You've seen it before – most often in comedies. I'm referring to the trope: "the blind leading the blind." You know how it goes: One character desperately needs some advice and asks for the help of another character who is supposedly an expert. As the story unfolds, the person giving the advice is far from an expert and may even know less than the person looking for advice. Neither character realizes this, and the first character suffers some big consequence, then wonders what went wrong.
It's pretty funny, unless it happens to you in real life. Enter: The story of Mr. F. There's a moral to his story that's worth keeping in mind during this registered retirement savings plan (RRSP) season.
Mr. F immigrated to Canada, from Europe, in 2000. English is not his first language and he struggled when he first arrived. In 2002, he wanted to open an investment account at one of the major banks. He was a stay-at-home father, looking after two infants and studying while he was at home. He wasn't earning any income. The bank employee that he consulted set up a registered retirement savings plan (RRSP) account for Mr. F, although he hadn't requested an RRSP account.
Clearly, an RRSP was inappropriate for Mr. F given that he wasn't earning income and therefore wouldn't have RRSP contribution room available to him. Mr. F had told the bank employee that he wanted to invest in a term deposit. Turns out the employee opened an RRSP mutual fund account for him instead.
Mr. F deposited a total of $11,450 into the account between 2002 and 2006. He didn't claim a deduction for the contributions in those years. Indeed, he had no income. The problem? Mr. F didn't have any RRSP contribution room in those years, so he had made "excess contributions" to his RRSP under our tax law.
When the taxman realizes that you've made excess contributions to your RRSP you may receive a request to file Form T1-OVP, which the Canada Revenue Agency (CRA) will use to calculate taxes, interest and penalties. Mr. F did receive this request and he filed T1-OVPs for all the years, albeit the forms were past their due dates by the time he found out he had an obligation to file them. He also removed his excess contributions from the RRSP account as soon as possible. Still, he was assessed taxes, interest and penalties amounting to $4,350 on contributions of $11,450.
CRA has the power to waive the taxes owing in this situation. Mr. F did apply to have the amounts waived, given the mistake that was made and that it wasn't his intention to contribute to an RRSP when he shouldn't have. CRA refused to listen. So, Mr. F went to court and appealed to receive relief from CRA's assessments.
The judge was sympathetic to Mr. F's situation. The judge didn't have the power to waive the tax owing, but could deal with the penalties for failure to file the T1-OVP forms. The judge concluded that the failure to file the forms was the result of a reasonable mistake. The judge was convinced that, if Mr. F had understood that his account was an RRSP, he would have closed the account. The judge concluded that Mr. F had exercised due diligence in relation to the filing requirement. The judge went on to suggest that Mr. F request a second impartial review of CRA's decision to levy the tax, and "strongly urged" the CRA employee reviewing that decision to consider the judge's comments.
What can we learn from Mr. F's story? A couple of things:
The less you know about investment options and taxes, the more competent your financial adviser needs to be. You don't want "the blind leading the blind" here. While some front-line people at your local bank branch may know what they're doing, you'll also find some of the least knowledgeable people there. Look for someone with a Certified Financial Planner (CFP) or Chartered Professional Accountant (CPA) designation and preferably someone referred to you by family or friends.
CRA is wholly unreasonable, most of the time. You'd think that the CRA employee dealing with Mr. F would have had enough common sense to see the mistake made in his situation – and to do what's right. Instead, the employee cost Mr. F, and taxpayers, a lot of time and money fighting this one. In addition to a competent financial adviser, work with a competent tax preparer who can catch these problems before CRA does.
Tim Cestnick, FCPA, FCA, CPA(IL), CFP, TEP, is an author and founder of WaterStreet Family Offices.