RRSP Over-Contribution Penalty: T1-OVP Tax and How to Fix It

RRSP over-contribution penalty: the rule in short

You owe a tax of 1% a month on the part of your unused RRSP contributions that is more than your RRSP deduction limit plus $2,000. The excess is measured at the end of each month, and the tax runs until a withdrawal or new deduction room removes it (Income Tax Act, section 204.1; CRA: going over your limit).

If tax applies, you file a separate return, the T1-OVP or T1-OVP-S, and pay within 90 days after December 31. It is not part of your regular income tax return.

An over-contribution noticed within the year has the fewest moving parts: it ends when a withdrawal or next January's room removes it, and one return covers any taxable months. A case needs more care when:

• the excess has sat in the plan for several years and no T1-OVP was filed;
• a pension buyback (past service pension adjustment) or a workplace pension cut your room;
• mandatory group RRSP contributions are involved;
• you want the CRA to waive the tax, which needs evidence and is discretionary.

Gather your notices of assessment (the RRSP deduction limit statement), statements showing the month of every contribution and withdrawal, and your T4 and any T10 slips. The CRA says RRSP receipts and T4RSP slips do not show the months it needs (Form T1-OVP).

RRSP contribution limit vs deduction limit: how did I over-contribute if room carries forward?

Your RRSP deduction limit already includes all unused room carried forward. The trap is the other side: contributions you made but never deducted also carry forward, as "unused contributions", and they keep using that limit until you deduct them (CRA: unused contributions).

Your notice of assessment shows both figures on its RRSP deduction limit statement. Subtract the unused contributions from the deduction limit to see what you can still put in without creating an excess.

The table summarizes the notes on Form T1-OVP. Withdrawals you include in income reduce the unused contributions in the month you receive them.

A common cause is working out room yourself as a share of income. The CRA's limit subtracts your pension adjustment from a workplace pension and any net past service pension adjustment (CRA: how contributions affect your limit). The CRA's figure is the one on your latest notice of assessment.

How far over my RRSP limit can I go before the tax starts?

The first $2,000 of unused contributions above your deduction limit is not taxed. You get this buffer only if you were 18 or older at any time in the previous year; anyone younger is taxed on every dollar over the limit (Income Tax Act, section 204.2(1.1); CRA: going over your limit).

The buffer is a standing allowance in the formula, not extra deduction room. The buffer is the same $2,000 in total, however many years the amount stays in the plan. Money inside the buffer cannot be deducted until a later year's deduction limit makes room for it.

How to calculate the RRSP over-contribution tax each month

For each month, take your unused contributions at month-end and subtract your deduction limit and the buffer. Any positive result is that month's excess; add the twelve monthly figures and multiply by 1% (Form T1-OVP-S).

1. Start with unused contributions carried in from the end of last year, less the part of last year's deduction that came from them (not contributions made in this year's first 60 days, or transfers such as a retiring allowance).
2. Add contributions made in the month.
3. Subtract withdrawals included in income that month.
4. Subtract the total of this year's deduction limit (leaving out this year's net past service pension adjustment), any pension adjustment reversal (box 2 of a T10 slip, room given back after you leave a workplace pension), and the buffer if you qualify.
5. A positive result is the month's excess.

Because the test is at month-end, money withdrawn before the end of the month it went in is not taxed. A withdrawal in a later month stops the tax from that month's end onward. If your documents do not show months, the CRA may treat contributions from the first 60 days of the year as January contributions, the rest as March, and all withdrawals as December, which can raise the tax (Form T1-OVP).

Did my group RRSP match, pension adjustment or pension buyback push me over?

Any of the three can. Employer deposits into a group RRSP are taxed to you as employment income (code 40 on your T4) and are remitted for you, so they use your deduction limit like your own deposits (CRA: employer contributions; Form T1-OVP).

The CRA's checklist says you owe no T1-OVP if all your unused contributions at year-end were mandatory group RRSP contributions made that year (CRA: do you have to complete a T1-OVP). Voluntary top-ups in a group plan get no such relief (Guide T4040).

