A recent decision from the Tax Court of Canada has shed some light on the vexed issue of dealing with over-contributions to registered retirement savings plans.

In the July decision, the court ruled that the taxpayer was obligated to pay additional tax, penalties and interest on the overpayment. The taxpayer unsuccessfully argued that the penalties were unfairly increased due to delays by the Canada Revenue Agency in processing a request for a waiver.

In Lennox v. The Queen the appellant taxpayer agreed that she had over-contributed to her RRSP by more than $20,000. The over-contribution occurred in January 2005. She did not realize that a mistake had been made until April of that year.

Upon discovering the mistake (the next day), she instructed her accountant to: advise CRA of the error; take steps to reverse the over-contribution; and request a waiver of additional tax penalties due to the over-contribution.

The Income Tax Act provides that, where an over-contribution has occurred due to a “reasonable error,” and where “reasonable steps have been taken to eliminate the excess, the Minister may waive the tax.” Obtaining such a waiver can amount to a considerable reprieve, as the CRA is authorized to impose an additional tax of 1% on the excess funds, calculated monthly.

The CRA acknowledged that it received notice of the over-payment in May 2005; however, the excess was not removed from the RRSP until August, while the taxpayer waited to hear back from the CRA.

At trial, the issue was whether the penalty should be calculated for the months of January to March (prior to discovery of the error) as the taxpayer requested, or from January to July — July being the last full month during which the excess amounts remained in the RRSP.

The taxpayer’s position was that, once she had engaged the CRA and waited for a ruling on the waiver, which was ultimately denied, it was “beyond her control to remove the overpayment from her account. That it continued to remain there at the end of April, May, June and July 2005 was the direct result of the Minister’s delay in processing her request,” the decision says.

However, Justice Georgette Sheridan agreed with the CRA’s position that the relevant language of the ITA is mandatory in nature, thus requiring the CRA to levy the additional tax if a waiver has not been granted. The section reads, in part: “where at the end of any month … 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 [emphasis added].” Justice Sheridan also noted that the mandatory nature of that language is reinforced by the power of the CRA to grant a waiver if it so decides. Essentially, if there is no waiver, the tax must be paid, regardless of why the excess funds remain in the RRSP account.

Sheridan also pointed out that the Tax Court of Canada lacks the jurisdiction to review the CRA’s decisions with respect to granting waivers of additional tax payable due to mistaken RRSP over-constributions. That issue falls within the jurisdiction of the Federal Court of Canada.

However, it appears that Sheridan reached these conclusions with some reluctance. The judgement also states: “Though it is not my decision to make, given the timely steps taken by the appellant, it is my opinion that the Minister’s decision to refuse [the taxpayer’s request for a waiver] seems a harsh one.”

IE