The Definition of Reasonable

FORUM Magazine


What may seem “reasonable” to a taxpayer may not seem so to the CRA

When it comes to tax law, what may be reasonable to a taxpayer may not necessarily be reasonable to the Canada Revenue Agency (CRA).

Take, for example, the recent case of Bernard Gagné (Gagné v AG (Canada), 2010 FC 778). Gagné found himself in Federal Court requesting a judicial review of CRA’s refusal to waive the penalty tax with respect to his overcontributions to his RRSP over the course of five years.

Mr. Gagné made excess RRSP contributions from 1995 to 2002 such that by the end of December 2002, he had accumulated an excess amount of over $13,500, which remained constant from 2003 to 2007.

Under the Income Tax Act, the penalty tax for overcontribution is one per cent of the excess amount per month for as long as the excess remains in the RRSP. In Gagné’s case, the excess amount was in the plan for 60 months over five years, from 2003 to 2007.

In addition to this special tax, Gagné was also liable for non-deductible arrears interest at the CRA’s prescribed rates for the penalty tax owing, and he was liable for penalties for late filing of the five annual T1-OVP-S returns to report the RRSP excess contributions.

For each of the five years, the special tax was about $1,100, to which a penalty in the range of $150 to $185 for late filing was added, as well as arrears interest varying between $85 and $600. As a result, the total amount Gagné owed for the period in question was about $8,900.

The Act, however, specifies that relief may be granted, at the CRA’s discretion, provided that “the individual establishes to the satisfaction of the Minister that the excess amount … on which the tax is based arose as a consequence of reasonable error, and [that] reasonable steps are being taken to eliminate the excess.”

In January 2009, with the help of CRA employees, Gagné completed and filed his T1-OVP-S returns for the five years in question. Concurrently, he sought relief for the special tax resulting from the excess RRSP contributions, claiming that he had been “misled by a financial advisor who from 1995 to 2002 repeatedly overestimated his RRSP contributions, which is what created the excess amount.”

Gagné maintained that it was only after he received a letter from the CRA in November 2008 that he became aware of his overcontribution situation, claiming not to have received an earlier CRA letter sent in March 2007.

In March 2009, the CRA denied Gagné’s request for relief on the grounds that the excess amount was not the result of a “reasonable error” and that he had taken no “reasonable steps’” to eliminate the excess.

The following month, having reviewed the excess amount, Gagné requested an administrative review of the CRA’s initial decision. It was upheld in September 2009 and thus he appealed to the Federal Court for a judicial review of the CRA’s decision not to grant him relief.

In Court, Gagné insisted that he “acted with diligence and in good faith as soon as he realized his mistake […] in 2008.” He again denied having received the first formal notice sent by the CRA in March 2007, but argued that as soon as he received the second notice, “he took the appropriate measures to rectify the situation” and that he “never wanted to abuse the system.”

The CRA argued that Gagné’s alleged RRSP overcontribution error was not “reasonable” since, for seven consecutive years from 1995 to 2002, he contributed more to his RRSP annually than he was entitled to contribute. In other words, since 2003, he had been in a situation of excess contributions.

Furthermore, the CRA maintained that on each Notice of Assessment Gagné received for each tax year, there was a printed notice indicating that if the amount of “unused’’ RRSP contributions is greater than his RRSP “deduction limit,” he could be “subject to a penalty.”

The judge had to decide whether the CRA’s final decision to deny Gagné relief was reasonable. The judge pointed to the tax act itself, which spells out the conditions for the tax waiver and states that the onus is on the individual to satisfy the minister that the excess amount arose as a consequence of a “reasonable error’’ and that “reasonable steps’’ had been taken to eliminate the excess.

The judge wrote that Canada’s tax system is based on self-assessment, which means that “it is up to each individual to make sure he or she does not exceed the deduction limit when contributing to an RRSP.”

The judge concluded: “Ignorance of the law is not a reasonable error; moreover, [he] could have contacted the [CRA] at any time to verify whether the amounts he was contributing were reasonable … Even if one believes [Gagné] when he states that he relied on a financial advisor or an accountant, objectively, the error is not reasonable.”

Not surprisingly, the judge concluded that the CRA’s final decision was indeed reasonable and that there was no reason to interfere with it.