The T1-OVP measures a year's excess using that year's deduction limit without that year's net past service pension adjustment, so a buyback can create an excess in the following year rather than the year it is certified. The CRA tells anyone with a net past service pension adjustment or negative unused room to complete the return to check. Pension buybacks interact with withdrawals and room in ways that are fact-specific; treat them as a case for review.

Do I have to file a T1-OVP, which version, and when is it due?

You file only if some month's excess is taxable. When it is, use the T1-OVP-S unless you made mandatory contributions to a group RRSP or a pooled registered pension plan in the year or the year before; then use the full T1-OVP. File one return for each year with tax, and send it with payment to your tax centre within 90 days after December 31, which is March 31 (March 30 in a leap year), earlier than your regular return (Income Tax Act, section 204.3; Guide T4040). The CRA's checklist also says no return is needed if all your unused contributions date from before February 27, 1995 and meet its conditions (CRA: do you have to complete a T1-OVP).

Attach statements showing the month and amount of every contribution and withdrawal. Unpaid tax and penalties accrue interest, compounded daily, from the 91st day after year-end (CRA: going over your limit).

What happens if I file or pay the T1-OVP late?

A late T1-OVP costs 5% of the balance owing plus 1% for each complete month late, up to 12 months, on top of interest (CRA: going over your limit). If the CRA sent you a demand to file and you owed a T1-OVP late-filing penalty for any of the three previous years, it is 10% plus 2% for each complete month, up to 20 months (Income Tax Act, section 162(2), applied by section 204.3(2)).

If T1-OVPs were never filed for past years and the CRA has not started a review, the CRA points to its Voluntary Disclosures Program (Guide T4040). See unreported income and voluntary disclosure. For relief from penalties and interest in general, see CRA penalties, interest and relief.

How do I take the excess out without tax withheld, and deduct it?

File Form T3012A with the CRA. Once the CRA approves it, your RRSP issuer can refund the unused contributions without withholding tax. You report the refund as income on line 12900 and claim an offsetting deduction on line 23200. The form cannot be used for contributions already moved to a RRIF (Form T3012A; CRA: withdrawing unused contributions).

The deduction is allowed only if both of these hold, and the refund is not a direct transfer from a pension plan or a withdrawal designated to get a pension buyback certified:

• Timing: you receive the refund in the year you contributed, the next year, or the year the CRA sends a notice of assessment or reassessment for the contribution year, or the year after.
• Intent: it is reasonable to consider that you expected to deduct the contributions in full for the year made or the year before, or that you did not contribute planning to withdraw and deduct them.

If you withdraw without Form T3012A, the issuer must withhold tax. You then claim that withheld tax on line 43700 and use Form T746 to work out the line 23200 deduction under the same conditions (Form T746; Income Tax Act, section 146(8.2)). The monthly tax keeps running until the money actually leaves the plan, so the time taken to approve a T3012A matters. A withdrawal outside the time window is still taxable income, with no offsetting deduction. If the excess came from a pension plan lump sum transferred above the limit, neither form applies: deduct what you withdraw on Form T1043 (Form T746; Income Tax Act, section 147.3(13.1)).

Will next year's new RRSP room absorb the excess instead of a withdrawal?

Yes, if it is large enough. Each January the new year's deduction limit applies, even before your notice of assessment shows it. If your unused contributions then fit within the new limit plus the buffer, the tax stops from that month, and you deduct the contributions on later returns (Income Tax Act, section 204.2(1.1)).

You still owe the tax for every taxable month before that, and you still file the T1-OVP for that year. Waiting also depends on next year's room: a pension adjustment or low earned income can leave less room than you expect. Check the RRSP deduction limit on your notice of assessment, or your CRA account, before relying on it.

Do contributions designated as Home Buyers' Plan repayments count toward the excess?

