Your RRSP unused contributions also known as overcontributions
Your Notice of Assessment (NOA) that you receive from the Canada Revenue Agency (CRA) after you file your tax return every year contains some important information. In particular, it will tell you how much money you can contribute to your RRSP in the next year. This is referred to as the deduction limit on the NOA. The RRSP information box takes up less than 1/3 of one of the pages of the Notice of Assessment and may be on the back side of a page, so it is easy to miss. It is also difficult to read.
The number to refer to for the amount of contribution room available for an RRSP deposit is the amount beside the bold (A) within the main box called the deduction limit. However, there is also another number underneath the main box beside the bold (B) which is your unused RRSP contributions. What this means is that you have overcontributed to your RRSP. In other words, you have contributed more than your deduction limit, sometime in the past. When this occurs, you didn’t get the benefit of the tax deduction on that excess amount, so it will sit there until you can use it.
Many people mistakenly think that the amount next to (B) is the amount that they can contribute, so the overcontribution amount can double up very easily. This is because of the word ‘Unused’. The CRA should change the word to ‘Excess’ to alleviate the confusion.
The problem comes in trying to use up that overcontribution amount once you realize it is there. If you have an overcontribution, you need to bring that to the attention of your bank as soon as possible. The bank may suggest transferring the funds to your spouse’s plan that may have some contribution room. The bank would also need to fill out Form T3012A to allow you to withdraw the amounts without paying any tax on the withdrawal. Otherwise you could withdraw the over contribution amount and pay tax on that withdrawal.
When you file your tax return after correcting the overcontribution amount, it may be reassessed and disallowed or partially disallowed when it is reviewed by the RSP review division. The withdrawal of the overcontribution amount is also tied to the deduction limit that you have available, so even though you withdrew the entire amount from your RRSP, you may not be able to offset that against the overcontribution amount if it is more than your deduction limit.
If you have overcontributed by more than $2,000 you could be subject to tax on the overcontributed amount of 1% per month on any amount more than $2,000 above your deduction limit.
It is very important to correct the overcontribution while you still have earned income that can be allocated to the deduction limit so that when you withdraw the overcontribution you will be able to receive the tax benefit, otherwise that overcontribution will stay there indefinitely and you will never be able to realize the tax benefit of those contributions.