ax court nameplate on table with judge

If your summer is generally slower, why not take advantage of this extra time to take on a project you otherwise might not have time for during the rest of the year? This summer, consider launching an “RRSP contribution room project.”

This project involves opening each and every client’s file, whether it be paper or electronic, to see if you have the most up-to-date information regarding the client’s available RRSP contribution room. If not, reach out to clients for a copy of their recent Notice of Assessment for 2017, detailing their cumulative unused RRSP contribution room.

It’s important to have this information on file well before RRSP season so that your clients don’t overcontribute to their RRSPs, as happened in a recent Tax Court of Canada case handed down in late June.

The case involved a taxpayer, Cathy Nolis, who was charged an RRSP overcontribution tax, penalties and interest of $1,603 (for 2013), $1,830 (for 2014) and $1,666 (for 2015) for making an excess contribution of $14,000 toward her RRSP.

The taxpayer, a former employee of the Province of Ontario’s Workplace Safety & Insurance Board, retired in 2013 and received a retiring allowance of just more than $34,000. Of this, $14,000 was an “eligible portion,” meaning that it can be transferred to an RRSP, on a tax-free basis, even if the taxpayer doesn’t have the available contribution room. The remaining $20,000 of the $34,000 the taxpayer received was a non-eligible portion of this retiring allowance.

The eligible portion of a retiring allowance is calculated as $2,000 per year of service before 1996, and an additional $1,500 per year (for a maximum of $3,500) of service before 1989. The additional $1,500 is available to employees who are not members of a company pension plan, or if their contributions to a pension plan have not yet vested.

The evidence showed that Nolis’s 2013 RRSP deduction limit was $14,995. Thus, she was able to contribute a total of $28,995 to her RRSP for 2013, being the $14,000 eligible portion of her retiring allowance plus the $14,995 of RRSP room carried forward. Nevertheless, in 2013, she contributed a total of $42,995 toward her RRSP, resulting in an excess contribution of $14,000 (i.e., $42,995 minus $28,995) arising that year.

Although the court documents don’t shed any light as to the reason for the taxpayer’s RRSP overcontribution, it appears likely that the $14,000 in respect of the eligible portion of the retiring allowance was contributed twice.

As the taxpayer had retired, she no longer had any salary or other “earned income” necessary for establishing new RRSP contribution room. Thus, she had a zero RRSP deduction limit for each of her 2014 and 2015 taxation years.

At no time did Nolis take steps to withdraw any of this excess contribution for any of her 2013, 2014 or 2015 taxation years. As a result, the $14,000 excess contribution in 2013 could not be deducted in either whole or part as a contribution to the taxpayer’s RRSP for either of those two succeeding years.

Therefore, the $14,000 excess contribution of 2013 carried forward unabated for each of the taxpayer’s 2014 and 2015 taxation years, giving rise the 1% a month penalty tax, plus interest and late-filing penalties for the Form T1-OVPs, “Individual Tax Return for RRSP…Excess Contributions.”

In upholding the tax, penalties and interest, the judge commented: “The onus was not on [the Canada Revenue Agency] to explain to a taxpayer his her or its tax/legal situation; we have in Canada a self-assessment system for tax reporting by which taxpayers have the responsibility to file their required returns and are expected to reliably and knowledgeably do so.”

Perhaps if the taxpayer and/or her advisor had been keeping track of her available RRSP contribution room as well as the contributions she made in 2013, the situation she went through could have been avoided.