Taxpayer tests RRSP contribution limits and gets on the wrong side of the CRA

Taxes Personal Finances

Jamie Golombek: The amount you can contribute to a combination of your RRSP and/or a partner RRSP is based purely on your own RRSP limit

Publication date:

Jan 20, 2022 • Jan 20, 2022 • 5 minute reading • 5 Responses A spousal RRSP is used when your spouse or partner has no (or minimal) income and therefore no contribution margin to make an own RRSP contribution. Photo by Getty Images/iStockphoto Files

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“Know your limit and stay within it” may not be the official slogan of the Canada Revenue Agency, but perhaps it should be in light of the harsh treatment a taxpayer recently received when trying to get some relief from his registered retirement savings plan. (RRSP ) overpayment penalty tax.

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To understand the taxpayer’s predicament, and why it finally made it to federal court in December, let’s briefly review some of the basics of RRSP, which is timely as we’re currently delving into the depths of the RRSP. season.

In order to claim a deduction on your 2021 return, you must contribute before 1 March 2022, and you will find the maximum amount that you can contribute at the bottom of the “Account about the RRSP deduction limit” on your 2020 tax bill. can also be found online through the My Account portal of the CRA.

Your deduction limit for 2021 is based on 18 percent (up to a limit of $27,830) of your earned income in 2020, less any pension adjustments your employer made in the prior year, plus any unused deduction limits from prior years. Earned income includes work, self-employment, and rental income (among other things).

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If you have a spouse or cohabiting partner, you may prefer to make your RRSP contribution to a “marital RRSP”, which is simply an RRSP of which your spouse or partner is the annuitant and legal owns it, but to which you pay contributions .

The most important thing to remember when it comes to spouse RRSPs is that the amount you can contribute to a combination of your RRSP and/or a spousal RRSP is based on pure on your own RRSP limit and has nothing to do with your spouse or partner’s own RRSP limit.

In many cases, a spousal RRSP is used when your spouse or partner has no (or minimal) income and therefore no personal contribution margin to make an own RRSP contribution. It is done as a way of preparing to split income in retirement, as the withdrawals of the spouses’ RRSP (and the withdrawals of the RRIF later) are generally taxed in the hands of the retiring spouse or partner, who would presumably fall into a lower tax bracket than you would at retirement.

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It is precisely this confusion that led to a taxpayer being fined for excessive RRSP contributions, and why he took the case to federal court.

The taxpayer had two RRSPs to which he had contributed since 2010, a regular RRSP and a spouse RRSP. In 2018, the taxpayer has total RRSP contributions higher than his allowable RRSP contribution limit for that tax year. The money came from his wife’s inheritance after her grandmother’s death, and “was more money than we ever had on hand and we thought it wise to fill both of our RRSP contributions to their limits.”

He discovered his overcontribution error in March 2019 while preparing for his return in 2018. He immediately had his tax advisor file a request with the CRA to waive the overcontribution tax, calculated at one percent per month, of $1,040.

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In the letter, the taxpayer explained that he was “impressed that spouses could combine and share their RRSP contribution chamber … He had no intention of over-contribution, but rather paid contributions using his own RRSP added to his husband’s dues room.”

He took steps shortly afterwards to revoke the excess contribution, filed the T1-OVP excess contribution return and paid the excess contribution tax, hoping to get it back once the CRA had assessed its case.

Unfortunately this was not to be. In September 2019, the CRA rejected its request, explaining that while it has the authority to waive the penalty tax “if you overpaid RRSP due to reasonable error”, it concluded that “the rules and regulations about RRSP contributions” do not constitute a reasonable error.

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In October 2019, the taxpayer again filed for an impartial, second review of the case by another CRA official. In the letter, he explained that he had wrongly contributed too much to his personal and wife’s RRSP. “This was in no way intended to take advantage of the RRSP contribution program…I made an honest mistake, reported it and corrected it as soon as possible.”

Again, the CRA rejected his request, saying that the taxpayer had made and claimed both personal and spousal RRSP contributions since 2010, and “should have known that all RRSP contributions … that were made (i.e., both personal and spousal) within (his) personal allowable RRSP deduction limit.”

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So the taxpayer turned to federal court to request a judicial review of the CRA’s decision and whether it was “reasonable.” A reasonable decision “is one that is based on an internally coherent and rational chain of analysis and is justified in relation to the facts and legislation limiting the decision maker.”

In order to quash a decision on this ground, “the referring court must be satisfied that there are sufficiently serious shortcomings in the decision that it cannot be said to have the required degree of justification, comprehensibility and transparency.”

The judge reviewed all the facts and circumstances surrounding the taxpayer’s overpayments, recognizing that it was “an honest mistake”, but “the test to be met … is the reasonableness of the mistake made, not the innocence of the (taxpayer).”

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The judge further said that since Canada’s tax system is based on self-assessment, it is up to individual taxpayers “to ensure that they manage their financial affairs in accordance with the (law). It was up to the (taxpayer) to ensure that he did not contribute too much to his RRSP and if there was any ambiguity or understanding regarding the defined contribution margin he was expected to seek advice. †

The judge, who upheld the sentence, concluded that the CRA’s decision was “justified, transparent and understandable, well within the range of possible and acceptable results.” She also ordered the taxpayer to pay the costs, amounting to $1,000, as the losing party in the case.

Jamie Golombek, CPA, CA, CFP, CLU, TEP is the General Manager, Tax & Estate Planning at CIBC Private Wealth in Toronto. Jamie.Golombek@cibc.com

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This post Taxpayer tests RRSP contribution limits and gets on the wrong side of the CRA

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