The taxpayer did not file income tax returns for the 1988 to 2003 taxation years on the basis that as he owed no tax, this was unnecessary. Thus, when he made RRSP contributions in 2003 and 2004, he had not received any recent Notices of Assessment and, thus, no details of his unused RRSP contribution room – which, in fact, had been reduced to near zero as a result of his and his employer’s contributions to a registered pension plan.
In 2007, the CRA sent the taxpayer a letter explaining that he might have over-contributed to his RRSPs from 2003 to 2005, thereby giving rise to an obligation to file over-contribution (T1-OVP) returns and pay penalty tax - but that if he withdrew the excess contributions within the statutorily prescribed timeframe, this could be done without withholding tax by filing a T3012A form. The taxpayer directed his accountant to prepare the forms. Although the accountant apparently sent the forms more than a year later (without any follow-up by the taxpayer), CRA had no record of having received them, and arbitrarily assessed the taxpayer on January 5, 2009 for tax on the over-contributions, penalties and interest. On January 21, 2009, his accountant filed T1-OVP returns for 2003 to 2007 and T3012A forms for 2003 and 2004. On February 26, 2010, the taxpayer withdrew the requisite RRSP funds, included the withdrawals in his income and claimed a corresponding deduction.
The Minister reassessed and denied the deduction. The Tax Court of Canada concluded that the taxpayer met the statutory requirements to claim the deduction for the 2004 over-contributions, but not the 2003 over-contributions. In obiter dicta, the Tax Court suggested that the taxpayer seek a ministerial waiver for the tax on the over-contributions, penalties and interest, which he did. In 2016, the Minister denied the taxpayer’s requests for relief from the tax on the over-contributions and for waiver of penalties and interest for the years still in issue. The delegate applied internal CRA guidelines that stated that “Reasonable error means that the taxpayer did not intend to over contribute to their RRSP/PRPP and that it happened because of extraordinary circumstances beyond their control,” and that “reasonable steps” allowed the taxpayer “two months from the date of the Agency’s letter to withdraw funds and submit proof.” The subsequent judicial review before the Federal Court was the subject of the taxpayer’s appeal.
In dismissing the taxpayer’s appeal from a Federal Court decision denying relief judicial review of this decision, and in finding that the delegate’s interpretation of s. 204.1(4) was unreasonable, Gleason JA stated (at paras 59, 61, 67, 68):
… [T]here is no way to equate the provision’s requirement of a reasonable error with a requirement that the error result from extraordinary circumstances. Nor is it reasonable to exclude from consideration all errors flowing from a mistake about the quantum of available contribution room or all errors caused by bad advice received from a third party. Similarly, it is unreasonable to interpret the taking of reasonable steps to withdraw an over-contribution from an RRSP to mean that a taxpayer must withdraw the over-contributions as soon as possible or within the two-month timeframe mentioned in CRA’s internal “Guidelines for waiving tax – 19(23)7.23”.
…[S]ubsection 204.1(4)… requires only that the error that led to the over-contribution and steps taken to remedy it be reasonable.
The delegate’s interpretation of subsection 204.1(4) of the ITA (as well as the interpretation set out in the internal CRA guideline, on which the delegate relied) thwarts the subsection’s remedial purpose as it virtually extinguishes the Minister’s discretion … . Nearly every error a taxpayer might make in over-contributing to his or her RRSP (other than a simple arithmetical error) will be caused by a misunderstanding of the applicable limits – an error of law. … Similarly, the fact that the error might have been made by a third party advisor or as a result of erroneous advice given by such advisor does not automatically mean that the error cannot be reasonable.
…[T]he requirements to take reasonable steps to withdraw an RRSP over-contribution cannot be equated with immediacy or with the two-month timeframe mentioned in CRA’s internal “Guidelines for waiving tax – 19(23)7.23”.
However, in going on to dismiss his appeal, she stated (at paras, 77-78):
… Mr. Connolly appears to have been aware that there was a limit on RRSP contributions and that one’s contribution room bore a relationship with one’s income. But… Mr. Connolly does not appear to have made any inquiries … to confirm his contribution room. His error therefore likely cannot be said to have been a reasonable one.
Even if Mr. Connolly could be said to have made a reasonable error in these circumstances, the steps Mr. Connolly took to correct the mistake cannot in any way be characterized as reasonable.