Subsection 204.1(2.1) - Tax payable by individuals -- contributions after 1990
Employer accidentally missed contributing, to a group RRSP or defined contribution pension plan, the Employer's portion on behalf of an employee for a time period. CRA stated:
In regards to an employer payment made in respect of missed contributions to an employee's registered plan, an employee would generally be liable for Part X.1 tax under subsection 204.1 of the Act where the contributions cause the employee to have a cumulative excess amount in respect of the employee's RRSPs.
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|Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(q)||employer restorative payment to RRSP or RPP to compensate for tort||159|
|Tax Topics - Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a)||employer restorative payment to RRSP or RPP to compensate for tort||115|
|Tax Topics - Income Tax Act - Section 60 - Paragraph 60(i)||employer restorative payment to RRSP or RPP to compensate for tort||159|
Where an amount withdrawn from an RRSP when there is a cumulative excess amount in respect of RRSPs, when does the Part X.1 tax cease? CRA responded:
Since the income tax under subsection 204.1(2.1) is calculated monthly, at the end of the month … the time for calculating the cumulative excess amount in respect of RRSPs under subsection 204.2(1.1) and undeducted RRSP premiums under subsection 204.2(1.2) is at the end of each month. Consequently, when an individual has a cumulative excess amount in respect of registered retirement savings plans, the withdrawal of the excess reduces the amount of the undeducted RRSP premiums under subsection 204.2(1.2) and thereby the cumulative excess amount in respect of registered retirement savings plans for the months ending after the date of withdrawal.
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|Tax Topics - Income Tax Act - Section 204.2 - Subsection 204.2(1.2)||a taxable RRSP withdrawal reduces undeducted RRSP premiums and, as a result, the cumulative excess amount in respect of RRSPs||323|
T1-OVP 2020 Individual Tax Return for RRSP, PRPP and SPP Excess Contributions
Meaning of "RRSP excess contributions"
References to "RRSP excess contributions" on this return mean your RRSP contributions, your unused RRSP contributions from prior years, plus your employer or former employer PRPP contributions that exceed your RRSP deduction limit, plus $2,000 for a given year.
You can only qualify for the additional $2,000 amount if you were 18 years or older at any time in 2019.
If your 2020 unused RRSP contributions are subject to tax, you have to complete and send this return with your payment to your tax centre no later than 90 days after the end of the tax year.
The taxpayer over-contributed to his RRSPs for the 2018 taxation year in December 2018, realized his error in March of 2019 and promptly filed a T1-OVP return reporting Part X.1 tax on the over-contribution, was consequently assessed such tax in a slightly higher amount, and then applied for waiver of the tax pursuant to s. 204.1(4).
After noting (at para. 24) that in Connolly “the applicant had provided little detail as to why he made the mistake that resulted in his over-contribution and did not appear to have made any inquiries, whether with his accountant, his bank or his employer, to confirm his RRSP contribution room … [so that] the Federal Court of Appeal concluded that his error likely could not be said to have been a reasonable one”, Aylen J dismissed the taxpayer’s application for judicial review of the two-level decision of CRA declining to waive the tax, stating (at para. 26):
While the Applicant asserts that his error was an honest mistake and that he did not knowingly intend to over-contribute, the test to be met under section 204.1(4) is the reasonability of the error made, not the innocence of the Applicant … . As noted in the decision on the Second Request, the Canadian tax system is based on self-assessment, which means that it is up to individual taxpayers to ensure that they conduct their financial affairs in accordance with the ITA. The onus was on the Applicant 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, the Applicant was expected to seek advice … .
The taxpayer did not file income tax returns for the 1988 to 2003 taxation years on the basis that as he owed no tax, this was unnecessary. Thus, when he made RRSP contributions in 2003 and 2004, he had not received any recent Notices of Assessment and, thus, no details of his unused RRSP contribution room – which, in fact, had been reduced to near zero as a result of his and his employer’s contributions to a registered pension plan.
In 2007, the CRA sent the taxpayer a letter explaining that he might have over-contributed to his RRSPs from 2003 to 2005, thereby giving rise to an obligation to file over-contribution (T1-OVP) returns and pay penalty tax - but that if he withdrew the excess contributions within the statutorily prescribed timeframe, this could be done without withholding tax by filing a T3012A form. The taxpayer directed his accountant to prepare the forms. Although the accountant apparently sent the forms more than a year later (without any follow-up by the taxpayer), CRA had no record of having received them, and arbitrarily assessed the taxpayer on January 5, 2009 for tax on the over-contributions, penalties and interest. On January 21, 2009, his accountant filed T1-OVP returns for 2003 to 2007 and T3012A forms for 2003 and 2004. On February 26, 2010, the taxpayer withdrew the requisite RRSP funds, included the withdrawals in his income and claimed a corresponding deduction.
