This is an updated version of a story originally published in 2014.
Why read this?
- Your client has an RRSP
- Your client exceeded her contribution limit
What’s an overcontribution?
If your client has undeducted RRSP contributions exceeding her deduction limit by more than $2,000, she’s overcontributed. CRA does not penalize smaller overcontributions.
What to do
1. Decide whether to withdraw the money
CRA may penalize overcontributions above the $2,000 cushion by 1% of the excess amount per month, but your client isn’t obligated to withdraw the money, says Sandy Kirkwood-Pearce, managing partner of EPR Trillium LLP. “If the investment is doing really well, the consequences of the overpayment penalty […] might be overshadowed,” she says.
2. If your client decides to remove the money, ask CRA to waive withholding tax
a. Use Part 1 of T3012A Tax Deduction Waiver on the Refund of your Unused RRSP, PRPP,
or SPP Contributions from your RRSP to calculate the amount the RRSP administrator can refund without withholding tax.
TIP: Filling out the T3012 may not be worth it if there’s little tax to be withheld, says Karen Slezak of Crowe Soberman LLP. “Withdraw the overcontribution and don’t worry that there will be some withholding tax,” she says. The tax withheld will count toward your client’s annual tax return. To minimize withholding tax, withdraw in batches under $5,000, she adds.
b. Under Part 2, designate which RRSP to withdraw the money from, and a destination account.
c. Attach proof of the overcontributions, such as certified copies of receipts, and send four copies of the form to CRA.
d. If CRA approves, it will return three signed copies of the form to your client.
e. Send the copies to your client’s financial institution.
f. Once the withdrawal is done, the institution will return two copies.
3. Ask CRA to waive the 1% monthly excess contribution tax
a. CRA may approve your client’s request, if:
i. her excess contributions arose due to a reasonable error; and
ii. she’s withdrawing, or has withdrawn, the excess contributions.
b. To make a request, fill out Form RC4288: Request for Taxpayer Relief—Cancel or Waive Penalties or Interest, or write to CRA explaining why the error was made, and why it’s reasonable; and any steps you’ve taken to eliminate the excess contributions.
c. Include copies of supporting documents, such as RRSP statements, demonstrating your client has withdrawn the excess funds, and any correspondence related to the error.
4. Determine If the client needs to submit FORM T1-OVP
If CRA assesses the unused contribution room as a negative amount, your client received gift money in her RRSP, or she contributed money to a partner’s RRSP without claiming a tax deduction, she may have to submit Form T1-OVP: Individual Tax Return for RRSP Excess Contributions.
a. Determine whether your client should submit the form with CRA’s T1-OVP quiz on page 21 of CRA’s RRSP guidance.
b. If necessary, complete T1-OVP. Send CRA the form and outstanding tax.
Payment is due 90 days after the end of the tax year. Starting on day 91, CRA charges compound daily interest on unpaid tax or penalties, a late filing penalty of 5% of the balance owing, and 1% of the balance for every month a return is late.
5. Complete your client’s annual return
If your client paid withholding tax:
a. Fill out Form T746: Calculating Your Deduction for Refund of Unused RRSP Contributions.Enter the amount on Line 11 of the T746 on Line 232 of the return. TIP: Complete a separate T476 for each year of overcontributions.
b. Write the amount in Box 20 of your client’s T4RSP Statement of RRSP Income slip on Line 129 of the return.
c. Submit the T746 and T4RSP with your client’s return. If your client didn’t pay withholding tax and has already filed the T1-OVP, complete her return as usual, says Kirkwood-Pearce.
Sources: Sandy Kirkwood-Pearce, CPA, CGA, LPA, managing partner of EPR Trillium LLP in London, Ont; Karen Slezak, CPA, CA, CFP partner, Tax, at Crowe Soberman LLP in Toronto; CRA.
|CRA withdrawal withholding tax rates|
|Up to $5,000||5%||10%||$5,001 to $15,000||10%||20%|
|$15,001 and up||15%||30%|