Over-contributed to your RRSP or TFSA? Here’s what to do

The penalty for RRSP over-contributions is 1 per cent per month for each month you are over the limit (Getty Images/urbazon)

People might think they have all their contributions in line when it comes time to file their taxes. But it’s not unusual to discover that you have overcontributed to your RRSP or TFSA. 

“More often than not, it’s an accident,” says CPA Denise Wright-Ianni. “It can happen when people are contributing monthly or have some sort of automatic contribution set-up but aren’t keeping track of those amounts over time.”

Here are some basics you need to know:

FOR RRSP OVER-CONTRIBUTIONS 

The penalty for RRSP over-contributions is 1 per cent per month for each month you are over the limit. CRA does allow a $2,000 grace amount for over-contributions. However, that amount is not tax deductible. 

The only way to remedy an RRSP contribution overpayment immediately is to withdraw the amount. However, that amount will be subject to taxation. “The good news is that you will be able to claim an offsetting deduction if certain conditions are met,” says Bruce Ball, vice-president, taxation, at CPA Canada.  “The key condition typically is that you make sure the over-contribution is withdrawn in the year it was made, the year in which you receive an assessment for the year of contribution, or in the year following each of these years. Also, if you meet the conditions for the offsetting deduction, you can have withholding tax waived on the withdrawal by filing form T3012A.” If you don’t file the T3012A, the tax withheld at source can be claimed as tax paid on your tax return.

If the over-contribution is later in the year and you are sure you will have enough contribution room to cover the amount next January, it may make more sense to keep the overpayment and pay the penalty until contribution room opens up again.

To pay the penalty you must file a T1-OVP tax return to calculate the amount within 90 days after the calendar year.

“It is important to watch RRSP contributions and to make sure action is taken on over-contributions,” says Ball. “If an over-contribution is not withdrawn on a timely basis, penalties may arise and you will be taxed eventually on the over-contribution as an RRSP withdrawal, for which no deduction was allowed.”

FOR TFSA OVER-CONTRIBUTIONS

TFSA over-contributions can often happen when people are managing multiple accounts, Wright-Ianni explains. “Many people have TFSAs in different establishments. It’s easy to lose track after a few years,” she says.

Playing catch up on contributions can also cause problems, as the contribution limits have varied depending on the year, she adds. “It can get really confusing, because the limits have changed so often.”

Another common mistake is replacing a withdrawal from a TFSA within the same calendar year, if you have already reached the contribution limit. In those cases, you must wait until the following year when the new contribution allowance opens in January. Although not as common now, many Canadians used TFSAs in the same way as a savings account. With repeated contributions and withdrawals, this can create an over-contribution as the TFSA limit is not increased by amounts withdrawn until the following year.

An additional cause of TFSA over-contributions can arise where you transfer a balance to another institution. If this is not done as a direct transfer, problems may occur. “If you simply withdraw the money from one plan and contribute it to another, the contribution to the new plan counts as a contribution this year while the withdrawal amount isn’t added to your TFSA room until the following year,” says Ball. 

TFSA over-contributions penalties are also 1 per cent a month over the term of the over-contribution until year end based on the highest excess amount for the month. Withdrawing the amount will fix the situation. Unlike RRSPs, there is no $2,000 grace amount and penalties for over-contributions must be filed by June 30.

CRA’s TFSA Guide (RC4466) is a helpful and easy-to-follow resource. CRA also provides a RC343 worksheet for keeping track of all your contributions and withdrawals. 

A FINAL LOOK

To avoid any problems the best place to start is reviewing your notice of assessment you receive each year, says Wright-Ianni. “It clearly states how much contribution room you have in your TFSA and your RRSP for the current year,” she adds. “You should always compare what the CRA has with your own records and go from there.”

In addition to your assessment notice, a contribution history is available online for both RRSPs and TFSAs through CRA’s My Account Service. 

If you have made an over-contribution and the CRA has assessed the penalty, one final thing to consider is an adjustment under the taxpayer relief provisions. 

RRSP OR TFSA?

These basics will help you understand which retirement savings vehicle is right for you. You can also refer to CPA Canada’s The Procrastinator’s Guide to Retirement or organize a financial literacy session, Planning for retirement, for your community to learn more.