Blessed by the Potato

Inspired by recent real-life events¹, let’s talk about what happens if you accidentally over-contribute to your RRSP.

Unlike for the TFSA, the government does track your RRSP contributions closely and will update you each year. Good thing too — RRSP contribution room accumulation is a good deal more complicated than asking how old you are and looking at your own activity, like with the TFSA’s across-the-board $5500 per year. Simply check the bottom of your notice of assessment for your contribution room for the year.

Your financial services providers will send you receipts to summarize your RRSP contributions at the end of the year, which makes it easy to report these on your taxes (which you do have to do).

There are penalties for over-contributing, but you get $2000 of leeway, so if you over-contribute by just a little bit you can carry it forward to use in a future year, without a penalty. If you over-contribute by more than $2000 there will be penalties, and you’ll want to pull it back out as soon as possible — though on that last point most people don’t find out about their over-contribution mistakes until the next tax year (at tax time in the spring), by which time they’ve earned enough new room to absorb them, so withdrawing to stop accruing penalties is often not necessary in practice².

When you do have an over-contribution, you can only claim a deduction up to your available room, but you have to report all of the contributions — the difference will get carried forward. Do not edit the amounts on your RRSP contribution receipts to keep your reported contribution below your deduction limit.

In most (all?) tax software, if you enter contributions above your deduction limit, the excess will automatically be carried forward, so you may not need the previous instructions for dealing with Schedule 7, but be sure to have a look at your Schedule 7 to be sure.

If you’ve over-contributed beyond the leeway room, then you’ll be facing a 1% tax per month — and this form (T1-OVP) is where you calculate and report it.

1. The sad thing is, there’s going to be more than one RL friend saying “hey, this one’s about me!”
2. Be sure to check your own situation and take care of over-contributions as soon as possible if you’re over the $2000 allowance.