TFSA or RRSP, what’s the right choice?

We shouldn’t automatically assume every client should be saving for retirement through an RRSP as opposed to a TFSA or non-registered account.

A recent Tax Court of Canada decision (Friedlander v The Queen, 2012 TCC 163) dealt with one such client whose advisor pushed him into registered savings without sizing up his situation. The client was assessed over-contribution tax, penalties and arrears interest based on his RRSP account—an account that should never have been opened for him.

Read: Create an RRSP exit strategy

Jacob Friedlander, whose first language is Spanish, immigrated to Canada in 2000. In 2002, he walked into a bank branch where he wished to open up an investment account. He told the employee he wasn’t working, and wasn’t earning any income that year. He was a stay-at-home father—with two infant children—who was also in school. Nonetheless, the bank employee set him up an RRSP.

Friedlander deposited a total of $11,450 in the account between 2002 and 2006. He never claimed any RRSP deductions for those years since he had no income from which to take the deduction. He also had no RRSP contribution room. Since Friedlander’s deposits were greater than the amount he was permitted to contribute to an RRSP, it resulted in an over-contribution tax of 1% per month.

Read: Crunch Time: an RRSP special report

A taxpayer in this situation can apply to CRA to get this tax waived. This can be done by filing form T3012A to get the CRA’s consent for the financial institution holding the RRSP to refund the excess contribution amount without any withholding tax.

Once an over-contribution tax applies, you must file a T1-OVP return for each year in which there was an excess contribution amount and pay the tax within 90 days after the year-end, unless the tax has been waived by the CRA before the end of that 90-day period.

Friedlander, however, didn’t file his T1-OVP returns until he was notified of the over-contributions in January 2009 by way of a letter from the CRA. As soon as he received the letter, he took the necessary steps to file all the T1-OVPs for the years in question and removed his excess contributions from his RRSP. But because the T1-OVP forms were not filed on time, he was hit not only with the 1% over-contribution tax for the relevant months but also with penalties and interest, all of which totalled approximately $4,350 on the $11,450 of deposits to his RRSP account.

Friedlander appealed to Tax Court seeking relief. Unfortunately, the Tax Court has no jurisdiction to waive the over-contribution tax. This can only be done by applying to the CRA. Friedlander did apply to the CRA, but his application was refused on the basis that he “had not shown that the RRSP excess contributions arose due to a reasonable error.”

Read: TFSA Vs. RRSP

The judge disagreed, and encouraged Friedlander to request a second impartial review of the (CRA’s) decision. The judge also strongly urged the person reviewing that decision to take into account his comments.

The Tax Court does, however, have the power to cancel the penalties assessed for failure to file the T1-OVP returns, provided a taxpayer exercised due diligence with respect to the filing requirements.

The judge, cancelling the penalties, concluded Friedlander’s failure to file was due to a “reasonable mistake of fact” as to the nature of the account he opened. If it had been an ordinary investment account, there would have been no requirement to file the T1-OVP returns.

Read: RRSP meltdown strategy: a second opinion

If Friedlander is unsuccessful getting his over-contribution tax waived, he would still be able to go to Federal Court for a review of the CRA’s decision.

This matter could’ve been avoided if the advisor had understood the client’s situation. As a new immigrant with no earned income—and no RRSP room—such an account wasn’t his best solution.

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.