RRSP Over-Contributions and Excess Contributions

To cushion errors in contributions due to fluctuating RRSP room, an over-contribution limit of $2,000 is allowed without penalty, provided you are at least 18 in the preceding taxation year.

Over-contributions could happen, for example, when you instruct your employer to make RRSP contributions on your behalf through a payroll deduction plan, but forget to mention a change in your contribution room due to a tax reassessment.

Many taxpayers, in fact, use this rule for tax planning purposes. They purposely contribute the amount allowed under their contribution room plus $2000. This is a great way to earn even more tax deferred income within your RRSP.

Example > Debbie has RRSP contribution room of $5,000, which she has contributed. But she is allowed to contribute a total of $7,000 without penalty, and decides to do so to earn tax-deferred investment income while the money is in the plan.

Avoid Making "Excess Contributions"
Excess contributions are RRSP contributions which exceed your contribution room plus $2,000. If you make an excess contribution, you need to create contribution room or pay the penalty. That’s important, because without the benefit of the RRSP contribution, leaving excess amounts in an RRSP will result in double taxation and expensive penalties.

Work with your tax and financial advisor. Discuss the following opportunities in managing your RRSP withdrawals with your tax and financial advisor:

• Withdrawal of Undeducted Contributions. Amounts contributed to your RRSP and not yet deducted may be withdrawn tax-free and with no withholding taxes by filing Form T3012A, Tax Deduction Waiver on the Refund of Your Undeducted RRSP Contributions. The amount withdrawn will be included on a T4RSP slip and must be reported as income. You may, however, claim an offsetting deduction on your tax return. Taxpayers who withdraw undeducted contributions without using Form T3012A will have tax withheld but may use Form T746 Calculating Your Deduction for Refund of Unused RRSP Contributions to calculate their allowable deduction on line 232.
   
• Contributions in Excess of Overcontribution Limits. Excess RRSP contributions are subject to a penalty tax of 1% per month. A complicated form called a T1-OVP Individual Tax Return for RRSP Excess Contributions must be completed in that case and the penalty must be paid by March 31 of the year following. Penalties will accrue until the excess contributions are withdrawn from the RRSP. You’ll want to ask a professional to help you with this form.