CEO in hot water with CRA after misunderstanding RRSP, pension plan rules

financialpost.com:

If you participate in your employer’s pension plan, the amount you’re able to contribute to your registered retirement savings plan (RRSP) is reduced by something called a pension adjustment (PA).

Your PA amount, which appears on your T4 slip, is the value of the benefits you earned in the prior year under your employer’s registered pension plans (RPP) and directly reduces your RRSP deduction limit for the following year. The purpose of the PA is to limit your RRSP contributions to the extent that contributions were made to an RPP.

But it’s important to remember there is a one-year lag, such that contributions made to your pension plan by either you or your employer in, say, 2023, affect your RRSP deduction limit for 2024. A failure to appreciate this lag could potentially lead to an RRSP overcontribution and penalty tax, which is why one taxpayer ended up in court last month.

If a taxpayer makes a contribution to their RRSP that exceeds their deduction limit, the excess contribution is taxed at a rate of one per cent per month until it is withdrawn. There is, however, a mechanism under the Income Tax Act that allows the Canada Revenue Agency to waive this overcontribution tax if the excess contribution occurred because of a “reasonable error” as long as “reasonable steps” were taken to eliminate the excess.

If the CRA refuses to waive the tax, taxpayers have the right to seek a judicial review of the CRA’s decision in Federal Court, which is how the current case came to trial.

The case involved a taxpayer, the former chief executive of an airport authority, whose compensation plan included participation in a defined-contribution pension plan. The taxpayer also annually topped up his retirement savings by contributing