No court relief for accidental RRSP overcontribution

While RRSP season officially ended with the March 1 deadline for eligible contributions, helping our clients understand the rules to ensure they don’t accidentally overcontribute is an ongoing challenge.

Take, for example, the recent case involving a taxpayer hit with a penalty tax for overcontributing to his RRSP, which stemmed from a lack of understanding surrounding spousal RRSPs and his contribution limit.

The case (Froehling v Canada, 2021 FC 1439) involved a taxpayer with two RRSPs he had been contributing to since 2010: a regular RRSP and a spousal RRSP. In 2018, the taxpayer made total RRSP contributions exceeding his allowable RRSP contribution limit for that tax year. The funds had come from an inheritance his wife received when her grandmother died. The amount “was more money than we previously ever had on hand and we thought it prudent to fill up both of our RRSP contributions to their limit,” he wrote in a letter to the CRA.

He discovered his overcontribution error in March 2019 when preparing his 2018 return. He immediately had his tax preparer submit a request to the CRA to waive the overcontribution tax, calculated as 1% of the excess contribution per month for a total of $1,040.

In the letter, the tax preparer explained that the taxpayer “was under the impression that spouses were able to combine and share their RRSP contribution room… He had no intention of making an overcontribution but rather made contributions using his own RRSP added to his spouse’s contribution room.”

The taxpayer took steps to withdraw the excess contribution; he filed the T1-OVP overcontribution return and paid the overcontribution tax, hoping to get it back once the CRA reviewed his case.

Unfortunately, this was not to be. In September 2019, the CRA denied his request, explaining that while the CRA has the power to waive the penalty “if you made RRSP excess contributions because of a reasonable error,” it found that “misunderstanding or not knowing the rules and regulations about RRSP contributions” does not constitute a reasonable error.

In October 2019, the taxpayer submitted a further request for an impartial, second review of the matter by a different CRA officer. In the letter, he explained that he overcontributed to his personal and wife’s spousal RRSP in error. As he explained, “This was not in any way meant to take advantage of the RRSP contribution program… I made an honest error, reported and corrected it as promptly as possible.”

The CRA denied his second request, saying the taxpayer had been making and claiming both personal and spousal RRSP contributions since 2010, and should have known that all RRSP contributions (i.e., both personal and spousal) had to be made within his personal RRSP deduction limit.

Thus, the taxpayer turned to Federal Court to seek a judicial review of the CRA’s decision and whether it was “reasonable.”

A reasonable decision, according to prior jurisprudence, “is one that is based on an internally coherent and rational chain of analysis and that is justified in relation to the facts and law that constrain the decision maker.” To set aside a decision on this basis, “the reviewing court must be satisfied that there are sufficiently serious shortcomings in the decision such that it cannot be said to exhibit the requisite degree of justification, intelligibility and transparency.”

The judge reviewed all the facts and circumstances surrounding the taxpayer’s overcontributions, acknowledging that it was “an honest mistake.” But, she continued, the test to be met “is the reasonability of the error made, not the innocence of the [taxpayer].”

The judge went on to say to that since the Canadian tax system is based on self-assessment, it’s up to individual taxpayers “to ensure that they conduct their financial affairs in accordance with the [act]. The onus was on the [taxpayer] to ensure that he did not over-contribute to his RRSP and if there was any lack of clarity or understanding as [to] the contribution room available to him, [he] was expected to seek advice.”

The judge, upholding the penalty, concluded that the CRA’s decision was “justified, transparent and intelligible, falling well within the range of possible and acceptable outcomes.” She also ordered the taxpayer to pay costs in the amount of $1,000 as the losing party in the case.

This was a costly error for the taxpayer, and perhaps one that could have been avoided with a better understanding of the RRSP contribution rules. As advisors, we are well-suited to help guide clients through these potential RRSP traps. In the end, however, it’s the client’s own responsibility to keep track of their RRSP contributions in accordance with the rules.

Jamie Golombek, CA, CPA, CFP, CLU, TEP is managing director, tax and estate planning, at CIBC Private Wealth in Toronto

Jamie Golombek

Tax & Estate

Managing Director, Tax and Estate Planning, CIBC Private Wealth Team Jamie Golombek is Managing Director, Tax and Estate Planning with CIBC in Toronto. As a member of the CIBC Private Wealth team, Jamie works closely with advisors from across CIBC to support their clients and deliver integrated financial planning and strong advisory solutions. He joined the firm in 2008 after 12 years with a global investment company, where he was involved in both internal and external consulting on all areas of taxation and estate planning. Jamie has also worked for Deloitte as a tax specialist in the Toronto office, where he specialized in both personal and corporate tax planning. Jamie is quoted frequently in the national media as an expert on taxation. He writes a weekly column called “Tax Expert,” in the National Post, has appeared as a guest on BNN, CTV News, and The National, and for several years was a regular personal finance guest on The Marilyn Denis Show. He received his B.Com. from McGill University, earned his CPA designation in Ontario and qualified as a US CPA in Illinois. He has also obtained his Certified Financial Planning (CFP) and Chartered Life Underwriting (CLU) designations. In 2023, Jamie was named a CPA Ontario Fellow. The FCPA is the highest distinction that can be bestowed upon a CPA who brings distinction to themselves and to their profession through leadership and achievement in their professional, community or personal lives. Jamie is a past chair of the Investment Funds Institute of Canada’s Tax Working Group. He is also a member of CPA Ontario, the Illinois CPA Society, the Estate Planning Council of Toronto, the Canadian Tax Foundation and the Society of Trust and Estate Practitioners. For nearly two decades, Jamie taught an MBA course in Personal Finance at the Schulich School of Business at York University in Toronto.