Each year, your RRSP contribution room will increase by the lesser of 18% of your “earned income” from the prior taxation year and the annual maximum contribution room for that year (for 2018 the maximum amount is $26,320)
Earned income is made up of both your employment and business income.
Any unused RRSP contribution room will be carried forward to future years, which will increase the amount of contributions that can be made in those years. Your RRSP contribution room is reported to you annually by the Canada Revenue Agency (CRA) on your Notice of Assessment.
The reporting of RRSP contributions on your personal tax return is unique from the reporting of other income and deductions in that it is not based on the calendar year. Contributions made in the first 60 days after the end of the taxation year (typically between January 1 and March 1) are to be reported on your personal return for the previous calendar year.
Over contributions above the $2,000 threshold will result in a penalty tax
It is also common for individuals to contribute to their RRSP in excess of their RRSP contribution room. Individuals are allowed to “over contribute” to their RRSP’s to a maximum of $2,000 without penalty. However, over contributions above the $2,000 threshold will result in a penalty tax, levied by CRA, equal to 1% per month of the amount over contributed.
If you are in a situation where you have over contributed to your RRSP in excess of the $2,000 threshold, there are two options available for you to resolve the issue. The first is to request that your financial institution withdraw the excess contributions from your RRSP. This will result in taxes being withheld and remitted to CRA by the financial institution, and a T4RSP being filed reporting the amount withdrawn. The T4RSP will need to be reported on your personal tax return as income in the year the funds are withdrawn. However, an offsetting deduction can be claimed on your personal tax return using Form T746 Calculating your Deduction for Refund of Unused RRSP Contributions, which will eliminate the income inclusion. This will result in the taxes withheld by your financial institution being refunded on your personal tax return.
The second option is to complete and file Form T3012A Tax Deduction Waiver on the Refund of Your Unused RRSP Contributions. This form needs to be completed by you, your financial institution and then approved by CRA prior to withdrawing your over contributions. Due to processing delays with CRA, it may take a few months for this process to be completed. The benefit of this option is that the financial institution will not have to withhold any taxes on your withdrawal. A T4RSP will be filed by your financial institution which will result in an income inclusion and an offsetting deduction equal to the withdrawn amount to be reported on your personal tax return.
It should be noted that under both options no taxes are paid on the amount withdrawn from your RRSP. The first option results in taxes being withheld when the withdrawal is made, but later refunded on your personal tax return, and the second option results in no taxes being withheld when the withdrawal is made. Given the additional paper work required and the additional time needed to complete the second option, we usually recommend that the first option be taken.
It is very important for individuals to act quickly when they have determined that they have over contributed to their RRSP. In order to ensure you are eligible to claim an offsetting deduction for an RRSP withdrawal, the withdrawal must be made by December 31 of the year following the assessment of your personal tax return. If you over contributed during 2016, your tax return will typically be assessed by April 30, 2017 (assuming you filed on time) and consequently you must withdraw the over contribution by December 31, 2018.
It is very important for individuals to act quickly when they have determined that they have over contributed to their RRSP
If you over contribute during the first 60 days of 2017, you will also need to withdraw the over contribution by December 31, 2018 since the RRSP contributions will be reported on your 2016 personal tax return. Failure to withdraw the over contributed amount within the time period specified above will result in “double tax” since you will need to pay tax on the amount withdrawn without receiving a deduction for the amount you originally contributed.
Finally, individuals who have over contributed during a given year are also required to file Form T1-OVP Individual Tax Return for RRSP Excess Contributions. This form calculates and reports the 1% per month penalty tax based on the amount of over contribution above the $2,000 threshold. The filing deadline for this form is 90 days after the end of the taxation year in which you were over contributed. For example, if you were over contributed during 2016, the filing deadline for 2016 would be March 31, 2017. Form T1-OVP is a complicated form to complete and if you require help with it please let us know.
If you have any questions regarding RRSP contribution room or if you are over contributed and need assistance resolving the issue, please feel free to contact us at 780-466-6204 or email us by clicking here.
Thanks to Darren Buma of KWB CA’s for providing much of this content.