Principal Issues: What is the meaning of "reasonable error" for the purposes of subsections 204.1(4) and 207.06(1)?
Position: Question of facts. General comments provided.
Reasons: Whether an error is reasonable can only be determined after a review of all the relevant facts and circumstances.
FEDERAL TAX ROUNDTABLE OCTOBER 7, 2020
APFF CONFERENCE 2020
Question 1
What does the term "reasonable error" mean?
Subsection 204.1(4) of the Income Tax Act (footnote 1) states that "[w]here an individual would, but for this subsection, be required to pay a tax under subsection 204.1(1) or 204.1(2.1) in respect of a month and the individual establishes to the satisfaction of the Minister that … the excess amount or cumulative excess amount on which the tax is based arose as a consequence of reasonable error, and … reasonable steps are being taken to eliminate the excess, the Minister may waive the tax.”
Subsection 207.06(1), which applies to TFSAs, is to the same effect.
What is a reasonable error? According to the Petit Larousse, an error is: [TaxInterpretations translation]
"The fact of being mistaken; a fault thus committed. The state of someone who is mistaken. An inconsiderate, regrettable action. An inaccurate assessment either of the qualities or existence of a fact, or of the interpretation or existence of a rule of law.
The term reasonable is defined as: [TaxInterpretations translation] "That which can be accepted, tolerated".
Thus, ignorance of a rule of law constitutes an error. Ignorance of the law is a maxim of criminal law. It is not possible for a defendant to raise ignorance of the law as a defence to a criminal offence. This has no place in the context of the application of a law such as the Income Tax Act, which is excessively complex and requires particular expertise to understand.
In Poucet v. Attorney General of Canada (footnote 2), the judge's comments at paragraphs 46 and 47 read as follows:
[46] This said, the Court agrees that the consequences visited on the Applicant are harsh and out of proportion with any error in over contributing to her RRSP. …
[47] In such circumstances, the Court repeats its concerns stated in Connolly v. Canada (National Revenue), 2017 FC 1006 in concluding that contributions to RRSPs can represent a hidden trap for many unsuspecting taxpayers such as the Applicant. It urges the Minister to take steps to find the appropriate means to provide conspicuous warnings to taxpayers not to make any contributions to their RRSP plans unless aware of their contribution limits because of the harsh penalties that may accrue from over contributions.
Question to the CRA
Can the Canada Revenue Agency ("CRA") clarify what it means by reasonable error and when it intends to exercise its discretion under subsections 204.1(4) and 207.06(1)?
CRA Response
The Minister (footnote 3) may waive the tax payable on excess TFSA or RRSP contributions if the taxpayer can satisfactorily demonstrate that the excess contributions that are subject to tax resulted from a reasonable error (footnote 4), and:
- reasonable steps have been or are being taken to eliminate the excess amount in the case of excess RRSP contributions; or
- one or more distributions are made without delay to eliminate the excess in the case of excess TFSA contributions.
Both relevant conditions must be met for the CRA to waive the tax. If more than one event has caused the excess contribution, each event will be considered separately. Requests for waiver must be submitted in writing and be accompanied by all supporting documentation.
With respect to the first condition in particular, the term "reasonable error" within the meaning of either subsection 204.1(4) or subsection 207.06(1) is not defined in the Income Tax Act. However, the CRA uses certain general internal guidelines to assess applications for waiver of tax on excess TFSA and RRSP contributions. Those guidelines are reviewed on an ongoing basis and are adapted based on the documentary evidence submitted in a particular situation. As such, those guidelines are not an exhaustive statement of what constitutes a reasonable error, as each situation must be considered on a case-by-case basis in light of all the facts, circumstances and relevant documentation pertaining to a particular situation.
According to those guidelines, a reasonable error means in the first instance that the excess is genuinely the result of an error and that the taxpayer did not intentionally overcontribute. For the error to be reasonable, it must also be considered by an impartial person (footnote 5) to be more likely to occur rather than less likely to occur based on the circumstances of the taxpayer.
Reasonableness is considered on a case-by-case basis and will depend on the facts, circumstances and relevant documents pertaining to each situation. Each application is carefully analyzed and efforts are made to obtain complete and accurate information in order to make an informed decision based on the events, parties involved and facts relevant to the case.
As each case is analyzed on its own merits, the CRA is not in a position to provide a detailed list of cases where it intends to exercise the discretion entrusted to it. However, the CRA can provide the following general comments.
