No one likes paying tax on investment income. With marginal tax rates as high as 54.8 per cent on interest income for residents of Newfoundland and Labrador, and capital gains tax rates now over 35 per cent in half the provinces for individuals with more than $250,000 of annual gains, maximizing registered plan contributions has never been more important. 

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CRA wins in court as woman fails to justify RRSP overcontribution Back to video

But whether you decide to contribute to a tax-free savings account (TFSA), a registered retirement savings plan (RRSP), a registered education savings plan, or the new first home savings account, it’s critical to stay on top of your contribution limits, lest you face penalty tax for overcontributions. 

Accidentally overcontributing to either a TFSA or RRSP seems to be a recurring problem for some taxpayers, evidenced by the continuous flow of newly reported cases, in which taxpayers go to court trying to wiggle out of the punitive overcontribution tax they’ve been assessed.

Take the most recent case, decided in late July, which involved a taxpayer who overcontributed to her RRSP in 2020 and 2021. She was taxed on the excess contributions at the rate of one per cent per month. 

Under the Income Tax Act, the Canada Revenue Agency (CRA) has the discretion to waive this overcontribution tax if the excess contribution occurred because of a “reasonable error” as long as “reasonable steps” were taken to eliminate the excess. If the CRA refuses to waive the tax, then taxpayers have the right to seek a judicial review of the CRA’s decision in Federal Court, which is how the current case came to trial. 

The taxpayer’s troubles began in 2020 when she overcontributed $41,291 to her RRSP. This problem was not addressed, and the overcontributions accumulated in subsequent tax years, such that the cumulative overcontribution amounts for the 2021 and 2022 tax years were $50,891 and $51,671, respectively. 

In May 2022, the CRA sent the taxpayer a letter informing her that she had overcontributed to her RRSPs and that penalty tax applied to the overcontributed amounts. The taxpayer wrote to the CRA in October 2022 requesting that the penalty tax be cancelled. She maintained that her overcontribution was “an honest mistake,” that she did not benefit from the overcontribution because the value of the investments in her RRSP had dropped resulting in no gain from the overcontributions and that “she was taking steps to remove the excess contributions to rectify the situation.” 

In January 2023, the CRA sent the taxpayer a letter acknowledging the taxpayer’s request, but noting that the taxpayer failed to report her RRSP contributions when filing her returns for the 2018 and 2020 taxation years. The result of this was that when assessing her tax returns for the 2018 through 2021 years, the CRA was unable to give accurate information to the taxpayer (presumably on her Notices of Assessment) regarding her correct unused RRSP contribution room each year. 

The letter went on to state that “under the self-assessment tax system, it is your responsibility to reconcile the documentation received from us with your personal documents and to let us know of any discrepancies.… Not understanding the regulations governing RRSPs, or not understanding or following up on the information we give you on your Notices of Assessment, are not reasons generally considered for cancelling (the overcontribution) tax.”  

The CRA, therefore, could “not justify” cancelling the assessed penalty tax because the taxpayer was unable to specify “what prevented her from making the necessary verifications before investing in her RRSPs.” 

The taxpayer subsequently requested a second-level review, which was also denied. In that denial letter, the CRA agent was sympathetic, writing that “even though I do not minimize the impact of the COVID-19 pandemic and inflation on your living expenses along with increased family responsibilities, you did not specify what prevented you from making the necessary verifications before investing in your RRSPs. Ignorance of the law cannot be considered for a request to cancel the tax on excess RRSP contributions.” 

The taxpayer thus appealed to Federal Court, requesting a judicial review of the CRA’s second-level decision to deny her relief. As in prior such cases, the judge’s role is to determine whether the CRA’s decision was “reasonable.” 

The judge noted that the taxpayer could not provide any evidence of steps she had taken to verify her RRSP contribution limits, and, in court, she confirmed that she did not take any such steps, acknowledging that “she did not have a reasonable explanation for the RRSP overcontribution.” 

As a result, the judge found that the CRA officer’s conclusion — that the taxpayer had not established that the overcontribution to her RRSP was a result of a reasonable error, and therefore, she was not entitled to relief — was reasonable. As the judge wrote, “The reasons provided by the (CRA) are clear and demonstrate a rational chain of analysis and a full consideration of the facts and information provided to them.” 

The judge also awarded the CRA $1,000 in costs, as she saw “no reason to depart from the general principle that the successful party should recover their costs.”

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

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