Connolly – Federal Court of Appeal finds that the CRA internal guidelines on waiving the RRSP over-contribution tax were inherently unreasonable

S. 204.1(4) provides that the tax imposed on RRSP contributions may be waived by the Minister if she is satisfied that the over-contribution “arose as a consequence of reasonable error, and reasonable steps are being taken to eliminate the excess.” Internal CRA guidelines stated that “Reasonable error means that the taxpayer did not intend to over contribute to their RRSP/PRPP and that it happened because of extraordinary circumstances beyond their control” (i.e., a mere mistake as to the contribution limit is not reasonable error) and that “reasonable steps” allowed the taxpayer “two months from the date of the Agency’s letter to withdraw funds and submit proof.”

Gleason JA found that these guidelines were unreasonable, stating:

The delegate’s interpretation of subsection 204.1(4) of the ITA (as well as the interpretation set out in the internal CRA guideline, on which the delegate relied) thwarts the subsection’s remedial purpose as it virtually extinguishes the Minister’s discretion … . Nearly every error a taxpayer might make in over-contributing to his or her RRSP (other than a simple arithmetical error) will be caused by a misunderstanding of the applicable limits – an error of law. … Similarly, the fact that the error might have been made by a third party advisor or as a result of erroneous advice given by such advisor does not automatically mean that the error cannot be reasonable.

… [Furthermore] the requirements to take reasonable steps to withdraw an RRSP over-contribution cannot be equated with immediacy or with the two-month timeframe mentioned in CRA’s internal “Guidelines for waiving tax – 19(23)7.23”.

However, she nonetheless did not find the CRA delegate’s refusal to provide relief to be unreasonable on the facts, given that the taxpayer had not sought any advice before over-contributing and had been very dilatory about addressing the situation once it was brought to his attention.

Neal Armstrong. Summary of Connolly v. Canada (National Revenue), 2019 FCA 161 under s. 204.1(4).