The Canada Revenue Agency (“CRA”) does have the discretion to waive tax penalties on excess (or deemed to be excess) contributions to Tax Free Savings Accounts (“TFSAs) and Registered Retirement Savings Plans (“RRSP”) if an excess contribution to a TFSA or RRSP resulted from a reasonable error under the applicable sections of the Income Tax Act (“ITA”). With regard to TFSAs, it would be for excess contributions made (plus any income earned on these contributions) are withdrawn without delay. For RRSPs, reasonable steps have been taken to remove or eliminate the excess.
In a recently released Technical Interpretation (2020-08252131C6 – warning it is in French – you can call on a bilingual colleague or friend to assist if needed?), the CRA provides some commentary on what constitutes a reasonable error with these guidelines:
- Ignorance of the rules – Due to the nature of our tax system as being based on self -assessment, the CRA does not usually waive the tax penalty on excess contributions if the excess arose as a result of the taxpayers’ negligence, inattention or ignorance of the rules,
- Third parties (advisers, professionals, employers) the mere fact that you may have relied on the advice of a third party is not, in itself sufficient cause to argue for a determination of a reasonable error. However, depending on the facts and circumstances, the CRA may be persuaded to waive the penalty.
Indeed, the CRA is careful to note that a determination of reasonable error would be made on a case by case basis, depending on the facts and circumstances of each case.
These comments appear to be consistent with a recent Federal Court Case (Badesha v Attorney General of Canada 2020 FC 215) where the taxpayer tried unsuccessfully to have penalties cancelled on excess contributions to his TFSA for 3 successive taxation years. The CRA assessed penalties in each successive year of excess contributions and in each instance, the taxpayer had made withdrawals but far less than what was required. The taxpayer contended that he did not understand the law and the assessments he received. The taxpayer also contended he was being harassed by fraudulent phone calls from individuals purporting to be from the CRA demanding money. He therefore assumed the assessments he received were in error.
The court noted that the CRA interprets reasonable error to mean the taxpayer’s excess contributions to a TFSA occurred because of extraordinary circumstances beyond the taxpayer’s control. The CRA interprets “without delay” to mean that the taxpayer took immediate corrective action to distribute the excess contributions or close the TFSA within 30 days of being notified by the CRA.
The CRA recently released Form RC2503 – Request for Waiver or Cancellation (of tax penalties) which deals with this subject.
As featured on All About Estates Blog where Baker Tilly WM Partner, Steven Frye, is a regular contributor.
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