Contribute to RRSP with Vigilance

National Post


With so many types of investment accounts available these days, from RRSPs to TFSAs, RESPs to RDSPs, it’s perhaps not surprising that you might be encouraged to open something other than a traditional non-registered account.

But if you’re not vigilant in the type of account you are opening, you could wind up facing severe tax, penalties and interest as Jacob Friedlander recently found out.

Mr. Friedlander, whose first language is Spanish, immigrated to Canada in 2000. In 2002, he walked into a bank branch where he wished to open up an investment account. He told the employee that he wasn’t working and therefore wasn’t earning any income that year. He was a stay-at-home father with two infant children who was also studying. Nonetheless, the bank employee he spoke with set up an RRSP account for him.

Mr. Friedlander deposited a total of $11,450 in the account between 2002 and 2006. He never claimed any RRSP deductions for those years since he had no income from which to take the deduction. He also had no RRSP contribution room.

As a result, the amounts he deposited were greater than he was permitted to contribute to an RRSP, resulting in an over-contribution tax of 1% per month. The tax is calculated on the T1-OVP return, which must be filed within 90 days of the end of each year in which there was an excess contribution amount.

Mr. Friedlander, however, didn’t file his T1-OVP returns until he was notified of the over-contributions in January 2009 by way of a letter from the Canada Revenue Agency (CRA).

As soon as he received the letter, Mr. Friedlander took the necessary steps to file all the T1-OVPs for the years in question and removed his excess contributions from his RRSP account. But because the T1-OVP forms were not filed on time, he was hit not only with the 1% over-contribution tax for the relevant months, but with penalties and interest totaling approximately $4,350 on the $11,450 of deposits to his RRSP account.

Mr. Friedlander appealed to Tax Court seeking relief. Unfortunately, the Tax Court has no jurisdiction to waive the over-contribution tax. This can only be done by applying to the Canada Revenue Agency (CRA).

Mr. Friedlander did apply to the CRA, but his application was refused on the basis that he “had not shown that the RRSP excess contributions arose due to a reasonable error.”

The judge disagreed, was extremely sympathetic and “strongly encourage(d) Mr. Friedlander to request a second impartial review of the (CRA’s) decision…and…strongly urge(d) the person reviewing that decision to take into account my comments.”

But what the judge did have the power to do was cancel the penalties assessed for failure to file the T1-OVP returns, provided a taxpayer has exercised “due diligence” with respect to the filing requirements.

The judge, canceling the penalties, concluded that Mr. Friedlander’s failure to file was due to a “reasonable mistake of fact” as to the nature of the account he opened at the bank. If it had been an ordinary investment account, there simply would have been no requirement to file the T1-OVP returns in the first place.