A taxpayer who over-contributed to his RRSP by mistake and gained no benefit from the error has failed to gain relief from the taxes that resulted.
However, the Tax Court of Canada only reluctantly found for the government in the case. In the concluding remarks of the October judgment in Hall v. The Queen, Justice Johanne D’Auray recommended that the minister of revenue grant relief to the taxpayer. The decision is a reminder that when clients overcontribute to their RRSPs in error, but fail to file the appropriate form to report and correct the error within strict deadlines (90 days), they are likely to be found liable for the resulting taxes and interest.
The decision also indicates that the overcontribution rules can operate in ways that are clearly unfair to the taxpayer, with no judicial power to correct the situation. As the decision notes, referring to the unfortunate consequences for the taxpayer in this case: “The resulting unfairness that can be caused by the operation of these provisions is not the basis for overriding a valid assessment.”
The issue arose after the taxpayer, who was experiencing an extended personal crisis that included job loss, loss of assets and mental illness, had overcontributions in his RRSP for the years 2008 to 2013, inclusive. The overcontribution in the RRSP from 2008 to 2013 was $12,029, including $4,879 in contributions from prior years that were not deducted and a $7,150 contribution in 2008. The taxpayer did not seek deductions for these amounts and derived no benefits.
The amounts owing as a result of the overcontributions were modest: tax owing in each of the years in question ranged from $515 to $585. Penalties – which were waived by the Canada Revenue Agency (CRA) prior to the hearing – were between $87.55 and $105. Annual arrears of interest ranged from $42 to $220.
There is a general three-year limit on the government’s right to reassess tax returns under Part I of the Income Tax Act (ITA). The taxpayer argued that the three-year period began to run from each of the tax years in question. Since the reassessments did not occur until June 2015, the taxpayer argued, at least some of the reassessments should have been barred.
However, the government’s argument that, under Part X.1 of the ITA different rules apply, was successful: that part of the ITA applies to overcontributions. Under those rules, a taxpayer who has overcontributed must file a Form T1-OVP, as required by s. 204.3(1) of the ITA, for each year an overcontribution remains in an RRSP. Without that filing, there is no time limit on reassessments. However, once such a reassessment has occurred, the three-year time limit for reassessments begins to run. As a result, the reassessments were not statute barred.
Justice D’Auray, in reviewing the law and the options before her, referred to a 2011 decision from the Federal Court of Appeal, Lans v. Canada. That court’s decision noted: “The fact that the application of the law in particular circumstances may seem harsh, or that CRA officials may not always have been very helpful, is not a ground in which the Tax Court can grant relief from a lawful assessment….”
The Hall decision advises the taxpayer to apply to the minister for a cancellation of the taxes.
“Mr. Hall was not working at the time of the hearing,” the decision notes, “and was still receiving disability payments. He is still very fragile. He also stated that he took reasonable steps to eliminate the excess.”
© 2016 Investment Executive. All rights reserved.