Ignorance of the requirements of the Income Tax Act
The case law generally recognizes that "because the Canadian tax system is based on self-assessment, it is incumbent on taxpayers to take reasonable steps to comply with the [Income Tax Act], including by seeking advice where necessary” (footnote 6). Consequently, the CRA generally cannot accept the claim of ignorance of the law as a basis for granting a waiver. If the excess arose as a result of the taxpayer's negligence or carelessness or by reason of ignorance of the requirements of the Income Tax Act, the CRA will not generally waive the tax payable on the excess contributions. For example, the fact that a taxpayer was unaware of the tax on excess contributions to an RRSP or TFSA, or of the filing requirement, are not in themselves acceptable reasons for waiving the tax.
Third parties (financial institutions, employers, financial advisors)
According to the jurisprudence, "the mere fact that a taxpayer has relied on an expert third party for advice is not determinative” (footnote 7). Taxpayers are required to satisfy their obligations under the statutes administered by the CRA. Consequently, taxpayers may be considered liable for tax on over-contributions, even if errors were made by third parties. A third party for this purpose is understood to be a representative acting on behalf of the taxpayer.
While the mere fact that a taxpayer relies on third-party advice is not, in and of itself, sufficient to conclude that an assessment arising from such advice is a reasonable error, in certain situations the CRA may consider it appropriate to waive tax arising from a third-party error, depending on the circumstances.
In all cases, the taxpayer's compliance history, especially in relation to previous excess contributions, as well as whether the taxpayer has suffered physical or mental distress (caused by death, serious illness or accident in the immediate family, marital separation or loss of employment, natural or man-made disaster) during the period for which relief is sought are factors that could be taken into account in assessing whether the error is reasonable.
Finally, here are examples of situations where the CRA has, in the past, considered excess contributions to be the result of a reasonable error:
- The taxpayer's notice of (re)assessment indicated an RRSP deduction limit of $0, where in fact the limit was a negative amount, so that the taxpayer may have mistakenly believed that the taxpayer was entitled to the $2,000 allowance, even though that the benefit of the allowance had already been generated due to premiums paid in the past;
- The taxpayer, through no personal fault, had over-contributed due to inaccurate information provided on the RRSP deduction limit statement, in a letter from the CRA, or on the CRA's "My Account" service (footnote 8);
- The taxpayer's RRSP deduction limit had been reduced retroactively, due to events such as the late submission of a pension adjustment or amended pension adjustment, or the late submission of an exempt past service pension adjustment or T215 slip (footnote 9) for exempt past service pension adjustments;
- The taxpayer, a TFSA holder, had made multiple contributions to and withdrawals from his TFSA with the objective of maintaining a TFSA account balance below the contribution limit.
This list is provided for illustrative purposes only and is not intended to be an exhaustive list of situations where the CRA may consider an over-contribution to be the result of a reasonable error, each situation being considered in light of all the relevant facts, circumstances and documentation.
Mélanie Beaulieu
(613) 670-8905
October 7, 2020
2020-085213
Response prepared in collaboration with:
Mohamed Benchaouche
Manager
Investment Plans Section
Third Party Reporting Division
Individual Returns Directorate
Assessment and Benefit Services Branch
(613) 290-1653
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 R.S.C. (1985), c. 1 (5th Supp.) (the “Act”)
2 2018 FC 473
3 This authority is delegated to certain CRA officials: https://www.canada.ca/en/revenue-agency/services/tax/technical-information/delegation-powers-duties-functions/delegation-ministerial-powers-duties-functions/delegation-under-9.html
4 Subsection 204.1(4) refers, in French, to an "erreur acceptable" and, in English, to a "reasonable error". Subsection 207.06(1) refers, in French, to a "erreur raisonnable" and, in English, to a "reasonable error". For the purposes of this document, the term "erreur acceptable" should be understood to include the term "reasonable error".
5 An impartial person is one who is not biased as to how a problem or situation arose and how it is resolved and who has no personal interest in its resolution.
6 Connolly v. Canada (National Revenuel), 2019 FCA 161, para. 69.
7 Id.
The "My Account" service is a resource that allows the taxpayer to check their RRSP deduction limit and TFSA contribution room and compare it with their own records. It is the taxpayer's responsibility to keep track of their own contributions and withdrawals to ensure that they are within their limits when making new contributions.
9 CANADA REVENUE AGENCY, Form T215, "Past Service Pension Adjustment (PSPA) Exempt from Certification".