EXCESS RRSP AND TFSA CONTRIBUTIONS – REASONABLE ERROR?

CRA has the discretion to waive the penalty tax on excess contributions to a TFSA or RRSP if the excess contribution resulted from reasonable error (Subsections 204.1(4) for RRSPs and 207.06(1) for TFSAs), and:

• for TFSAs, the excess contributions, plus any income or capital gains reasonably attributable to them, are withdrawn without delay; and for RRSPs, reasonable steps are taken to eliminate the excess.

In an October 7, 2020 French Technical Interpretation (2020-0852131C6, Mélanie Beaulieu), CRA provided comments on what constitutes reasonable error for these purposes, stating that all facts and circumstances should be reviewed for each case. CRA provided the following general comments on their internal guidelines:

• Ignorance of the rules – Due to the self-assessment nature of the tax system, CRA does not usually waive the penalty tax on excess contributions if the excess contribution arose as a result of the taxpayer’s negligence, inattention, or ignorance of the rules.

• Third parties (financial institutions, employers, financial advisors) – As a third party is a representative acting on behalf of the taxpayer, the mere fact that a taxpayer relies on the advice of a third-party is not, in and of itself, sufficient to constitute a reasonable error. However, depending on the circumstances, it may be appropriate for CRA to waive taxes.