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- RRSP deduction limit for the year
- Unused RRSP contributions previously reported and available to deduct this year
- Available RRSP contribution room (#1 minus #2)
If you have more unused RRSP contributions than you have RRSP deduction limit, that means you have an RRSP overcontribution.
What happens if you overcontribute to your RRSP?
A taxpayer is allowed to overcontribute to their RRSP by up to $2,000, Ryan. So, if you have a $3,550 overcontribution, that puts you $1,550 over the allowed buffer. This amount is subject to a penalty of 1% per month.
How do I correct an overpayment to my RRSP?
There are a few steps you need to take.
You should withdraw the excess contribution. If you ask your financial institution for an RRSP withdrawal, they will withhold income tax based on the size of the withdrawal. In the case of a withdrawal of less than $5,000, there is 10% withholding tax.
You can request a withdrawal with no tax withheld by completing Form T3012A, Tax Deduction Waiver on the Refund of Your Unused RRSP, PRPP, or SPP Contributions from your RRSP. However, you must send this to the Canada Revenue Agency (CRA), Ryan, and in the meantime, the 1% penalty will continue to accrue.
You can also choose to take the withdrawal and wait until you file your tax return to recover the withholding tax. When you file your tax return, you can complete Form T746 Calculating Your Deduction for Refund of Unused RRSP, PRPP, and SPP Contributions. This will allow you to offset the RRSP withdrawal income by making a deduction against it. No net income will be included on your return and the withholding tax will be refunded.
Calculating your RRSP overcontribution penalty
Another step is to file a T1-OVP Individual Tax Return for RRSP, PRPP and SPP Excess Contributions. This is the filing used to calculate your 1% monthly penalty. It is a confusing form. The CRA says that you should send your “authorization” and documents (like statements, for example) showing the months of your contributions in the year in question. This seems to acknowledge they know the form is confusing.
In your case, Ryan, there is a penalty of 1% x $1,550 per month—or $15.50 per month—from February until the month of the withdrawal. By comparison, the withholding tax on the withdrawal would be 10%—or $155 in total. In my opinion, it may be better to avoid paying $15.50 per month while you wait for the CRA to approve your T746, which could take a few months.
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