Late Withdrawals from Your RRSP Can Cost You

May 20, 2022

written on behalf of Feigenbaum Law

One of the most important reasons why someone might want to work with a tax professional is to take advantage of tax benefits and programs. Tax benefits and programs help individuals reduce their tax burdens, assist with home purchases, and save for retirement, amongst other advantages. However, it’s important to remember that business and personal tax planning can be complicated, and failure to follow the rules of these programs may nullify the potential benefits they provide or – worse yet – leave the taxpayer with an increased tax burden. This was the case in a recent decision from the Tax Court of Canada, in which a taxpayer borrowed money from her RRSP to purchase a home and found herself with an unexpected tax bill years later.

First-time home buyers can save with tax programs

The Home Buyers’ Plan is a program offered by the federal government in which first-time home buyers may withdraw up to $35,000 from their RRSP to purchase a home. Under the program, the money withdrawn is not taxed so long as it is paid back into the RRSP within 15 years. (Please note the rules for the Home Buyers’ Plan are subject to change. Please refer to the program’s official website to ensure you have the most up-to-date information.)

In 2015, the taxpayer, in this case, agreed to purchase a condominium that had yet to be built. The anticipated completion date of the building was December 2015. In that same year, she withdrew $20,000 from her RRSP to pay a pre-construction deposit on the unit. As can be the case with construction, the completion date was delayed for factors outside of the taxpayer’s control. The occupancy date for the condo was pushed back two years to December 2017, and the closing of the purchase was delayed until May 2018.

Missed program deadlines can result in tax penalties

In early 2016, the taxpayer contacted the Canada Revenue Agency (CRA) to ask about making a second withdrawal. She was told that she would be able to take out the remaining $5,000 in her Home Buyers’ Plan and use it towards closing costs. However, the CRA official failed to inform her of the time limitation for the second withdrawal. The Home Buyers’ Plan required the second withdrawal to occur either in the same year as the initial withdrawal or the following year.

At the time the CRA provided their advice, she would have been able to make the withdrawal. Without being informed of the proper deadline, the taxpayer withdrew a second $5,000 from her RRSP in 2017. She used the funds towards the purchase of the condo more than one year after the initial withdrawal.

The taxpayer later received a reassessment of her 2017 taxes, and she was asked by the CRA to pay tax on the $5,000. The money qualified as an RRSP withdrawal rather than an amount eligible under the program. For the withdrawal to qualify under the Home Buyers’ Plan and not be taxed, it must have been made in the same year as the downpayment or in the following year.

Official errors or unjust circumstances do not affect tax reassessments

The taxpayer took the position that she was not aware of the timeline she was subject to and that she had acted only as directed by the Canada Revenue Agency official. Had she been given the correct information, she would have acted accordingly. She asked the court to agree that in her circumstances, the tax cost she was ordered to pay was not appropriate, reasonable, or just from a tax policy perspective.

The court agreed but nevertheless asserted that it must apply the applicable law. The court relied on a similar case before the Federal Court of Appeal in 2004, where the court wrote:

“The applicant says that the law is unfair and he asks the Court to make an exception for him. However, the Court does not have that power. The Court must take the statute as it finds it. It is not open to the Court to make exceptions to statutory provisions on the grounds of fairness or equity. If the applicant considers the law unfair, his remedy is with Parliament, not with the Court.”

Although the missed deadline was, in part, a result of incomplete information given by a CRA official, the taxpayer was still liable to pay tax on the $5,000 withdrawal. The court held that appeals against reassessments must be based on law, not on the judge’s personal views of fairness. Despite the court being sympathetic to the taxpayer’s position, it was unable to rule in her favour.

Other remedies may be available for unjust tax decisions

It can be disappointing when honest misunderstandings result in increased tax obligations. This decision highlights the importance of making sure one complies with tax laws before making decisions which may have undesirable or irreversible outcomes. In this case, the court acknowledged that if negligence had been involved, another remedy might have been available to the taxpayer. It is important to consult with a tax professional to understand the law when issues arise and the best avenues to take for relief.

Work with the experienced tax team at Feigenbaum Consulting for comprehensive tax solutions

Feigenbaum Consulting is pleased to offer full-service solutions for both financial and legal matters our clients may be experiencing. As an accounting and legal firm, we are uniquely positioned to offer a comprehensive range of services to benefit clients in both a personal and corporate capacity. We work with clients to avoid pitfalls before they happen but are prepared to represent our clients should litigation become necessary. Please reach out to us online or by phone at 1-877-695-1269 to speak to a talented member of our tax team and find out how we can help you achieve peace of mind for tax matters today.


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