REASONS
FOR JUDGMENT
Sommerfeldt J.
I. INTRODUCTION
[1]
These Reasons pertain to the Appeals instituted
by Edward L. Chiang in respect of the assessment of tax under Part X.1 of the Income
Tax Act
(the“ITA”) by the Canada Revenue
Agency (the “CRA”) on behalf of the Minister of
National Revenue (the “Minister”). The tax under
Part X.1, colloquially referred to as a tax on RRSP overcontributions, was
assessed by the CRA for the 2004 through 2013 taxation years. However, in order
to calculate the amount of Part X.1 tax (if any) payable by Mr. Chiang, it is
necessary to consider the contributions made by him to his registered retired
savings plan (the “RRSP”) from 1995 through 2005.
[2]
Although the colloquial term that is frequently
used is “RRSP overcontribution,” the technical
term, as set out in subsection 204.2(1.1) of the ITA, is “cumulative excess amount of an individual in respect of
registered retirement savings plans.”
In these Reasons, I will sometimes shorten that technical term to “cumulative
excess amount.”
II. ISSUES
[3]
The issues in these Appeals are:
a) Did Mr.
Chiang have a cumulative excess amount (and if so, to what extent) in respect
of his RRSP for any of the taxation years between 2004 and 2013 inclusive?
b) Is Mr. Chiang liable to late-filing penalties in respect of the
taxation years from 2004 to 2013, pursuant to section 204.3 and subsection
162(1) of the ITA?
III. BACKGROUND
[4]
From 1995 to 2005 (with the exception of 1998),
Mr. Chiang made contributions to his RRSP. It appears that Mr. Chiang paid
reasonable and careful attention to the Registered Retirement Savings Plan
(RRSP) Deduction Limit Statement that was attached to his Notice of Assessment
for each taxation year,
and ensured that, with the exception of 1997, the amount of his RRSP
contribution for a particular year did not exceed the limit specified in
the Deduction Limit Statement for that year. Nevertheless, by 2004,
the CRA was of the view that Mr. Chiang had an ongoing cumulative excess amount,
which attracted tax under subsection 204.1(2.1) of the ITA.
IV. ANALYSIS
A. Statutory Provisions
[5]
For the purposes of these Appeals, the critical
provisions in Part X.1 of the ITA are subsections 204.1(2.1) and
204.2(1.1), which read as follows:
204.1(2.1) Where, at the end of any month after December,
1990, an individual has a cumulative excess amount in respect of registered
retirement savings plans, the individual shall, in respect of that month, pay a
tax under this Part equal to 1% of that cumulative excess amount….
204.2(1.1) The cumulative excess amount of an individual in
respect of registered retirement savings plans at any time in a taxation year
is the amount, if any, by which
(a) the amount of the individual’s undeducted RRSP premiums at that time
exceeds
(b) the amount determined by the formula
A + B
+ R + C + D + E
where
A is
the individual’s unused RRSP deduction room at the end of the preceding
taxation year,
B is
the amount, if any, by which
(i) the lesser of the RRSP dollar limit for the year and 18% of the
individual’s earned income (as defined in subsection 146(1)) for the preceding
taxation year
exceeds the total of
all amounts each of which is
(ii) the individual’s pension adjustment for the preceding taxation year
in respect of an employer, or
(iii) a
prescribed amount in respect of the individual for the year,
C is,
where the individual attained 18 years of age in a preceding taxation year,
$2,000, and in any other case, nil,
D is
the group plan amount in respect of the individual at that time,
E is,
where the individual attained 18 years of age before 1995, the individual’s
transitional amount at that time, and in any other case, nil, and
R is
the individual’s total pension adjustment reversal for the year.
For the purposes
of these Appeals, factors D, E and R in the above formula are not relevant.
B. Reassessment for 1994
[6]
On June 12, 1995 the CRA sent to Mr. Chiang his
Notice of Assessment for 1994. Attached to that Notice of Assessment was Mr.
