The Risks of Overcontributing to an RRSP
Contributing too much to RRSPs can lead to harsh consequences. The most recent case to address this issue was Hall v The Queen (2016 TCC 221).
Under the Income Tax Act, if you contribute to your RRSP beyond what you’re permitted to deduct (i.e., your RRSP deduction limit), any excess above the permitted $2,000 lifetime overcontribution limit is subject to a 1% per month overcontribution tax.
In Hall, the taxpayer had $12,029 of excess contributions in his RRSP since the end of 2008, which consisted of a balance of $4,879 of undeducted contributions from prior years and a $7,150 RRSP contribution made in 2008.
The taxpayer neither claimed (nor was allowed) a deduction for RRSP premiums for any of his unused RRSP contributions for the 2008 through 2013 tax years. Since he had a $12,029 excess contribution in his RRSP since 2008, he should have filed Form T1-OVP Individual Tax Return for RRSP Excess Contributions for each of the 2008 through 2013 taxation years.
Since he hadn’t, CRA assessed him approximately $3,500 in overcontribution penalty tax, $600 in late-filing penalties (which were subsequently waived by CRA) and over $850 of arrears interest.
The taxpayer did not contest that he had overcontributed. Instead, he argued he was not reassessed within the general three-year time limit under the Tax Act. Specifically, he argued that since he was reassessed on June 10, 2015 for the 2008, 2009, 2010 and 2011 taxation years, “these years were statute-barred at the time of the reassessment.” Accordingly, the taxpayer argued CRA was only entitled to reassess his 2012 and 2013 taxation years.
CRA disagreed, arguing that “there is no time limit to assess a taxpayer when a Return has not been filed with the Minister.” Since it was actually CRA that prepared the Returns for RRSP Excess Contributions on behalf of the taxpayer and assessed him accordingly on June 10, 2015, the three-year “normal reassessment period” to reassess runs until June 10, 2018—three years after the issuance of the initial assessment. Therefore, CRA argued it assessed the taxpayer within the prescribed time limit.
The judge agreed with CRA, finding the taxpayer was required to file a T1-OVP for the tax years in which he had overcontributed. This is a “separate return, which is different from the [income tax] returns” filed annually. In this case, the original assessment occurred on June 10, 2015, when CRA first assessed the taxpayer for the overcontribution tax.
The taxpayer submitted that “it was unreasonable for the Minister to assess the 2008 taxation year, seven years later, in 2015.” While the judge acknowledged the assessment was only issued after “a long period,” nonetheless, the Tax Act “does not provide any time limit for the Minister to conduct an original assessment.”
Quoting a prior Federal Court of Appeal case, the judge wrote, “[t]he fact that the application of the law in particular circumstances may seem harsh, or that CRA officials may not always have been very helpful, is not a ground on which the Tax Court can grant relief from a lawful assessment.”
There may, however, be forthcoming relief. While the judge found CRA’s assessment to be valid and “lawful,” she said it was “still within the Minister’s discretion to completely waive the tax owed.” During the years under litigation, the taxpayer was suffering from mental illness, in which “he and his spouse almost lost everything […] His excess contribution in 2008 was the product of a reasonable error based on his mental condition at the time.” The judge recommended “that the Minister exercise his discretion for the taxation years in issue.”
Hopefully, CRA will respond compassionately and waive the overcontribution tax.