Registered Retirement Savings Plans (RSPs) are a popular way for Canadians to save for retirement. Contributions to RSPs are tax-deductible, which means that they can help reduce your income tax bill. However, there are limits to how much you can contribute each year, and if you go over these limits, you could face penalties from the Canada Revenue Agency (CRA). In this post, we’ll discuss what to do if you overcontribute to your RSP and the steps required to fix the problem.
Understand the RSP Contribution Limits
Before you start contributing to your RSP, it’s essential to understand the contribution limits. In 2023, the maximum amount you can contribute to your RSP is 18% of your earned income from the previous year, up to a maximum of $29,210. However, you may also have unused contribution room from previous years that you can use. The CRA will send you a notice of assessment each year, which will show you your contribution limit.
What Happens When You Overcontribute to Your RSP?
If you contribute more than your allowable contribution limit, the CRA will charge you a penalty of 1% per month on the excess amount until it’s withdrawn. The penalty will continue until the excess amount is removed from your RSP. You will also be required to pay tax on the excess amount, and any investment income it generates will be taxed at the highest marginal tax rate.
How to Fix an Overcontribution to Your RSP?
If you discover that you’ve overcontributed to your RSP, you should take steps to fix the problem as soon as possible. Here are the steps required to fix an overcontribution:
- Determine the Amount of Overcontribution: The first step is to determine how much you’ve overcontributed. You can find this information on your most recent notice of assessment from the CRA or when you file your tax return, it may list the amount of the overcontribution.
- Withdraw the Excess Amount: Once you’ve determined the excess amount, you must withdraw it from your RSP. You can do this by contacting your financial institution and asking them to withdraw the excess amount. Keep in mind that you will be required to pay tax on the excess amount, and any investment income it generates will be taxed at the highest marginal tax rate.
- File the Required Forms: You will need to file Form T1-OVP, Individual Tax Return for RRSP Excess Contributions, with your income tax return for the year in which the overcontribution occurred. This form will calculate the amount of tax you owe on the excess amount.
- Wait for the Notice of Assessment: The CRA will send you a notice of assessment once they have processed your return. This notice will show you the amount of tax you owe on the excess amount.
Avoiding Withholding Taxes on RSP Withdrawals by Filing the T3012A Form
When you withdraw the excess amount from your RSP, you’ll also realize your financial institution is required to withhold a portion for taxes. To avoid this, you’ll need to file another form with CRA called the T3012A. Although the benefit of filing the T3012A is your financial institution will not withhold an amount of your withdrawal. The downside is the time it will take CRA to notify you of approval for this form which your financial institution will need before they can waive the withholding amount. This time will lengthen the time of your overcontribution and generally increase the fines you’ll pay.
Cancelling or Waiving Tax on RSP Excess Contributions with the CRA
The Canada Revenue Agency (CRA) may consider cancelling or waiving the tax on excess contributions to an RSP. But only if the excess contributions arose due to a reasonable error, and reasonable steps have been taken to eliminate them. To request a waiver or cancellation, one must fill out an RC2503 form. With this form, provide information about the error, proof of excess contribution removal, and any other relevant correspondence.