Chiang’s 1995 Deduction Limit Statement, which showed that his RRSP deduction
limit for 1995 was $8,287, which consisted of his 1994 RRSP deduction limit in
the amount of $35 plus $8,252, representing 18% of Mr. Chiang’s 1994 earned
income, which was $45,849. On September 5, 1995 the CRA reassessed Mr. Chiang’s
income for 1994 in such a manner as to reduce his earned income by $16,793,
which resulted in a corresponding reduction, in the amount of $3,022, in
respect of his RRSP deduction limit for 1995.
By reason of the reassessment, Mr. Chiang’s RRSP deduction limit for 1995
was reduced from $8,287 to $5,265. That latter amount was actually shown as the
opening entry in the calculations set out in Mr. Chiang’s 1996 Deduction Limit
Statement, which was mailed on June 20, 1996 and which showed that the RRSP
deduction limit for 1996 was also $5,265,
given that Mr. Chiang, according to the CRA, had not deducted any RRSP
contributions in respect of 1995,
and did not have any earned income in 1995.
[7]
Counsel for the Crown submitted that the
reduction in the RRSP deduction limit for 1995 in the amount of $3,022 (i.e.,
$8,287 – $5,265) had an ongoing impact on the calculation of Mr. Chiang’s
deduction limit for each of the years thereafter, to and including 2015. I am
not convinced that the impact of the 1994 reassessment was that long lasting,
given that the adjustment to the RRSP deduction limit for 1995 was actually set
out in the 1996 Deduction Limit Statement.
C. Undeducted Contributions
(1) Schedule
7 for 1995 and 1999
[8]
Mr. Chiang explained that he prepared his own
income tax returns, using a commercial software program. Rather than producing
his complete income tax returns, he entered into evidence only excerpts from
each of his returns from 1995 through 2005.
For each of those years, except 1995 and 1999, Mr. Chiang produced copies
of the particular page in the particular return that contained line 208,
which sets out the amount of the RRSP contribution that was deducted. For 1995
and 1999, Mr. Chiang did not produce copies of the pages containing line 208
because, as he stated in his testimony, those pages showed that no amount was
entered on line 208. Instead, for 1995 and 1999, Mr. Chiang produced copies of
Schedule 7 (dealing with unclaimed or unused RRSP contributions), which showed
that RRSP contributions had been made but not deducted for those two years. In
other words, it is my understanding that, although RRSP contributions were made
by Mr. Chiang in respect of 1995 and 1999, line 208 on his income tax returns
for those years indicated that no RRSP contribution was actually deducted for
either year. Mr. Chiang said that he had contributed $4,269.62 to his RRSP
in respect of 1995 and $4,300 to his RRSP in respect of 1999. However, according
to Mr. Chiang, due to some glitch or other malfunction in the software, the deductions
did not appear on line 208, notwithstanding that he had made those
contributions to his RRSP and had intended to deduct the contributions. Mr.
Chiang reasonably understood and believed, when preparing his 1995 and 1999
income tax returns and when testifying at the hearing of these Appeals, that he
had deducted those contributions.
[9]
A closer review of Schedule 7 for 1995 shows on
line 245 (also labelled elsewhere as line 2) that Mr. Chiang did contribute
$4,269.62 to his RRSP. Line 1 on Schedule 7 shows that Mr. Chiang had
unclaimed RRSP contributions from his 1994 Notice of Reassessment in the amount
of $8,287.00, and line 5 on Schedule 7 shows that the amount of the RRSP
contributions available to deduct for 1995 was $12,556.62 (i.e., $8,287.00 +
$4,269.62). Schedule 7 also contains an entry described as “Contributions made to your own RRSP or your spouse’s RRSP
based on your ’95 RRSP deduction limit (that you are claiming).” To the
right of that entry, in a space identified as line 6, nothing has been entered.
