Whether you choose to save in a TFSA, an RRSP or both, it’s important to take the time to understand how the plans work as well as to keep on top of your available contribution room, lest you fall afoul of the rules and get slapped with an over-contribution penalty tax by the Canada Revenue Agency.
And, while the tax man does have the ability to waive any over-contribution tax, penalties and arrears interest charged as a result of over-contributions, two cases decided this month demonstrate that the CRA shows little mercy when it comes to over-contributions.
TFSA over-contribution
The first case dealt with an over contribution to a TFSA. If you over-contribute, the penalty tax is one per cent per month for each month (or part of any month) your TFSA is an over-contribution position. But there’s a separate, additional over-contribution tax of one per cent per month if a non-resident contributes to their TFSA after becoming non-resident of Canada, which is what happened in the first case. And since a non-resident stops accumulating new TFSA room for each year they are non-resident, the taxpayer also faced the normal over-contribution tax of one per cent per month, on top of the non-resident over-contribution tax, for contributions she continued to make as a non-resident beyond her allowable room.
The taxpayer’s troubles began in July 2009, when she opened a TFSA. Between 2009 and 2016, she made contributions to her TFSA. The problem? She was no longer a resident of Canada during this period.
In October 2011, the CRA wrote to the taxpayer advising her that she may have to pay tax on the TFSA contributions that she made while she was not a resident of Canada, as well as on the excess contributions to her TFSA. The letter provided her with three options for addressing the tax owing. The CRA sent similar letters to the taxpayer for the 2010, 2011 and 2012 taxation years. The CRA sent these letters to the Canadian address that the taxpayer used on her 2009 tax return.
Unfortunately, by 2011, the taxpayer was no longer able to receive mail at this address and thus never received those letters. She only became aware of the excess contribution issue after June 30, 2017 when she was informed by her bank that her TFSA was being held by the CRA.
In the summer of 2017, the taxpayer applied to the CRA for relief from both the non-resident and excess contribution tax. The CRA denied the taxpayer’s request in February 2018, at which time the taxpayer requested a second-level review by the CRA, which was also denied. That’s how the taxpayer ended up in Federal Court this month, requesting a review of the CRA’s decision to deny her relief.
Under the Income Tax Act, the CRA has the discretionary power to waive over contribution taxes if the taxpayer “establishes to the satisfaction of the (CRA) that the liability arose as a consequence of a reasonable error” and the taxpayer took steps to remove the over-contribution, along with any income or gains reasonably attributable to the over contribution, “without delay.”
The taxpayer reasoned that the CRA shouldn’t have assumed that she received the notifications “without proof.” The CRA argued in response that it has no obligation to demonstrate that a taxpayer has received mail, rather “it only needs to demonstrate that such mail was sent.” Indeed, prior jurisprudence has concluded that the fact that a taxpayer did not update their address “cannot be laid at the feet of the (CRA).”
The CRA, in refusing to waive the over contribution taxes, argued that “it is the taxpayer’s onus to understand the law.” The judge agreed with the CRA and found that the decision not to waive the over contribution tax was reasonable.
The CRA, in refusing to waive the over-contribution taxes, argued that 'it is the taxpayer’s onus to understand the law
RRSP over-contribution
The second case, decided this week, involved RRSP over-contributions. Your RRSP contribution limit for a given year is generally calculated as 18 per cent of the prior year’s earned income (up to a maximum of $26,500 for 2019) less any pension adjustment from your employer, plus unused RRSP room from prior years.
In 2003 and 2004, the taxpayer over-contributed $30,000 and $15,000 respectively into a combination of personal and spousal RRSPs. The taxpayer had no tax owing for several years and, on the advice of his accountant, did not file income tax returns for these tax years. As a result, he did not receive notices of assessment and was thus unaware that he didn’t actually have enough RRSP contribution room as a result of pension contributions made through his employer and the related pension adjustments.
In February 2007, the CRA informed the taxpayer that he may have over contributed to his RRSPs and that, if so, the excess was subject to a one per cent per month over contribution penalty tax. He was also informed that he had to file RRSP over contribution (T1-OVP) returns for each year he had excess RRSP contributions. The taxpayer failed to file the T1-OVP returns within the time limit requested, so the CRA assessed the taxpayer tax on his RRSP over contributions, penalties for failure to file the T1-OVP returns on time and arrears interest on both amounts. By the fall of 2018, the total of tax, penalties and interest had grown to nearly $70,000.
The taxpayer applied to the CRA for relief from the tax on the over-contributions, penalties and interest, which the CRA denied. He then appealed the CRA’s decision to the Federal Court, which did not find the CRA’s decision to deny relief to be “unreasonable.” Finally, the taxpayer sought relief in the Federal Court of Appeal.
The taxpayer argued that “since he earned a good income at the time, he thought that he could make the maximum contribution.” He was apparently unaware that he didn’t have the RRSP room as a result of his pension contributions through work.
In a lengthy written decision, the appellate court concluded, once again, that the CRA’s decision not to waive the tax, penalties and interest was not to be interfered with, as the taxpayer “appears to have been aware that there was a limit on RRSP contributions.” Yet, the taxpayer “does not appear to have made any inquiries … to confirm his contribution room. His error therefore likely cannot be said to have been a reasonable one.”