The Minister reassessed and denied the deduction. The Tax Court of Canada concluded that the taxpayer met the statutory requirements to claim the deduction for the 2004 over-contributions, but not the 2003 over-contributions. In obiter dicta, the Tax Court suggested that the taxpayer seek a ministerial waiver for the tax on the over-contributions, penalties and interest, which he did. In 2016, the Minister denied the taxpayer’s requests for relief from the tax on the over-contributions and for waiver of penalties and interest for the years still in issue. The delegate applied internal CRA guidelines that 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,” and that “reasonable steps” allowed the taxpayer “two months from the date of the Agency’s letter to withdraw funds and submit proof.” The subsequent judicial review before the Federal Court was the subject of the taxpayer’s appeal.
In dismissing the taxpayer’s appeal from a Federal Court decision denying relief judicial review of this decision, and in finding that the delegate’s interpretation of s. 204.1(4) was unreasonable, Gleason JA stated (at paras 59, 61, 67, 68):
… [T]here is no way to equate the provision’s requirement of a reasonable error with a requirement that the error result from extraordinary circumstances. Nor is it reasonable to exclude from consideration all errors flowing from a mistake about the quantum of available contribution room or all errors caused by bad advice received from a third party. Similarly, it is unreasonable to interpret the taking of reasonable steps to withdraw an over-contribution from an RRSP to mean that a taxpayer must withdraw the over-contributions as soon as possible or within the two-month timeframe mentioned in CRA’s internal “Guidelines for waiving tax – 19(23)7.23”.
…[S]ubsection 204.1(4)… requires only that the error that led to the over-contribution and steps taken to remedy it be reasonable.
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.
…[T]he 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, in going on to dismiss his appeal, she stated (at paras, 77-78):
… Mr. Connolly appears to have been aware that there was a limit on RRSP contributions and that one’s contribution room bore a relationship with one’s income. But… Mr. Connolly does not appear to have made any inquiries … to confirm his contribution room. His error therefore likely cannot be said to have been a reasonable one.
Even if Mr. Connolly could be said to have made a reasonable error in these circumstances, the steps Mr. Connolly took to correct the mistake cannot in any way be characterized as reasonable.
Hall v. The Queen, 2016 TCC 221 (Informal Procedure)
The taxpayer had $12,029 of excess contributions in his RRSP since the end of 2008. He failed to file a Return for RRSP Excess Contributions (“Return”) on form T1-OVP for his 2008 to 2013 years as required by s. 204.3(1). The Minister assessed the taxpayer in 2015 for the tax owing and arrears interest.
Based inter alia on the taxpayer’s mental illness during the years in litigation, D’Auray J advised him to apply for a cancellation of taxes under s. 204.1(4) and that, if the Minister were to refuse to waive the tax, he could also apply to the Minister under s. 220(3.1) for waiver of the related interest. Furthermore, she recommended “that the Minister exercise her discretion for the taxation years in issue” (para. 37).
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|Tax Topics - Income Tax Act - Section 152 - Subsection 152(4)||assessment of Part I tax returns does not engage the running of statute-barring for taxes under other Parts||145|
|Tax Topics - Income Tax Act - Section 204.3 - Subsection 204.3(2)||assessment of Pt I returns did not start Pt X.1 statute-barring period running||71|
What is meant by reasonable error in s. 204.1(4) and s. 207.06(1), and when will CRA exercise its discretion thereunder? CRA responded:
[R]easonable error means in the first instance that the excess is genuinely the result of an error and that the taxpayer did not intentionally overcontribute. For the error to be reasonable, it must also be considered by an impartial person to be more likely to occur rather than less likely to occur based on the circumstances of the taxpayer. …
If the excess arose as a result of the taxpayer's negligence, carelessness or ignorance of the requirements of the Income Tax Act, the CRA will not generally waive the tax payable on the excess contributions. …
While the mere fact that a taxpayer relies on third-party advice is not, in and of itself, sufficient to conclude that an assessment arising from such advice is a reasonable error, in certain situations the CRA may consider it appropriate to waive tax arising from a third-party error, depending on the circumstances. …
[H]ere are examples of … excess contributions [considered] to be the result of a reasonable error:
- The taxpayer's notice of (re)assessment) indicated an RRSP deduction limit of $0, where in fact the limit was a negative amount, so that the taxpayer may have mistakenly believed that the taxpayer was entitled to the $2,000 allowance …;
- The taxpayer, through no personal fault, had over-contributed due to inaccurate information provided on the RRSP deduction limit statement [or by] the CRA…;
- The taxpayer's RRSP deduction limit had been reduced retroactively, due to events such as the late submission of a pension adjustment or amended pension adjustment, or the late submission of an exempt past service pension adjustment or T215 slip … for exempt past service pension adjustments;
- The taxpayer, a TFSA holder, had made multiple contributions to and withdrawals from his TFSA with the objective of maintaining a TFSA account balance below the contribution limit.
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|Tax Topics - Income Tax Act - Section 207.06 - Subsection 207.06(1)||examples of what CRA has accepted as a “reasonable error” in making an RRSP or TFSA over-contribution||303|