Tax Tip Thursday

CRA wins case against taxpayer who said he made honest mistake on RRSP

The penalty for overcontributing to an RRSP is one per cent per month for each month the overcontribution (beyond a $2,000 allowable overage) remains in your account.

The fastest, easiest way to correct an overcontribution situation is to simply request a withdrawal of the amount overcontributed from your RRSP issuer.
This amount will be subject to withholding tax, which will be part of the tax paid when your tax return is completed. You will need to complete CRA’s Form T746, Calculating Your Deduction for Refund of Undeducted RRSP Contributions.
This will allow you to claim an offsetting deduction against the RRSP income.

You can avoid the withholding tax on the withdrawal using a Form T3012A, Tax Deduction Waiver on a Refund of Your Undeducted RRSP Contributions.

We do NOT recommend you do that as it will delay the withdrawal of your funds by months as you have to wait for the CRA to approve it.

Should you get hit with over-contribution tax, the CRA has the ability to cancel that tax if the excess contribution occurred because of a “reasonable error” as long as “reasonable steps” were taken to eliminate the excess.

Taxpayers who are hit with the penalty tax can apply, in writing, to the CRA for a waiver of the tax if they can demonstrate that the above two conditions have been met. Ideally, any application for a waiver should include proof that the excess contributions were withdrawn, along with any other correspondence that shows the excess contributions were due to a reasonable error.

If the CRA refuses to cancel the tax, then a taxpayer has the right to seek a judicial review of the CRA’s decision in Federal Court, which is what happened in this most recent case.

The taxpayer’s troubles began back in April 2021 when he contributed $22,118 to his RRSP which exceeded his 2021 limit of $9,504, as shown in his 2021 Notice of Assessment. About a year later, in April 2022, the taxpayer realized his error and requested a tax-free withdrawal from his RRSP for the excess contribution by completing Form T3012A.

In August 2022, the CRA approved Form T3012A to withdraw the $12,614 excess amount. It also advised the taxpayer that he needed to file the T1-OVP Return for the 2021 tax year to calculate and pay the over-contribution tax.

It then sent the taxpayer a T1-OVP notice of assessment for 2021 requiring him to pay $955.26 in net federal taxes (representing the one per cent monthly over-contribution tax), $85.97 in penalties, and $27.37 in arrears interest.

In September 2022, the taxpayer wrote to the CRA requesting that it waive the over-contribution tax and penalties. This request was denied in May 2023. In June 2023, he submitted a further request, explaining that, to determine his available contribution room, he mistakenly took the amount from his 2019 Notice of Assessment instead of the 2020 one. He added that he received “no benefit” from his mistaken over-contribution.

The CRA officer denied his second request for relief, concluding that the taxpayer’s misinterpretation of his RRSP deduction limit statement did not constitute a “reasonable error … as he was provided with the information required to contribute the correct amount to his RRSP.”

Having been twice denied relief, the taxpayer sought a review in federal court, where the role of the judge in such cases is to determine whether the CRA’s decision not to waive the over-contribution tax was reasonable.
At trial, the taxpayer raised five reasons in support of his claim that the CRA’s decision was unreasonable: it was unreasonable to expect no errors after 40 years of tax submissions; his over-contribution was an honest error and no gains were realized; the CRA abused its power in making the decision; the CRA’s decision was not consistent with the intent of the Income Tax Act and the penalties provided by the Act are “irrational and abusive.”
While the judge did not dispute that the taxpayer’s over-contribution to his RRSP may have been an honest mistake, he found that the taxpayer’s other arguments “are without any merit, as the (CRA) was simply applying the law as enacted by Parliament and no evidence was provided by (the taxpayer) to support his claims of abuse of power and inconsistency with the (Tax Act’s) intent.”

As the judge noted, “Misinterpreting an RRSP contribution limit statement is not in and of itself a reasonable error, since it is the taxpayer’s duty and responsibility to ensure the accuracy of statements made in their income tax returns.”
As a result, the judge dismissed the taxpayer’s application for judicial review and found that the CRA reasonably concluded that discretionary relief was not warranted in this case. “While I recognize that (the taxpayer) made an honest mistake when determining his contribution limit, there are no grounds for the Court to intervene,” concluded the judge.

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Disclaimer:

This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal or tax advice nor can it or should it be relied upon. All tax situations are specific to each individual. If you have specific tax questions you should book an appointment for a 1 on 1 consultation.