Too Much RRSP? Excess Contribution Penalty A Headache
The federal government has just released two new forms to help advisors and their clients calculate excess RRSP contributions and their 1% per month penalties. To view the new forms, link to them here - T1-OVP and T1-OVP-S.
RRSP contributions in excess of the $2,000 (or those in excess of contribution room for taxpayers under 19) are subject to a penalty of 1% per month on the excess. A complicated form called a T1-OVP must be completed in that case and the penalty must be paid by March 31 of the year following the cumulative excesses. Penalties will accrue until the excess contributions are withdrawn from the RRSP.
It's important to remove those contributions, because you'll want to avoid double taxation upon later withdrawal (that is, you want to make sure you got a tax deduction for any contributions that will later be taxable). Paying a professional to reverse the excess can be expensive too, because the forms are a time-consuming, complicated headache.
Here's what you need to know when you contribute too much to your RRSP:
1. When the Contribution occurs<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com🏢office" />
2. The amount over the allowed overcontribution limit of $2000 (Note if under 18 no overcontribution limit is allowed)
3. The amount of excess contribution (amount over $2000) x # months x 1% per month = penalty
4. When to calculate penalty (payment is due March 31)
5. How far.back you need to go (taking into account new RRSP room every January) . .
6. How to withdraw overcontributions
7. How to withdraw excess contributions
Bottom line: tax and financial advisors get your RRSP contributions rightóover- and excess-contributions are expensive.
For all the information on this subject including access to all RRSP contribution, withdrawal and excess contribution forms, subscribe to The Knowledge Bureau's online tax reference for taxpayers, financial advisors and their clients: EverGreen Explanatory Notes.
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