RRSP Over-Contributions: No Mercy, No Relief

INTRODUCTION

The Federal Court of Appeal's recent decision of Patrick Connolly v Minister of National Revenue (herein "Connolly v. MNR") highlights the serious onus the taxpayer bears to understand and apply the complexities and nuances of the Income Tax Act (Canada) (the "Act") rules as they relate to the common and recurring issue of over-contributions by taxpayers to their respective Registered Retirement Savings Plans ("RRSPs").

LEGISLATION & POLICY PROVISIONS

RRSP & OVER-CONTRIBUTION

Generally speaking, a taxpayer's RRSP contribution limit for a given tax year is calculated at 18% of his/her prior year's earned income1, less any "pension adjustment"2 from a taxpayer's employer, plus any unused RRSP contribution room carried over from prior years.

Subsections 146(1), (5) and (5.1) provide that a taxpayer's contributions to an RRSP are deductible up to the taxpayer's RRSP deduction limit. Generally speaking, a taxpayer's RRSP deduction limit is comprised of both his/her RRSP premiums deductible and amount of his/her spousal RRSP premiums deductible. Where a taxpayer makes any contribution to his/her RRSP which exceeds his/her deduction limit, the total excess amount is taxed at the rate of one percent (1%) per month until it is withdrawn3. This special 1% "penalty tax" is payable by the individual and applies for each month that the excess contribution remains in place. The Act also provides that a Taxpayer has a $2,000 "cushion", before being subject to any over-contribution penalty. 4

Paragraph 56(1)(h) and subsections 146(8), (8.2) and (8.21) of the Act provides that while a taxpayer is taxed on the withdrawal of any subject over-contribution from an RRSP, he/she is entitled to a corresponding deduction provided such withdrawal is made within the statutorily prescribed period. Commonly, this period is up to two years after the taxpayer made the over-contribution.

Meanwhile, subsection 204.3(1) of the Act provides that taxpayers who make over-contributions to their RRSP must file a T1-OVP return within ninety (90) days of the end of the taxation year to estimate and pay the amount of tax payable. However, since the taxes on RRSP over-contributions are payable at the end of each month, the taxpayer must typically pay interest on the unpaid taxes pursuant to subsections 161(1) and 204.3(2). This is compounded by the fact that there is usually a long period of time before a taxpayer may be aware that there was an over-contribution to their RRSP5. Furthermore, a taxpayer is liable also to pay penalties for failing to "file timely" the required T1-OVP return. 6

DISCRETIONARY RELIEF

Subsections 204.1(4) and 220(3.1) of the Act provides for the possibility of discretionary relief by the Minister against such interest and penalties.

Subsection 204.1(4) provides, in part, that:

Where an individual would, but for this subsection, be required to a pay a tax under subsection... 204.1(2.1) in respect of a month and the individual establishes to the satisfaction of the Minister that...

the...cumulative excess amount on which the tax is based arose as a consequence of reasonable error, and reasonable steps are being taken to eliminate the excess, the Minister may waive the tax. (Emphasis added.)

Subsection 220(3.1) of the Act provides, in part, that:

The Minister may, on or before the day that is ten calendar years after the end of the taxation year of a taxpayer...or on application by the taxpayer...on or before that day...waive or cancel all or any portion of any penalty or interest otherwise payable under this Act by the taxpayer...in respect of that taxation year...

The facts, history, judicial history and ultimate judgment of Connolly v. MNR provide a demonstration of the many facets of the Act summarized in the above legislation.

OVERVIEW

In Connolly v. MNR, Mr...