Why CRA should reconsider taxing RRSP fees paid from open accounts

CRA is currently preparing a much-anticipated folio dealing with its new position on the rules for investment management fees for RRSPs, RRIFs and TFSAs.

If you’ve been dreading the change, you’ll be glad to know IFIC has suggested CRA tighten its scope.

Background

In December, we reported that CRA’s position had changed with regards to registered fees paid from open accounts. At the November 2016 Canadian Tax Foundation Conference, CRA told attendees that paying registered plan fees from non-registered accounts will incur a tax penalty equivalent to the fee.

At the time, CRA said it viewed the practice as creating an unfair advantage because it’s equivalent to a tax-free increase in the value of the registered plan. CRA told Advisor.ca it would share guidance this spring on how it will apply its new position, which comes into effect January 1, 2018.

The agency also explained it would be consulting with industry stakeholders before releasing the folio. One of those stakeholders was IFIC.

IFIC’s position

“[CRA] wanted to get a better understanding of how the rules would work practically,” explains James Carman, senior policy advisor of taxation at IFIC, referring to his group’s consultations with CRA. He says those discussions included both phone calls and emails.

IFIC’s position? “We do not believe the advantage rules in this scenario should apply to registered plans — RRSPs and RRIFs,” he says. “It can’t be assumed that the investor is always going to be better off paying investment management fees outside the registered plan. Some of the factors that will determine it are how long the money stays in the registered plan, the tax rate of the annuitant, and the rate of return they’re receiving on it. Usually it takes a fairly substantial amount of time to derive a tax advantage by paying the fees outside the plan.”

He adds that there’s often a non-tax reason to pay fees from a non-registered account, such as liquidity. “The reason most retail investors pay [registered account fees] outside of the plan is not to gain a tax advantage,” argues Carman. “It’s simply a matter of convenience.”

Carman also points out that when money is eventually withdrawn from a RRIF, it is taxable — so tax is eventually paid on the money not used to pay fees.

TFSA withdrawals, on the other hand, are not taxable. And while Carman says there’s minimal tax advantages for most retail investors to pay TFSA management fees out of non-registered accounts, he acknowledges CRA “may [still] consider there to be an advantage.”

IFIC has also asked CRA to delay implementing its new position, which is supposed to be effective January 2018. While he understands there are good operational and tax reasons for implementing something at the beginning of a tax year, “we’re almost halfway through the year,” Carman says.

What advisors can do now

Carman says once the folio is finalized, advisors should consider:

• which fees are impacted;
• how systems might need to change to capture relevant information;
• which clients are affected;
• what options exist for paying investment fees; and
• how each client will pay fees going forward.

A CRA representative told us in March that those who wish to provide comments to CRA in advance of the folio’s release can email folios@cra-arc.gc.ca.

Melissa Shin

Melissa is the editorial director of Advisor.ca and leads Newcom Media Inc.’s group of financial publications. She has been with the team since 2011 and been recognized by PMAC and CFA Society Toronto for her reporting. Reach her at mshin@newcom.ca. You may also call or text 416-847-8038 to provide a confidential tip.