The registered retirement savings plan (RRSP) and tax-free savings account (TFSA) are great financial accounts for saving and investing. These accounts are registered with the Canadian government and offer tax benefits for Canadians. The RRSP allows you to defer taxes until retirement, while the TFSA will enable you to grow your investments tax-free.
When planning for your retirement and taxes, it is essential to note that the Registered Retirement Savings Plan (RRSP) and Tax-Free Savings Account (TFSA) have annual and lifetime contribution limits. Here’s what you need to know about the RRSP and TFSA, their contribution limits, and what to do if you over-contribute to either account.
The RRSP Deduction Limit and Penalties
A 2023 report shows that more Canadian tax filers contribute to their registered retirement savings plan. With tax rates increasing, tax-deductible RRSP contributions help Canadians reduce their current taxes, deferring the tax liabilities until retirement, when income levels are expected to be lower.
The RRSP offers tax-deferral benefits within contribution limits, generally called an RRSP deduction limit. The Canadian government determines how much you can contribute to your registered retirement savings plan. The first RRSP deduction limit determinant is your previous year’s qualifying income. In your initial taxation year, your RRSP deduction limit is the lesser of 18% of your prior year’s earned income and
the annual RRSP limit set by the CRA. The 2023 RRSP limit was $30,780. The 2024 RRSP limit is higher at $31,560.
You can carry forward unused RRSP contribution room. In subsequent years, your RRSP deduction limit is based on your carried-forward unused RRSP contribution room, the lesser of 18% of your prior year’s earned income, and the annual RRSP limit and pension adjustments, where applicable.
When calculating your registered retirement savings plan deduction limit, the CRA considers all contributions to pooled registered pension plans (PRPPs) and specified pension plans (SPP).
If you over-contribute to your RRSP by more than $2,000, you will have a monthly tax penalty of 1 percent on the excess contributions. You can avoid the RRSP tax penalty if you withdraw the excess amount before the end of the month that you exceeded your contribution limit.
To pay the tax penalty on an RRSP over-contribution, fill and submit the Individual Tax Return for RRSP, PRPP, and SPP Excess Contributions form to your tax center, including qualifying documents showing contribution and withdrawal transaction details, such as an account statement.
You can request the CRA to cancel or waive the tax penalty on excess RRSP contributions, provided you can prove that the over-contributions were because of a reasonable error and that you are taking the required steps to eliminate the excess contributions. Use the Request for Waiver or Cancellation form to request an RRSP over-contribution tax penalty cancellation or waiver.
If you need information on your RRSP deduction limit, you can get this from your tax notice of assessment or by checking your CRA My Account. You can also contact the CRA to provide your RRSP information.
The TFSA Contribution Limit and Penalties
The Tax-Free Savings Account allows Canadians to save and grow their investments tax-free. The CRA does not tax investment income and capital gains in a TFSA.
Since its inception in 2009, the CRA has provided an annual TFSA dollar limit to restrict how much Canadians can contribute to a tax-free savings account. The TFSA contribution limit may change each year to adjust for inflation. For example, the TFSA annual limit remained at $6,000 from 2019 to 2022 and increased to $6,500 in 2023 and $7,000 in 2024.
Unused TFSA contribution room accumulates, and you can carry it forward. Your total TFSA contribution room is calculated using the current year’s TFSA dollar limit, unused TFSA contribution room, and withdrawals from your account in the prior year.
For example, if you qualified to open a tax-free savings account in 2019 and did not make any contributions as of 2023, your total contribution room will be $37,500 —a cumulative of $30,500 from 2019 to 2023, plus the 2024 $7,000 TFSA limit.
Similar to the registered retirement savings plan, there are tax penalties for making excess TFSA contributions. The TFSA over-contribution tax penalty is 1 % on the highest excess amount for every month the over-contribution remains in the account.
If you need to determine the total over-contribution amounts subject to the 1% tax, use the Schedule A – Excess TFSA Amounts form to calculate your TFSA tax liability. If you over-contribute to your TFSA, the CRA may send an excess TFSA amount letter to inform you or a TFSA return. To avoid accumulating tax charges, withdraw the excess contribution in your tax-free savings account.
If you receive a proposed TFSA return from the CRA, you can confirm your TFSA contribution room from your CRA My Account profile and pay what you owe if you agree with the assessment. If you disagree with the assessment, you can send a review letter to the CRA with supporting documentation and a detailed explanation of any excess contributions. You also need to show proof of correcting any excess TFSA contributions.
The Canada Revenue Agency may also waive or cancel your TFSA tax penalty, depending on your situation.
If you have concerns about TFSA or RRSP over-contribution taxes, Contact DW & Associates Chartered Professional Accountants. We provide general and client-tailored accounting and tax solutions.