CRA wins in court as woman fails to justify RRSP overcontribution
No one likes paying tax on investment income. With marginal tax rates as high as 54.8 per cent on interest income for residents of Newfoundland and Labrador, and capital gains tax rates now over 35 per cent in half the provinces for individuals with more than $250,000 of annual gains, maximizing registered plan contributions has never been more important.
But whether you decide to contribute to a tax-free savings account (TFSA), a registered retirement savings plan (RRSP), a registered education savings plan, or the new first home savings account, it’s critical to stay on top of your contribution limits, lest you face penalty tax for overcontributions.
Accidentally overcontributing to either a TFSA or RRSP seems to be a recurring problem for some taxpayers, evidenced by the continuous flow of newly reported cases, in which taxpayers go to court trying to wiggle out of the punitive overcontribution tax they’ve been assessed.
Take the most recent case, decided in late July, which involved a taxpayer who overcontributed to her RRSP in 2020 and 2021. She was taxed on the excess contributions at the rate of one per cent per month.
Under the Income Tax Act, the Canada Revenue Agency (CRA) has the discretion 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, then 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 taxpayer’s troubles began in 2020 when she overcontributed $41,291 to her RRSP. This problem was not addressed, and the overcontributions accumulated in subsequent
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