No. Contributions you designate on Schedule 7 as Home Buyers' Plan or Lifelong Learning Plan repayments are left out of the T1-OVP calculation, and they cannot be deducted either (Form T1-OVP; Guide T4040).

The designation must actually be made on your return. A contribution you meant as a repayment but did not designate is an ordinary contribution and can create an excess. A shortfall in your required repayment that you include in income counts as a withdrawal in the T1-OVP calculation. Taking the excess out as a Home Buyers' Plan or Lifelong Learning Plan withdrawal does not count, because it is not included in income: the CRA warns the tax may still apply (CRA: going over your limit). For a balance owed when you move to the US, see Home Buyers' Plan balance when you leave Canada.

Can the CRA waive the tax if it was an honest mistake?

It can, but only if you show both that the excess arose from a reasonable error and that you are taking, or have taken, reasonable steps to remove it. The decision is at the CRA's discretion (Income Tax Act, section 204.1(4)).

Ask on Form RC2503, explaining why the excess happened, why the error was reasonable, and what you did to remove it, with dates. Attach documents showing the exact month of every contribution and withdrawal; receipts and T4RSP slips are not accepted for this. If the CRA refuses, the same form asks for a second review (Form RC2503).

A waiver request asks for discretion. If you think the CRA's calculation itself is wrong, for example it used its default months, the objection rules apply to this tax as to income tax, and you have at least 90 days from the date of the notice to object (Income Tax Act, section 204.3(2), which applies section 165).

My notice of assessment still shows unused RRSP contributions: how do I clean it up?

First decide whether the figure is right. The notice shows "unused RRSP contributions previously reported and available to deduct"; if the amount is correct, you deduct it on line 20800 in a later year, up to that year's deduction limit (CRA: unused contributions).

A withdrawal you included in income stops the monthly tax even if you could not deduct it. Whether that same contribution can still be deducted later depends on the facts.

Example

Illustrative figures in Canadian dollars. Each person was 18 or older in the previous year.

A misread notice

Deduction limit C$12,000; C$20,000 contributed in March; nothing else unused. The excess over C$12,000 plus the C$2,000 buffer is C$6,000 at the end of March through December: C$60 a month, C$600 for the year. The person deducts C$12,000 on that year's return, which does not lower that year's monthly tax, files a T1-OVP-S, and pays within 90 days after December 31. Had the C$6,000 excess been withdrawn in June instead, only the March, April and May month-ends would be taxed: C$180.

Next January, C$9,000 of new room arrives. The remaining C$8,000 of unused contributions now fits within the limit, so the tax stops without a withdrawal and the C$8,000 is deducted on the next return.

A small slip

Contributions end up C$1,500 over the deduction limit. That is inside the C$2,000 buffer, so there is no tax and no T1-OVP. The C$1,500 is reported as unused on Schedule 7 and deducted once the next year's limit makes room.

A newcomer in a group plan

In the first year in Canada, the person has no RRSP deduction limit. C$6,000 goes into a mandatory group RRSP, half of it the employer's match. Of the C$6,000, C$2,000 is inside the buffer and C$4,000 is covered by the group-plan relief, so there is no tax that year. In the next year the relief covers only that year's new mandatory contributions, so the carried C$6,000 can become taxable to the extent it is more than the new room (from the first year's Canadian earnings) plus the C$2,000 buffer, unless a withdrawal covers it first. A full T1-OVP is the return to check in both years.

Different for you?

• You also over-contributed to a TFSA: a different tax and return apply; see TFSA over-contributions.
• You own a corporation and set your own salary: see salary for RRSP room and CPP.
• You arrived in Canada this year: for first-year room and reporting, see your first year as a Canadian tax resident.
• The excess sat for several years, or T1-OVPs were never filed: see voluntary disclosure and get individual tax help.
• A pension buyback, workplace pension or mandatory group plan is involved: the room and the return are fact-specific; get individual tax help.
• You left Canada with an RRSP: see RRSP and TFSA after leaving Canada.
• You are a US citizen with an RRSP: see Canadian registered accounts on a US return.