Understanding your RRSP contribution limits is crucial for effective tax management. While the tax deductions on your RRSP contributions can be advantageous, it’s essential to be mindful of your contribution limit.
Your RRSP contribution limit is determined by any unused RRSP deduction room from the previous year, the additional annual limit for the current year, and any pension adjustments.
The Canada Revenue Agency calculates your annual RRSP deduction room by assessing the lesser of 18 percent of your prior year’s income and the annual RRSP limit. For 2023, the RRSP limit is $30,780, increasing to $31,560 in 2024. The best place to find your RRSP contribution room for the upcoming year is on your notice of assessment after filing your taxes.
Don’t panic if you over-contributed to your RRSP, especially if you over-contributed by up to $2,000. There is no tax penalty for excess RRSP contributions up to $2,000. However, if you over-contribute to your RRSP by more than $2,000, you may owe the CRA 1 percent per month on your excess contributions over the $2,000 for as long as the excess amount remains in your account.
Excess RRSP contributions do not increase your tax deductions and will not reduce your taxes when you file your income tax and benefit return. If you have an excess contribution penalty, complete and submit the T1-OVP, Individual Tax Return for RRSP, PRPP and SPP Excess Contributions and pay the tax within 90 days after the end of the year you made the excess contributions. Failure to pay the 1 percent tax will result in additional penalties, including 5 percent of your owed balance.
Always keep track of your RRSP contributions. You can verify your annual contributions by requesting a statement from your financial institution.
How to Avoid RRSP Over-contribution Tax Penalties
If you discover you have over-contributed to your RRSP, withdraw the excess contributions to avoid tax penalties.
Helpful Tip: You can avoid the 1 percent tax on your excess RRSP contributions if you withdraw the excess amounts before the end of the month in which you made the contribution. Also, the 1 percent tax penalty may not apply to excess contributions made before February 27, 1995.
Did you know you can request a waiver or cancellation of an RRSP tax penalty if your excess contributions resulted from a reasonable error and have been or will be withdrawn? To apply for a waiver or cancellation, fill out and submit Form RC2503, Request for Waiver or Cancellation of Part X.1 Tax—RRSP, PRPP, and SPP Excess Contribution Tax. Contact the Canada Revenue Agency if you realize you may have over-contributed to your registered retirement savings plan to determine the next steps.
Disclaimer: This article is for general information purposes only, and is not legal, financial, or tax planning advice. Everyone’s situation is unique, and this article cannot apply to every person. The reader should not take any action, or refrain from taking any action, as a result of this article without first obtaining legal or professional advice.
