We’ve talked about what kind of investment fees are deductible, and how management expense ratio (MER) fees are treated versus direct fees.

This article will discuss deductibility in relation to RRSPs, RRIFs and TFSAs.

For a mutual fund held in an RRSP/RRIF, there will be no difference between charges levied through an MER or via a direct fee. This assumes the fee is sourced within the RRSP/RRIF itself, and that the CRA’s administrative concession (Letter 9727875E, as discussed in Part 1) applies to direct fees charged within an RRSP/RRIF.

But what if a direct fee is charged to the annuitant personally, to be paid out of that person’s non-registered bank account? While ITA s.18(1)(u) prohibits the annuitant from deducting such a payment, the fact that it comes from outside the RRSP/RRIF would appear to allow for more funds to continue to compound in that tax-sheltered environment. Intuitively, this would seem to be to an investor’s benefit, but the following example indicates otherwise.

Assume a 50% marginal tax rate (MTR) investor who has to pay a 2% charge on a mutual fund worth $100 within an RRSP. The payment can either be by MER within the RRSP itself or through a non-registered bank account that currently holds $100. After the payment, the RRSP will be cashed out.

If the MER is used, the RRSP is reduced to $98 initially, and further to $49 on cashout. Adding $100 from the bank, the investor’s net worth is $149.

If the bank account is used, the RRSP is preserved at the original $100, and reduced to $50 on cashout. Adding the $98 remaining in the bank, the investor’s net worth is $148.

The RRSP internal payment is favoured because the cost is levied pre-tax. To determine after-tax cost, divide by the marginal tax rate. A $2 pre-tax cost will ultimately cost $1 after-tax to a 50% MTR investor or $0.80 at 40% MTR.

In sum, because RRSP/RRIF money is yet to be taxed, it is less costly to have associated fees charged within that pre-tax environment. And if non-registered money is nonetheless used for this purpose, the after-tax cost will be greater as the marginal tax rate increases.

Read: Should you charge fee or MERs to save clients tax?

TFSA investments

Compared to pre-tax RRSP/RRIF money, TFSA money is after-tax. Non-registered money is also after-tax, so there is no difference in the after-tax cost of paying TFSA-related charges from within a TFSA or through the use of external non-registered sources.

On the other hand, one of the beneficial characteristics of a TFSA is that current year withdrawals entitle an investor to a dollar-for-dollar credit toward contribution room in the next calendar year. On the other hand, a decline in value of a TFSA provides no such entitlement for the investor to make an equivalent contribution.

Accordingly, a fee charged to a TFSA investor may be more favourable than an MER that reduces a mutual fund’s value within that plan. The requisite cash for the fee can be drawn from the TFSA, entitling the investor to re-contribute the equivalent amount in the following year, based on the credited room. Alternatively, if the fee is paid from a non-registered account, the TFSA remains entirely intact.

Note: in the last instance, there could be a risk that this would be deemed as a contribution to the TFSA. There are no reported cases or CRA letters on the topic. The CRA concession in 1998 in letter 9727875E, with respect to RRSP/RRIFs, may have some applicability, but cannot be presumed to reflect the views of current CRA administration. This issue may be clarified with the spring publication of a tax folio on fees paid out of registered accounts.

Surrounding considerations


Both the MER and the fee are subject to GST/HST, and this should have no effect on the foregoing comparisons where the investor is resident in the same province as the mutual fund manager.

However, a common approach for fund managers is to apply a blended rate based on proportional provincial residence of the investors. Whether directly-applied or blended, the manager’s levied HST rate may differ from the investor’s GST/HST rate, particularly where there is no provincial service tax.

Thus, there may be a benefit favouring direct fees where the mutual fund’s applied HST rate is greater than the rate applied in the province on such a fee. Any differences will be in the range of hundredths of a percentage point.

Read: Does going fee-based save clients tax?

Fees paid from unit redemptions

Some mutual fund companies offer one or more fund series designed to allow investors to pay their fees to their advisor through the redemption of fund units. The tax treatment would be akin to that applying to a SWP from a fund. The investor should be clear on the steps in the arrangement.

