Overcontributed To Your RRSP? Here's How To Fix It To Avoid Tax Problems And Penalties

Introduction: The Tax Risks of Overcontributing to an RRSP

A Registered Retirement Savings Plan ("RRSP") is the first and most powerful tax planning tool for many Canadians planning for retirement. Any income that is earned on investments held in an RRSP (e.g. dividends) is not taxable in the hands of the RRSP holder at the time the income is earned. This allows a taxpayer to reinvest any gains on RRSP investments back into the plan on a tax-free basis and to accelerate growth of that taxpayer's savings faster than with a non-registered plan.

A taxpayer's RRSP is not a means of avoiding tax all-together, merely deferring tax until a time later in life, and typically for retirement. The tax deferral mechanism of the Canadian RRSP is the result of two intersecting rules: