Refund of Registered Pension Plan contributions due to reasonable error
December 8, 2014
Bill C-4 (Economic Action Plan 2013 Act No. 2) received Royal Assent on December 12, 2013. This Bill included changes, effective January 1, 2014, in how certain contributions to registered pension plans (RPPs) can be refunded to the contributor where a contribution arose due to reasonable error. The law now permits any amount that was contributed to an RPP due to a reasonable error to be refunded without requiring a T4A slip to be issued to the applicable contributor, or for withholding tax to be applied.
However, there are certain requirements that must be met before this refund can be made:
- Not avoiding the revocation of the registration of the pension plan:
The refund cannot be made to avoid the revocation of the registration of the pension plan. This means that if a pension regulator was in the process of revoking the registration of a pension plan due to excess contributions or otherwise, a T4A slip must be issued and withholding tax must be applied (subject to any prior pension regulator approval, if applicable).
- Reasonable error:
According to the Canada Revenue Agency (CRA) website, reasonable error means that a contribution arose because of a mistake and that the contributor did not intentionally make the contribution. It has to be an error that an impartial person would consider likely to occur based on a particular set of circumstances. First-time extraordinary circumstance or those beyond the contributor's control that led to the mistaken contribution, would, in most cases, show that the contribution arose due to a reasonable error.
It should be noted that if a client has made incorrect contributions or similar errors in previous years, they would most likely not fall under this "reasonable error" requirement. The particular situation would need to be reviewed when making a determination on the reasonableness of the error.
- Timing of refund caused by reasonable error:
The refund must be made no later than December 31 of the year following the year in which the inadvertent contribution was made. This allows contributions to be refunded without first obtaining authorization from the CRA.
If the contribution error is not discovered until after December 31 of the year following the year in which the incorrect contribution was made, the existing procedure of seeking authorization from the CRA will continue to apply (or issuing a T4A slip and withholding tax on the refund amount).
This measure applies to RPP contributions made on or after January 1, 2014.
Note: the tax legislation cannot change the requirements under pension legislation. Some pension jurisdictions require prior approval to be given before the funds can be returned to the plan sponsor or, if applicable, the member, so you must continue to ensure that prior approval/notice is not required beforehand.
Please contact your Sun Life Group Retirement Services representative.