In other words, Schedule 7 indicates that Mr. Chiang did not claim a deduction
in respect of the contribution that he made for 1995. Below the line for entry
of the amount of the RRSP deduction that is being claimed is a further blank
with the instruction “Enter this total on line 208 of
your return.” To the right of that instruction, on line 8, nothing was
entered by Mr. Chiang. In my view, this is the reason for which line 208 of his
1995 income tax return did not show a deduction for an RRSP contribution. It
appears that, rather than there being a glitch in the software, the amount of
the intended deduction was not entered on Schedule 7. Consequently, the last
entry on Schedule 7 for 1995 shows the Unclaimed RRSP Contributions (line 5
minus line 8) as being $12,556.62.
[10]
Something similar happened in 1999. Schedule 7
to Mr. Chiang’s 1999 income tax return shows that Mr. Chiang contributed $4,300
to his RRSP in respect of 1999. That amount appears on line 245 (also labelled
elsewhere as line 4) and on line 5 of Schedule 7. The same number, $4,300,
appears on line 7, which is described as “RRSP
contributions available to deduct.” Below that, the entry for line 8 is described
as “1999 deduction for: Contributions that are based on
(and do not exceed) your 1999 RRSP deduction limit shown on your 1998 Notice
of Assessment or Notice of Reassessment.” Although Mr.
Chiang’s RRSP deduction limit for 1999 was $4,393, Mr. Chiang did not enter any
amount on line 8 of Schedule 7. Consequently, his 1999 RRSP deduction, which
was also described as the amount to be entered on line 208 of his return, was
left blank. In other words, even though Mr. Chiang had made a contribution of
$4,300, and even though he thought that he was deducting that amount, by reason
of the manner in which Schedule 7 was completed, he did not actually deduct any
RRSP contribution for 1999.
[11]
It is my impression that Mr. Chiang is a
conscientious taxpayer who was, in the context of his RRSP, reasonably endeavouring
to contribute and deduct the appropriate amount each year. When Mr. Chiang
testified, he genuinely was of the impression that he had deducted the amounts
that he had contributed to his RRSP for 1995 and 1999. I am of the view that
his failure to deduct the contributed amounts, which was unbeknown to him, was due
to innocent and reasonable inadvertence.
(2) Overcontribution
for 1997
[12]
The 1997 Deduction Limit Statement that was sent
to Mr. Chiang with his 1996 Notice of Assessment showed his RRSP deduction
limit for 1997 as being $6,391.
Line 208 in Mr. Chiang’s 1997 income tax return shows that he purported to
claim an RRSP deduction in the amount of $8,051. However, since that amount was
greater than his RRSP deduction limit for 1997, the portion of the contribution
that was allowed as a deduction was only $6,391. Consequently, Mr. Chiang had
an undeducted contribution in respect of 1997 in the amount of $1,660 (i.e.,
$8,051 – $6,391).
[13]
Based on two of the three tabulations set out by
Mr. Chiang in his Notice of Appeal, it appears that, when Mr. Chiang made his
RRSP contribution for 1997, he was of the impression that he had unused RRSP
deduction room from previous years, such that he understood (albeit
incorrectly) that he was not making an overcontribution for 1997.
(3) Aggregate
Undeducted Contributions
[14]
By reason of the above RRSP-related occurrences
in respect of 1995, 1997 and 1999, by the end of 1999, Mr. Chiang had aggregate
undeducted RRSP contributions in the amount of $10,229.62, as follows:
|
1995
|
$4,269.62
|
|
1997
|
1,660.00
|
|
1999
Total
|
4,300.00
$10,229.62
|
(4) Calculations by the Parties
[15]
The CRA’s calculations have generally shown
that, for most of the months in each year from 2004 to 2010, Mr. Chiang’s cumulative
excess amount was $10,229.
