because on January 1, 2026, John will earn new RRSP contribution room based on his 2025 income. Even though contributions made in the first 60 days of 2026 can be deducted on his 2025 tax return, the actual contribution occurred in 2026, allowing his new 2026 contribution room to immediately absorb the $4,000 excess contribution.
What counts towards your RRSP contribution room?
In addition to contributions you make to your own personal RRSP, the following are common examples of other contributions that also reduce your available contribution room:
- contributions made to your spouse's RRSP
- contributions made to a group RRSP (including your employer's matching contributions)
- transfer of a severance (retiring allowance) to your personal RRSP (or your spouse's)
What's the penalty for an RRSP overcontribution?
Generally, you have to pay a tax of 1% per month on your unused contributions that exceed your RRSP deduction limit by more than $2,000 - this $2,000 is a cushion allowed by the Income Tax Act to individual taxpayers. As long as you don't overcontribute by more than $2,000, you will not incur any penalties.
Steps to take if you know you've overcontributed
Step 1: Firstly, you should determine whether it's worth withdrawing the excess contributions. For example, if your investments are performing really well, you may decide that the 1% monthly penalty is a small price to pay while you wait for your RRSP contribution room to increase again in the new year.
Step 2: If you decide you want to avoid any further penalties, the next step is to withdraw the excess contributions from your RRSP - this withdrawal will be subject to a withholding tax. However, if you would like to avoid any withholding tax, do not withdraw the funds yet. You will need to first complete Form T3012A Tax Deduction Waiver on the Refund of your Unused RRSP Contributions from your RRSP and mail 4 copies to your CRA tax centre. The CRA will then assess your request and, if approved, it will return 3 completed copies to you, which you will then provide to your financial institution.
Step 3: Determine if you need to pay the 1% monthly penalty by completing the CRA's T1-OVP questionnaire. If the questionnaire determines that you need to complete the T1-OVP form, complete the form and send it to the CRA, alongside payment for the penalty incurred. If you would like to request that the CRA waive the penalty, you will need to complete Form RC4288 Taxpayer Relief Request, and submit it to the CRA alongside your T1-OVP. The CRA may grant your request if it determines you made a reasonable error when you overcontributed and you demonstrate that you have withdrawn or plan to withdraw the excess contributions.
Step 4: File your annual income tax return:
If you submitted Form T3012A and it was approved by the CRA, you will claim the withdrawal of the excess contributions as income per the T4RSP you will have received from your financial institution. You can claim an offsetting deduction for the same amount on line 23200.
If you withdrew excess contributions without submitting Form T3012A, you will need to complete Form T746 Calculating Your Deduction for Refund of Unused RRSP Contributions. This form is necessary in order for you to claim an offsetting deduction on line 23200 for the withdrawal of excess RRSP contributions, which will have to be included in your income for the year in which the withdrawal was made. If filing electronically, keep this form with you for at least 6 years in case the CRA asks to see it.
Need help sorting out your RRSP overcontribution?
If you've discovered excess RRSP contributions or received a notice from the CRA, getting expert help early can save you time, stress, and unnecessary penalties. Reach out today for a quick consultation on how we can get your tax situation corrected and back on track.
