Investors can breathe a sigh of relief: CRA will not apply its position on registered account fees paid out of non-reg accounts until at least 2019.
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 (e.g., if an investor pays a management fee of $500 from outside a registered plan, the investor could be taxed the full $500). CRA views the practice as creating an unfair advantage because it’s equivalent to a tax-free increase in the value of the registered plan.
But the agency has not yet shared how it will apply its new position, and has delayed releasing such guidance twice: first telling Advisor.ca it would be released in the spring, and later revising that to summer.
This month, in a letter dated Sept. 15 and shared on TaxInterpretations.com, a representative of the Income Tax Rulings Directorate has shed light on the delay. “We are currently considering a number of submissions from various stakeholders and will be deferring the proposed implementation date by one year to January 1, 2019,” wrote Stéphane Charette. CRA’s original target date for implementation was January 1, 2018.
In an email exchange dated Sept. 22, a CRA representative told Advisor.ca it was making final changes to the folio and hoped to release it “in a few weeks[;] certainly before Oct. 31.” (Update, Oct. 3: read the story behind the delays here.)
IFIC, which has consulted with CRA on its position, is pleased by the deferred implementation.
“We appreciate the CRA’s decision to postpone implementation to allow time for investors and the industry to prepare for these changes,” says Paul Bourque, IFIC’s president and CEO, commenting in a release on Charette’s letter. “Since details of how the new rule will work have not been finalized, the new date will allow time for the CRA to finalize its implementation plans, for the industry to design outcomes that are in clients’ interests, and for advisors to inform clients of their options.”
Indeed, without the folio, there are unanswered questions.
“We do not believe the advantage rules in this scenario should apply to registered plans — RRSPs and RRIFs,” James Carman, senior policy advisor of taxation at IFIC, told us in June. He pointed out that when money is eventually withdrawn from an RRIF, it is taxable — so tax is eventually paid on the money not used to pay fees, and therefore there’s no (or nominal) advantage. But Carman acknowledged that CRA “may [still] consider there to be an advantage” for paying TFSA fees out of non-registered accounts, since TFSA income is generally not taxed.
Michelle Connolly, vice-president of Tax, Retirement and Estate Planning at CI Investments, says she’s waiting for such clarification from CRA. “All they’ve announced is a deferral of the implementation to 2019, […] but there has been no further guidance as to whether [the position will affect] all registered accounts or just TFSAs.”
Connolly adds that CRA’s pending position change is part of a trend toward tightening policy by removing room for interpretation. “Like [with] the principal residence exemption, the trend is they want more information; they want to cut down on aggressive tax planning [and] the interpretation that advantages occur.”
In other words, she says, “if Finance does not like how CRA is administrating, they simply enact new legislation or influence CRA’s administration of current legislation.”
What advisors can do now
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 email@example.com.