Federal Court upholds CRA decision on RRSP overcontribution penalties; taxpayer fails to prove error
Investment income in Canada can be heavily taxed, as reported by Financial Post.
Marginal rates can reach as high as 54.8 percent on interest income for residents of Newfoundland and Labrador.
Additionally, capital gains tax rates exceed 35 percent in half of the provinces for individuals with annual gains over $250,000. This makes maximizing registered plan contributions increasingly important.
Whether contributing to a tax-free savings account (TFSA), registered retirement savings plan (RRSP), registered education savings plan, or the new first home savings account, it is crucial to monitor contribution limits closely to avoid penalty taxes for overcontributions.
Overcontributing to a TFSA or RRSP remains a recurring issue for some taxpayers, as evidenced by continuous cases of individuals facing punitive overcontribution taxes and seeking relief through the courts.
A recent case decided in late July involved a taxpayer who overcontributed to her RRSP in 2020 and 2021, resulting in a penalty tax of one percent per month on the excess contributions.
The Income Tax Act grants the Canada Revenue Agency (CRA) the discretion to waive this tax if the overcontribution was due to a “reasonable error” and if “reasonable steps” were taken to eliminate the excess.
If the CRA refuses to waive the tax, taxpayers can seek a judicial review of the CRA’s decision in Federal Court, which is how the current case came to trial.
The taxpayer’s difficulties began in 2020 when she overcontributed $41,291 to her RRSP. This issue was not addressed, and the overcontributions continued, with cumulative amounts reaching $50,891 in 2021 and $51,671 in 2022.
In May 2022, the CRA notified the taxpayer of the overcontributions and the penalty tax that applied.
The taxpayer responded in October 2022, requesting that the penalty tax be cancelled, arguing that her overcontribution was “an honest mistake” and that she did not benefit from it due to a decline in the value of her RRSP investments.
She also stated that she was taking steps to remove the excess contributions.
However, in January 2023, the CRA responded that the taxpayer had failed to report her RRSP contributions in her 2018 and 2020 tax returns.
This omission meant the CRA could not provide accurate information regarding her unused RRSP contribution room in her Notices of Assessment for the years 2018 through 2021.
The CRA’s letter emphasized the taxpayer’s responsibility under the self-assessment tax system to reconcile CRA-provided documentation with her personal records and to report any discrepancies.
The CRA concluded that “not understanding the regulations governing RRSPs” or failing to follow up on the information in the Notices of Assessment were not valid reasons to cancel the overcontribution tax.
The taxpayer requested a second-level review, which was also denied. The CRA agent expressed sympathy but reiterated that the taxpayer had not specified what prevented her from verifying her RRSP contribution limits before investing.
The agent noted that “ignorance of the law cannot be considered for a request to cancel the tax on excess RRSP contributions.”
The taxpayer appealed to Federal Court, seeking a judicial review of the CRA’s decision. The judge’s role was to determine whether the CRA’s decision was “reasonable.”
The judge observed that the taxpayer could not provide evidence of any steps taken to verify her RRSP contribution limits and admitted in court that she had no reasonable explanation for the overcontribution.
Consequently, the judge found the CRA officer’s decision to deny relief was reasonable, as the reasons provided were clear and demonstrated a rational chain of analysis. The judge also awarded the CRA $1,000 in costs, affirming the principle that the successful party should recover their costs.
