How to Deal with RRSP Excess Contribution

RRSP excess contribution generally occurs when the amount of a taxpayer’s undeducted contributions exceeded his/her deduction limit by more than $2,000. Such excess contribution is taxed @ 1% per month on the unused contribution. To be specific, the excess contribution amount is calculated as the excess of RRSP deduction limit (shown in the lasted notice of assessment or notice reassessment or T1028, Your RRSP/PRPP Information) plus $2,000 over the unused contribution from prior years plus current year’s contribution. However, the $2,000 is available to taxpayers who are 19 or older at any time of the year.

If you find that you have already contributed excess in RRSP, so the question is how to remove money from RRSP and what are the tax consequences?

If you decide to remove money from RRSP, you can withdraw money without or with withholding tax:

• • You can ask CRA to waive withholding tax by using CRA Form T3012A (Tax Deduction Waiver on the Refund of your Unused RRSP, PRPP, or SPP Contributions from your RRSP).
    • Under Part 1, determine a number of unused RRSP contributions that your RRSP issuer can refund you without withholding tax;
    • Under Part 2, specify the RRSP account and designate the amount to be refunded;
    • Send four copies of this form to CRA along with certified copy of proof of over-contribution;
    • If CRA approved the application, it sends three copies back to you duly filled in Part 3;
    • Complete Part 4 and send all three copies to RRSP issuer;
    • After withdrawal, RRSP issuer completes Part 5 and returns two copies to you;
    • Amount of withdrawal will be reported by the issue in form T4RSP; and
    • You need to attach this approved form and T4RSP with your T1 return.
  • Or you can withdraw money by paying withholding tax, which will be reported by the issuer in form T4RSP. Enter withdrawal amount on Line 129 of T1 return and fill out CRA Form T746 (Calculating Your Deduction for Refund of Unused RRSP, PRPP, and SPP Contributions) to claim the same amount as a deduction on Line 232 of T1 return. Submit both T746 and T4RSP to CRA with T1 return.

• • If CRA determines that you had an excess contribution, and your unused RRSP deduction room is a negative amount or your received a gift into your RRSP, you may have to submit CRA Form T1-OVP (Individual Tax Return for RRSP, SPP and PRPP Excess Contributions). Use this form specific to the related year. CRA suggests following the six-step process shown in Chart 4 of CRA guide T4040 to determine if you have to pay tax on the excess contribution.

• • If you have determined that you have to file T1-OVP and pay such 1% tax, in order to avoid late-filing penalty and interest on the balance owing you must file the return and pay tax owing within 90 days from the end of the year in which excess contribution occurred. Late-filing penalty is levied on the balance owing @5% on the 91th day plus 1% each month that your income tax and benefit return is late, up to maximum 12 months. However, CRA may levy higher penalty in case of repeated failure.

• • However you may ask CRA to waive 1% tax per month on excess contribution under taxpayer relief provision by using CRA Form RC4288 (Request for Taxpayer Relief – Cancel or Waive Penalties or Interest), if your excess contribution occurred due to reasonable error and you have taken or are taking reasonable steps to remove excess money. You need to explain, justify and document this clearly.

Tax Tips:

• • If your excess contribution is not huge, it’s better not to apply through T3012A because withholding tax amount you pay now will eventually be adjusted with your tax owing or added to a tax refund when you file your T1 income tax and benefit return for the year.

• File T1-OVP within 90 days from the end of the year in which excess contribution occurred to avoid penalty and interest.

Sources: CRA

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