According to the CRA’s submissions, in December 2010, Mr. Chiang withdrew $203
from his RRSP. Therefore, from 2011 to 2013, the CRA showed Mr. Chiang’s
cumulative excess amount as $10,026 (i.e., a $203 reduction from the amount
shown for the first eleven months of 2010).
[16]
Mr. Chiang filed a detailed and meticulously
drafted Notice of Appeal, setting out various reasons as to why (in his view) he
was not subject to tax under Part X.1 of the ITA, and containing three
tables, showing calculations in support of his argument that he did not have a
cumulative excess amount. Mr. Chiang’s calculations were premised on his
apparent understanding that the contributions of $4,269.62 and $4,300 in 1995
and 1999 respectively were, not only contributed, but also deducted. However,
as explained above, in preparing Schedule 7 to his 1995 and 1999 income tax
returns, Mr. Chiang neglected to deduct the amounts that he had contributed in
those two years.
(5) Analysis
and Calculations by the Court
[17]
The second table in Mr. Chiang’s Notice of
Appeal purported to be drafted in accordance with the formula to be used in
determining a taxpayer’s cumulative excess amount, as set out in subsection
204.2(1.1) of the ITA. However, Mr. Chiang’s table treated the RRSP
contributions in respect of 1995 and 1999, in the amounts of $4,269.62 and
$4,300 respectively, as having been deducted, notwithstanding that, as
explained above, those amounts were actually not deducted.
[18]
In written submissions filed by the Crown after
the hearing,
the Crown provided the CRA’s calculations of Mr. Chiang’s cumulative excess
amount and Part X.1 tax for each month from January 2004 to December 2013. As
indicated above, beginning in December 2010, the Crown’s calculations showed
the cumulative excess amount as being $10,026. As well, the Crown’s
calculations showed that Mr. Chiang contributed $4,416 to his RRSP in February
2006, whereas the documentary evidence indicated that that contribution was
made in January 2006. Inasmuch as Part X.1 tax is calculated on a monthly
basis, by showing the contribution of $4,416 as having been made in February
rather than January, there was a small impact on the amount of Part X.1 tax
calculated by the CRA.
[19]
Schedule A to these Reasons contains five tables
prepared by the Court for the purpose of calculating the Part X.1 tax payable
by Mr. Chiang.
Those tables indicate that Mr. Chiang had a cumulative excess amount from 2004
through 2013 and that Part X.1 tax was payable by Mr. Chiang for each of those
years.
[20]
For each year, other than 2006, the amount of
Part X.1 tax payable by Mr. Chiang was the same as the amount of Part X.1 tax
calculated by the CRA, as set out in the written submission filed by counsel
for the Crown on June 5, 2017. For 2006, the amount of Part X.1 tax calculated
by the Court was $987.48, whereas the amount set out in the Crown’s written
submissions was $943.32.
[21]
It is my understanding that the respective
amounts of the Part X.1 tax payable by Mr. Chiang, as set out in the Reply, were
based on the amounts of Part X.1 tax shown in the respective notices of
assessment. For 2006, 2011, 2012 and 2013, the amount of Part X.1 tax assessed
by the CRA was slightly less than the amount of Part X.1 tax calculated by the
Court. As the amount of assessed tax cannot be increased on an appeal, the
respective amounts assessed by the CRA (and not the amounts calculated by the
Court) represent the amounts payable by Mr. Chiang.
D. Late-Filing Penalties
[22]
The CRA assessed late-filing penalties against
Mr. Chiang, pursuant to section 204.3 and subsection 162(1) of the ITA. There
is some uncertainty as to the amounts of the penalties that were assessed.
Subparagraph 8(c) of the Reply states that the CRA assessed late-filing
penalties in the amounts of $50.96 for 2004, $71.30 for 2005, $160.36 for 2006,
$167.87 for each year from 2007 to 2010, $163.73 for each of 2011 and 2012, and
$115.67 for 2013,
whereas paragraph 12 of the Reply states that the CRA assessed late-filing
penalties in the amounts of $50.96 for 2004, $71.30 for 2005, $160.36 for 2006,
$167.87 for each year from 2007 to 2012, and $118.50 for 2013. The CRA took the
position that Mr. Chiang had failed to file the requisite tax returns (Form
T1-OVP), as and when required by paragraph 204.3(1)(a) of the ITA.
