What Happens When You Contribute Excess Amounts to your RRSP
Being able to contribute to an RRSP is one of the great tax saving strategies available to all Individual Canadian Taxpayers who generate “earned income” which is essentially income earned from employment (salaries) or self employment. It is extremely important to know that there are unfortunately limits to how much you can contribute and Revenue Canada (CRA) actually imposes penalties on overcontributions to your RRSP.
Note that passive income like dividends and interest is ineligible and does not factor into the calculation for how much you can contribute to an RRSP.
Understanding RRSP Contribution Limits (and Why Overcontributions Can Be Costly)
Your RRSP contribution room is based on your earned income from the previous calendar year, multiplied by 18%, up to an annual maximum set by the CRA. For 2024, the maximum contribution limit is $31,560 (based on 2023 income).
For example, if you earned $60,000 in 2023 from employment or self-employment, your contribution room for 2024 would be $10,800 (60,000 × 18%). This amount will appear on your Notice of Assessment and in your CRA My Account.
If you don’t contribute the full amount, the unused room is carried forward indefinitely, allowing you to contribute more in future years. This is especially helpful if you’re early in your career and not yet in a high tax bracket since contributions made later, when your income is higher, will result in greater tax savings.
So Why Is There a Problem With Overcontributions?
RRSPs offer a valuable tax deferral. This means that you get a deduction today, and your contributions grow tax-free until withdrawal. But this benefit makes excess contributions problematic. Funds that exceed your limit continue to grow tax-free when they shouldn’t, which is why the CRA charges penalties.
The CRA allows a $2,000 lifetime cushion for overcontributions. Beyond that, any excess is subject to a 1% penalty per month until it's withdrawn or absorbed by new contribution room in a future year.
Your available RRSP room is reported on your latest Notice of Assessment and is also viewable online via CRA My Account. It is essential to know this amount before making contributions for the year.
What If You Overcontribute?
If you exceed your RRSP limit (beyond the $2,000 buffer), you must file Form T1-OVP, Individual Tax Return for RRSP Excess Contributions to calculate the penalty tax owing. If you fail to file this form and pay the required tax, the CRA may charge additional penalties.
For example, if you owe tax and don’t file the T1-OVP within 90 days after year-end, the CRA may charge a late-filing penalty:
5% of the balance owing, plus
1% for each month the return is late (to a maximum of 12 months).
Conclusion
Many people assume that overcontributions can simply be carried forward without consequence, but the onus is on the taxpayer to know and follow the rules. Before making an RRSP contribution, always confirm your limit:
Check your CRA Notice of Assessment
Log in to CRA My Account
Or call the CRA individual enquiries line
Staying informed helps you take full advantage of RRSP tax savings without triggering unnecessary penalties.
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