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You may be the most honest taxpayer, with a perfect record of tax compliance, diligently filing each year’s tax return, on time, for decades, and never owing the Canada Revenue Agency (CRA) a cent. But all that counts for bubkes should you make “an honest error” when contributing to your registered retirement savings plan (RRSP), as one taxpayer recently found out. But before delving into the details of this latest case, let’s review the RRSP overcontribution rules and how to expediently remove any overcontribution.

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The penalty for overcontributing to an RRSP is one per cent per month for each month the overcontribution (beyond a $2,000 allowable overage) remains in your account. The fastest, easiest way to correct an overcontribution situation is to simply request a withdrawal of the amount overcontributed from your RRSP issuer. This amount will be subject to withholding tax, which can be recovered later when you file your tax return. You will need to complete CRA’s Form T746, Calculating Your Deduction for Refund of Undeducted RRSP Contributions which will allow you to claim an offsetting deduction to counter the RRSP income inclusion for the withdrawn amount when you file your return.

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Alternatively, to avoid the initial withholding tax and the opportunity cost of not having the use of those funds throughout the year, you can apply to the CRA using Form T3012A, Tax Deduction Waiver on a Refund of Your Undeducted RRSP Contributions. You complete Parts 1 and 2 and mail it to your tax centre. Once the CRA reviews and approves Part 3, it will be returned to you. You then fill in Part 4 and present it to your RRSP issuer in order to withdraw the overcontributed amount without withholding tax.

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This process can take some time during which the monthly penalty tax is accruing. So it may make sense in some cases, such as with large overcontributions, to bypass the T3012A process and simply withdraw the overcontribution, pay the withholding tax, and get that back when you file your return.

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Should you get hit with overcontribution tax, the CRA has the ability to cancel that tax if the excess contribution occurred because of a “reasonable error” as long as “reasonable steps” were taken to eliminate the excess. Taxpayers who are hit with the penalty tax can apply, in writing, to the CRA for a waiver of the tax if they can demonstrate that the above two conditions have been met. Ideally, any application for a waiver should include proof that the excess contributions were withdrawn, along with any other correspondence that shows the excess contributions were due to a reasonable error.

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If the CRA refuses to cancel the tax, then a taxpayer has the right to seek a judicial review of the CRA’s decision in Federal Court, which is what happened in this most recent case. The taxpayer’s troubles began back in April 2021 when he contributed $22,118 to his RRSP which exceeded his 2021 limit of $9,504, as shown in his 2021 Notice of Assessment. About a year later, in April 2022, the taxpayer realized his error and requested a tax-free withdrawal from his RRSP for the excess contribution by completing Form T3012A.