[23]
As indicated above, Mr. Chiang had
conscientiously tracked his RRSP contributions and was genuinely of the view
that he had not made any overcontributions to his RRSP. Accordingly, based on
his understanding, there was no need to file a return pursuant to paragraph
204.3(1)(a) of the ITA.
[24]
When counsel for the Crown addressed the issue
of the late-filing penalties during his oral submissions, he began by
submitting that Mr. Chiang had not exercised due diligence, such that the
late-filing penalties had been appropriately assessed by the CRA. However, as
counsel for the Crown continued to discuss this issue, he seemed to back away
from his initial submission, and ultimately conceded that the evidence may not
support the imposition of penalties. He concluded by saying that he had no
strong argument to make in support of the penalties.
[25]
I have considered whether Mr. Chiang may rely on
the due diligence defence, which the Supreme Court of Canada explained as
follows:
The due diligence
defence is available if the defendant reasonably believed in a mistaken set of
facts that, if true, would have rendered his or her act or omission innocent. A
defendant can also avoid liability by showing that he or she took all
reasonable steps to avoid the particular event…. The defence of due diligence
is based on an objective standard: it requires consideration of what a
reasonable person would have done in similar circumstances.
[26]
Although La Souveraine dealt with a
regulatory offence, the Federal Court of Appeal has confirmed that the defence
is also available in respect of administrative penalties:
This Court has
held that there is no bar to the defence argument of due diligence, which a
person may rely on against charges involving strict liability, being put
forward in opposition to administrative penalties…. It may be worth reviewing
the principles governing the defence of due diligence before applying them to
the facts of the case at bar.
The due diligence
defence allows a person to avoid the imposition of a penalty if he or she
presents evidence that he or she was not negligent. It involves considering
whether the person believed on reasonable grounds in a non-existent state of
facts which, if it had existed, would have made his or her act or omission
innocent, or whether he or she took all reasonable precautions to avoid the
event leading to the imposition of the penalty…. In other words, due diligence
excuses either a reasonable error of fact, or the taking of reasonable
precautions to comply with the Act.
[27]
I concur with the statement made by counsel for
the Crown, to the effect that the evidence may not support the imposition of
penalties. As noted above, Mr. Chiang genuinely and reasonably believed that he
had deducted the contributions that he had made to his RRSP for 1995 and 1999
and that he had unused RRSP deduction room in respect of 1997. Thus, it is my
view that Mr. Chiang reasonably believed in, and was operating under, a
mistaken set of facts that, if true, would have resulted in there not having
been a cumulative excess amount. Therefore, his failure to file tax returns
(Form T1-OVP) for 2004 to 2013 resulted from a reasonable error of fact, so as
to be excused by the due diligence defence. Accordingly, I am of the view that
the late-filing penalties should be cancelled.
V. CONCLUSION
[28]
To summarize, it is my view that the Part X.1
tax assessed by the CRA against Mr. Chiang for 2004 through 2013 is properly
payable, but that the late-filing penalties assessed for those years should be
cancelled. Accordingly, these Appeals are allowed and the assessments that are
the subject of these Appeals are referred back to the Minister for
reconsideration and reassessment in accordance with these Reasons. As success
in these Appeals is divided, there is no award as to costs.
[29]
It is recommended that, if Mr. Chiang has not
already done so, he should, possibly with the assistance of a professional tax
adviser, take steps to eliminate the ongoing cumulative excess amount in
respect of his RRSP, so as to avoid the further imposition of Part X.1 tax in
the future.
Signed at Edmonton,
Alberta, this 31st day of August, 2017.
“Don R. Sommerfeldt”
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