Don’t over-contribute to registered plans

July 24, 2013 | Last updated on July 24, 2013
3 min read

The consequences of over-contributing to RRSPs and TFSAs can be costly. Sandeep Kapil found this out. The CRA had refused to cancel his RRSP over-contribution tax, interest and penalties.

Excess RRSP contributions are subject to a special tax of 1% per month on the excess amount beyond a $2,000 limit. If you over-contribute, you’ll also have to file an annual T1-OVP return to report the excess contribution and be liable for interest and penalties for either not filing the form or filling it out late.

There’s relief from the tax if your over-contribution was “as a consequence of a reasonable error” and “reasonable steps are being taken to eliminate the excess.”

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.

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.

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 told the 1% tax on excess RRSP contributions would be charged for each month that his excess contributions remained in his RRSP.

After the CRA received his T1-OVP for 2008, 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 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 he was not aware that he was precluded from making RRSP contributions in his first year of Canadian employment, the Judge said 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.

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