Jamie Golombek: The amount you can contribute to a combination of your RRSP and/or a spousal RRSP is based purely on your own RRSP limit
Publishing date:
Jan 20, 2022 • 4 days ago • 5 minute read • 5 Comments
A spousal RRSP is used when your spouse or partner has no (or minimal) income and thus no contribution room with which to make their own RRSP contribution. Photo by Getty Images/iStockphoto files “Know your limit and stay within it” may not be the official slogan of the Canada Revenue Agency, but perhaps it should be in light of the harsh treatment a taxpayer recently experienced in trying to get some relief for his registered retirement savings plan (RRSP) overcontribution penalty tax.
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To understand the taxpayer’s predicament, and why it eventually wound its way to Federal Court in December, let’s briefly review some RRSP basics, which is timely given we’re currently in the depths of RRSP season.
To claim a deduction on your 2021 return, you need to contribute by March 1, 2022, and the maximum amount you can contribute can be found at the very bottom of the “RRSP deduction limit statement” on your 2020 Notice of Assessment. It can also be looked up online using the CRA’s My Account portal.
Your deduction limit for 2021 is based on 18 per cent (up to a limit of $27,830) of your 2020 earned income, less any previous year’s pension adjustments from your employer, plus any unused deduction limit from previous years. Earned income includes employment, self-employment and rental income (as well as a few other things).
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If you have a spouse or common-law partner, you may prefer to make your RRSP contribution to a “spousal RRSP,” which is simply an RRSP that your spouse or partner is the annuitant and legal owner of, but to which you make contributions.
The important thing to remember when it comes to spousal RRSPs is that the amount that you can contribute to a combination of your RRSP and/or a spousal RRSP is based purely on your own RRSP limit and has nothing to do with your spouse or partner’s own RRSP limit.
In many cases, a spousal RRSP is used when your spouse or partner has no (or minimal) income and thus no contribution room with which to make their own RRSP contribution. It’s done as a way to prepare for splitting income upon retirement since the spousal RRSP withdrawals (and RRIF withdrawals later) will generally be taxed in the hands of the withdrawing spouse or partner, who presumably would be in a lower tax bracket than you upon retirement.
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It’s precisely this confusion that led one taxpayer to get hit with a penalty tax for RRSP overcontributions, and why he took the matter to Federal Court.
The taxpayer had two RRSPs that he had been contributing to since 2010: a regular RRSP and a spousal RRSP. In 2018, the taxpayer made total RRSP contributions exceeding his allowable RRSP contribution limit for that tax year. The funds came from his wife’s inheritance from the passing of her grandmother, and “was more money than we previously ever had on hand and we thought it prudent to fill up both of our RRSP contributions to their limit.”
He discovered his overcontribution error in March 2019 when preparing his 2018 return. He immediately had his tax preparer submit a request to the CRA to waive the overcontribution tax, calculated at one per cent per month, of $1,040.
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In the letter, the taxpayer explained he “was under the impression that spouses were able to combine and share their RRSP contribution room … He had no intention of making an overcontribution but rather made contributions using his own RRSP added to his spouse’s contribution room.”
He took steps to withdraw the excess contribution shortly thereafter, filed the T1-OVP overcontribution return and paid the overcontribution tax, hoping to get it back once the CRA reviewed his case.
Unfortunately, this was not to be. In September 2019, the CRA denied his request, explaining that while it has the power to waive the penalty tax “if you made RRSP excess contributions because of a reasonable error,” it found that “misunderstanding or not knowing the rules and regulations about RRSP contributions” do not constitute a reasonable error.
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In October 2019, the taxpayer submitted a further request for an impartial, second review of the matter by a different CRA officer. In the letter, he explained he overcontributed to his personal and wife’s spousal RRSP in error. “This was not in any way meant to take advantage of the RRSP contribution program … I made an honest error, reported and corrected it as promptly as possible.”
Again, the CRA denied his request, saying the taxpayer had been making and claiming both personal and spousal RRSP contributions since 2010 and “should have been aware that all RRSP contributions … made (i.e., both personal and spousal) had to be made within (his) personal allowable RRSP deduction limit.”
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Article content Thus, the taxpayer turned to Federal Court to seek a judicial review of the CRA’s decision and whether it was “reasonable.” A reasonable decision “is one that is based on an internally coherent and rational chain of analysis and that is justified in relation to the facts and law that constrain the decision maker.”
To set aside a decision on this basis, “the reviewing court must be satisfied that there are sufficiently serious shortcomings in the decision such that it cannot be said to exhibit the requisite degree of justification, intelligibility and transparency.”
The judge reviewed all the facts and circumstances surrounding the taxpayer’s overcontributions and acknowledged it was “an honest mistake,” but, “the test to be met … is the reasonability of the error made, not the innocence of the (taxpayer).”
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Article content The judge went on to say that since the Canadian tax system is based on self-assessment, it’s up to individual taxpayers “to ensure that they conduct their financial affairs in accordance with the (act). The onus was on the (taxpayer) to ensure that he did not over-contribute to his RRSP and if there was any lack of clarity or understanding as (to) the contribution room available to him, (he) was expected to seek advice.”
The judge, upholding the penalty, concluded the CRA’s decision was “justified, transparent and intelligible, falling well within the range of possible and acceptable outcomes.” She also ordered the taxpayer to pay costs, in the amount of $1,000, as the losing party in the case.
Jamie Golombek, CPA, CA, CFP, CLU, TEP is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto. Jamie.Golombek@cibc.com
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