1%/month on excess above the $2,000 buffer — how to detect, calculate, and fix it
Taxable Over-Contribution (above $2,000 buffer):
Contributing more to your RRSP than your available room allows is called an over-contribution. The Income Tax Act provides a $2,000 lifetime over-contribution buffer — meaning you can exceed your official deduction limit by up to $2,000 at any point without penalty. Beyond that buffer, the CRA charges a 1% per month penalty tax on the excess amount.
The $2,000 buffer is a lifetime cumulative amount, not an annual one. It's designed to protect against small calculation errors. However, it does not generate a tax deduction — it just avoids the penalty. Intentionally using the buffer as extra room is not recommended since you gain no deduction benefit from those dollars.
The penalty is calculated on the highest over-contribution amount in any given month. Using the T1-OVP form, the CRA calculates the cumulative excess RRSP amount at the end of each calendar month. The 1% tax applies to that month's highest excess above zero (after the $2,000 buffer).
| Excess Over $2,000 Buffer | Monthly Penalty | Annual Penalty |
|---|---|---|
| $1,000 | $10/month | $120/year |
| $5,000 | $50/month | $600/year |
| $100 | $100/month | $1,200/year |
| $25,000 | $250/month | $3,000/year |
| $50,000 | $500/month | $6,000/year |
Assume your RRSP deduction limit is $20,000, but you contributed $28,000 this year. Your over-contribution calculation:
1. Using a stale deduction limit: Many Canadians look at their previous year's NOA rather than their most current deduction limit. New room is added each year based on earned income, and spousal contributions, employer contributions, and pension adjustments all affect the calculation.
2. Forgetting about pension adjustments: If you joined a workplace pension plan mid-year or your employer's pension adjustment increased, your RRSP room shrinks. Your T4 won't arrive until February — by which time you may have already over-contributed in January.
3. Spousal RRSP confusion: When you contribute to a spousal RRSP, it uses your deduction limit. Some people mistakenly contribute to both their own and a spousal RRSP without realizing both amounts count against the same limit.
4. RRSP loan early in January: Taking a large RRSP loan on January 2 before checking your actual CRA My Account room is a recipe for over-contribution if your expectations and actual room differ.
5. Employer RRSP group plan contributions: If your employer contributes to your group RRSP, those amounts count against your deduction limit too, even if you didn't choose them.
The most straightforward fix is to withdraw the over-contributed amount from your RRSP. The withdrawal is subject to withholding tax (10% for amounts up to $5,000, 20% for $5,001–$15,000, 30% for over $15,000) and will be included in your taxable income for the year. However, you can apply for relief from the withholding tax by submitting Form T3012A to the CRA, asking them to waive withholding on the withdrawal since it's correcting an over-contribution.
If you have new RRSP room coming in the next calendar year (because you earned income in the current year), you can leave the over-contribution in place. The penalty accrues monthly until the new room is available. Once new room opens, the excess is absorbed and the penalty stops. This approach only makes sense if the expected new room is large and the wait is short (e.g., 1–3 months into the new year).
Under the CRA's fairness provisions, you can apply for a waiver of RRSP penalty tax if the over-contribution resulted from a "reasonable error" and you are taking steps to correct it. File a letter of explanation along with the T1-OVP. The CRA does grant waivers — particularly for first-time offenders who caught the error quickly — but it's not guaranteed.
Both registered accounts impose a 1%/month penalty for over-contributions, but the RRSP has a $2,000 lifetime buffer while the TFSA has zero tolerance above your contribution room. TFSA over-contributions are arguably more common and more punishing for those who don't understand the re-contribution rules. See our TFSA over-contribution guide for full details.
If you over-contributed beyond the $2,000 buffer at any point during the calendar year, you must file a T1-OVP by March 31 of the following year. The form calculates the monthly penalty for each month of the year the excess was present. Key steps:
Park withdrawn excess RRSP funds in KOHO's savings account earning up to 4.5% while you resolve the over-contribution. No fees, no minimums.