Over-contribution retribution

The consequences of inadvertently over-contributing to RRSPs and TFSA can be quite costly. Sandeep Kapil found this out recently. The CRA had refused to cancel his RRSP over-contribution tax, interest and penalties (Sandeep Kapil v Canada Revenue Agency and Attorney General of Canada, 2011 FC 1373).

Excess RRSP contributions are subject to a special tax of 1% per month on the excess amount beyond a $2,000 limit. A taxpayer who over-contributes must also file an annual T1-OVP return to report the excess contribution and is liable for interest and penalties for either not filing the form or filing it out late.

There is relief from this over-contribution tax where the excess amount arose “as a consequence of a reasonable error” and “reasonable steps are being taken to eliminate the excess.”

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Conflicting advice

In 2008, Kapil moved to Montreal from the U.S. to join his employer, SAP Labs Canada. Before making the RRSP contributions in question, Kapil sought the advice of both the CRA and the financial advisor responsible for managing his company’s group RRSP program.

He testified he “was given inconsistent advice by both entities.” He first spoke to someone at the CRA, who told him he was ineligible to make an RRSP contribution for 2008, his first Canadian tax year.

He called a second time and the CRA specialist he spoke with told him he could.

Kapil also claims a financial advisor from his Group RRSP administrator confirmed the advice he initially received from CRA (that he was ineligible to make an RRSP contribution for 2008) but stated that a different advisor later told him he was eligible.

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Of course the rule in the Tax Act is clear. He was simply not entitled to make RRSP contributions during his first year of employment in Canada since RRSP contribution room is based on the prior year’s earned income, which must be earned while a resident of Canada.

Went ahead anyway

In March 2008, Kapil nonetheless contributed $18,000 to his RRSP. In January 2009, he contributed a further $4,500.

In July 2009, he completed Form T3012A (Tax Deduction Waiver on the Refund of Unused RRSP Contributions) requesting permission from the CRA to withdraw approximately $2,500 in excess contributions from his RRSP for 2008.

(Presumably, he was comparing his total contributions of $22,500 ($18,000 in 2008 plus $4,500 in 2009) to the maximum 2008 contribution limit of $20,000.)

The CRA sent him a letter approving his withdrawal and advised him that he had to file a T1-OVP tax return for 2008 and that failure to file this within 90 days of the end of that year would result in a late-filing penalty as well as arrears interest. He was also advised that the 1% tax on excess RRSP contributions would be charged for each month that his excess contributions remained in his RRSP.

The CRA received his T1-OVP for 2008 on January 19, 2010. He was assessed $1,600 of over-contribution penalty tax along with a T1-OVP late-filing penalty of $224 and arrears interest of $91.

Kapil requested that the over-contribution tax be cancelled, along with the penalties and interest. CRA refused, saying, “The excess contributions were not the product of a reasonable error.” He thus found himself in Federal Court asking the Judge to review whether CRA’s decision to refuse to waive tax, interest and penalties was “reasonable.”

Ignorance isn’t a defence

Although Kapil tried to argue that he was not aware that he was precluded from making RRSP contributions in his first year of Canadian employment, the Judge said that his knowledge of the tax rules is irrelevant.

Citing a prior case, he said, “It was up to the applicant to ensure that she did not make excessive contributions to her RRSP and her lack of understanding of the law is not a reasonable error. The tax system is admittedly complex and when taxpayers are faced with complexity they are expected to seek advice.”

The Judge also found it curious that despite inconsistent answers given by both the CRA and the Group RRSP administrator about his entitlement to contribute for 2008, he chose to do so anyway.

As the Judge wrote, “Put otherwise, there is no reasonable explanation on the record as to why he chose to follow the advice that was favourable to his tax position as opposed to the advice that was unfavourable… Accepting all of [Kapil’s] evidence as true, it is, when assessed objectively, an indicia of a potential problem, not a window or lacunae of which a reasonable person would hope to exploit to their advantage.”

Not surprisingly, the Judge felt that Kapil should have known his limit was zero and simply not contributed for 2008. The Judge therefore felt that the CRA’s decision not to cancel the over-contribution tax, interest and penalties was indeed reasonable.

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.