Registered Retirement Savings Plans (RRSPs) can be a great
retirement planning tool for many Canadians, but they may also be
costly for the unwary. If you have over-contributed to your RRSP,
certain problems can arise.
The Penalty
A penalty tax is applicable, even though the over-contribution
has never been deducted from taxable income. This tax is due to the
fact that the income earned on your over-contribution is earned
within a registered plan; therefore, the income accumulates in your
RRSP tax-free until withdrawn. The penalty tax is equal to 1% per
month of the over-contributed amount. This tax is not calculated on
your annual personal income tax return, but on form T1-OVP, which
is due by March 31 of the following calendar year. The form is
applicable the moment you have over-contributed regardless of
future corrections to the amount. It is important to note that the
liability to pay this tax can never be statute-barred if a T1-OVP
is not filed.
