CRA wins in court over RRSP overcontribution

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Nobody likes paying tax on investment income. With marginal tax charges as excessive as 54.8 per cent on curiosity earnings for residents of Newfoundland and Labrador, and capital gains tax rates now over 35 per cent in half the provinces for people with greater than $250,000 of annual positive factors, maximizing registered plan contributions has by no means been extra vital. 

However whether or not you determine to contribute to a tax-free financial savings account (TFSA), a registered retirement financial savings plan (RRSP), a registered schooling financial savings plan, or the brand new first house financial savings account, it’s important to remain on high of your contribution limits, lest you face penalty tax for overcontributions. 

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Unintentionally overcontributing to both a TFSA or RRSP appears to be a recurring drawback for some taxpayers, evidenced by the continual circulate of newly reported instances, during which taxpayers go to courtroom making an attempt to wiggle out of the punitive overcontribution tax they’ve been assessed.

Take the latest case, determined in late July, which concerned a taxpayer who overcontributed to her RRSP in 2020 and 2021. She was taxed on the surplus contributions on the charge of 1 per cent per 30 days. 

Beneath the Earnings Tax Act, the Canada Revenue Agency (CRA) has the discretion to waive this overcontribution tax if the surplus contribution occurred due to a “cheap error” so long as “cheap steps” had been taken to eradicate the surplus. If the CRA refuses to waive the tax, then taxpayers have the appropriate to hunt a judicial assessment of the CRA’s resolution in Federal Court docket, which is how the present case got here to trial. 

The taxpayer’s troubles started in 2020 when she overcontributed $41,291 to her RRSP. This drawback was not addressed, and the overcontributions amassed in subsequent tax years, such that the cumulative overcontribution quantities for the 2021 and 2022 tax years had been $50,891 and $51,671, respectively. 

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In Could 2022, the CRA despatched the taxpayer a letter informing her that she had overcontributed to her RRSPs and that penalty tax utilized to the overcontributed quantities. The taxpayer wrote to the CRA in October 2022 requesting that the penalty tax be cancelled. She maintained that her overcontribution was “an trustworthy mistake,” that she didn’t profit from the overcontribution as a result of the worth of the investments in her RRSP had dropped leading to no achieve from the overcontributions and that “she was taking steps to take away the surplus contributions to rectify the state of affairs.” 

In January 2023, the CRA despatched the taxpayer a letter acknowledging the taxpayer’s request, however noting that the taxpayer did not report her RRSP contributions when submitting her returns for the 2018 and 2020 taxation years. The results of this was that when assessing her tax returns for the 2018 by way of 2021 years, the CRA was unable to present correct info to the taxpayer (presumably on her Notices of Evaluation) relating to her appropriate unused RRSP contribution room every year. 

The letter went on to state that “underneath the self-assessment tax system, it’s your accountability to reconcile the documentation obtained from us along with your private paperwork and to tell us of any discrepancies.… Not understanding the rules governing RRSPs, or not understanding or following up on the knowledge we offer you in your Notices of Evaluation, usually are not causes typically thought-about for cancelling (the overcontribution) tax.”  

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The CRA, subsequently, might “not justify” cancelling the assessed penalty tax as a result of the taxpayer was unable to specify “what prevented her from making the mandatory verifications earlier than investing in her RRSPs.” 

The taxpayer subsequently requested a second-level assessment, which was additionally denied. In that denial letter, the CRA agent was sympathetic, writing that “although I don’t decrease the influence of the COVID-19 pandemic and inflation in your residing bills together with elevated household tasks, you didn’t specify what prevented you from making the mandatory verifications earlier than investing in your RRSPs. Ignorance of the legislation can’t be thought-about for a request to cancel the tax on extra RRSP contributions.” 

The taxpayer thus appealed to Federal Court docket, requesting a judicial assessment of the CRA’s second-level resolution to disclaim her reduction. As in prior such instances, the choose’s position is to find out whether or not the CRA’s resolution was “cheap.” 

The choose famous that the taxpayer couldn’t present any proof of steps she had taken to confirm her RRSP contribution limits, and, in courtroom, she confirmed that she didn’t take any such steps, acknowledging that “she didn’t have an affordable rationalization for the RRSP overcontribution.” 

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Because of this, the choose discovered that the CRA officer’s conclusion — that the taxpayer had not established that the overcontribution to her RRSP was a results of an affordable error, and subsequently, she was not entitled to reduction — was cheap. Because the choose wrote, “The explanations supplied by the (CRA) are clear and exhibit a rational chain of study and a full consideration of the info and knowledge supplied to them.” 

The choose additionally awarded the CRA $1,000 in prices, as she noticed “no purpose to depart from the overall precept that the profitable occasion ought to recuperate their prices.”

 Jamie Golombek, FCPA, FCA, CFP, CLU, TEP, is the managing director, Tax & Property Planning with CIBC Personal Wealth in Toronto. Jamie.Golombek@cibc.com.

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