In the SWP discussion in Part 3, the amount of the redemption was calculated such that the investor would have sufficient after-tax cash to pay the fee. This was necessary to preserve the integrity of the example and account for all sources of cash when comparing the payment methods.

By comparison, a mutual fund company under such a program is not in a position to perform such a gross-up calculation as the details are personal to the investor. Accordingly, a unit redemption program would redeem the gross unit value equating to the fee amount. The investor would need to calculate and include in her income the associated capital gains and pay the related tax from other cash. Though that tax may not be a large cost, both investor and advisor should understand the process used to make the payment, and the income tax compliance/reporting process that would follow.

Management fee rebates

Many mutual fund companies offer a discount to a fund’s MER if the investor holds a minimum amount of the particular fund or fund family. In some cases, the discount may be available to a family or household, rather than on an individual investor basis.

Mutual fund trust management fee rebates (MFRs) are generally carried out through the distribution of taxable income equal to the amount of the rebate.

For mutual fund corporations, the MFR will initially be taxable as an inducement under ITA s.12(1)(x). However, the taxpayer may elect under ITA s.53(2.1) to reduce the ACB by the amount of MFR paid. In effect, the election operates like a return of capital equal to the MFR; the return of capital reduces the investor’s ACB, which ultimately results in a capital gain on disposition.

While such rebates may apply to both registered and non-registered accounts, taxable dispositions are only relevant to non-registered accounts.

Segregated funds

ITA s.20(1)(bb) allows investment counsel fees where the advice is with respect to “purchasing or selling specific shares or securities.”

Segregated funds are sometimes generically referred to as the insurance industry’s version of mutual funds. The values of the contracts vary with the value of an underlying pool of investment assets that are segregated from the insurer’s other assets. The contracts are structured as annuities. Subject to any contract restrictions, the annuitant/investor is generally entitled to the payment of the fund value from time to time.

At the 2014 Conference of Advanced Life Underwriters (CALU) roundtable, CRA representatives considered whether a deduction should be allowed for advice related to the purchase or sale of segregated funds. The key part of the response is as follows:

“Paragraph 20(1)(bb) of the Act applies in the context of shares or securities of a taxpayer. A segregated fund policy is a contract of insurance and, in our view, is not a share or security of the taxpayer. Consequently, it is our position that paragraph 20(1)(bb) of the Act does not apply to fees paid by a taxpayer in respect of the advisability of the acquisition or disposition of segregated fund policies, or for the administration or management thereof as the requirements of that paragraph are not met.” (Emphasis added.)

Following that CALU conference, CRA was asked to reconsider its position, but in a letter issued August 24, 2016 it reaffirmed that it does not consider segregated funds to be securities for this purpose. This letter was released to the public in late 2016.

In the end, is fee or MER better?

A few general principles can guide the consideration of how best to manage the decision between MER and direct fees in the payment of advisor compensation with respect to advice on the purchase and sale of mutual fund investments:

  • There is no difference in the results for a non-registered account where fully taxable income (e.g., interest) is earned and distributed.
  • Where the income in a non-registered account is in the form of unrealized capital gains, immediate deductibility of a direct fee may be favourable over an internally charged MER.
  • Technically, there is an income inclusion for investment counsel fees paid within an RRSP/RRIF, but CRA provides an administrative concession from this negative tax consequence.
  • Charges related to RRSP/RRIF holdings are less costly after-tax when paid from the RRSP/RRIF than by using non-registered money (which will not be permitted after January 1, 2018).
  • Paying TFSA-related charges using non-registered money (directly or indirectly) may preserve TFSA room.
  • A detailed invoice of charges or separately invoiced charges can assist in correctly reporting the appropriate amounts and sources for deductibility.

Read Part 1 of this series here, Part 2 here and Part 3 here.

Doug Carroll, JD, LLM (Tax), CFP, TEP, Practice Lead — Tax, Estate & Financial Planning at Meridian.