Registered plan fee guidance forthcoming from CRA, but timing unclear

Last month’s revisions to the Canada Revenue Agency’s advantages folio didn’t include changes to the section governing fees—an update that’s been highly anticipated since 2016, when the Canada Revenue Agency (CRA) signalled that paying registered account fees out of open accounts constituted an advantage.

Investment industry participants will have to keep waiting for that update.

“As noted at the 2018 Canadian Tax Foundation annual conference, the Canada Revenue Agency intends to update the folio to provide additional guidance on fees once the Department of Finance completes a tax policy review of certain types of fees,” said CRA spokesperson Dany Morin in an emailed statement. “We are not aware at this time when the Finance review is expected to be completed.”

The CRA confirmed in October 2018 that it would delay taxing registered account investment fees paid from open accounts “indefinitely,” pending a review by the Department of Finance.

This delay is a win for industry associations, as well as clients who pay registered plan fees from non-registered accounts.

“Until [the] CRA issues a folio [update] or other commentary to the contrary, advisors can go with status quo and allow clients to have their open, non-registered accounts pay for registered plan fees,” said Michelle Connolly, director of Advanced Planning – Tax & Estates, Wealth Distribution at Sun Life Financial. “But be forewarned as I believe that this will likely change in the future.”

At the November 2016 Canadian Tax Foundation Conference, the CRA told attendees that paying registered plan fees from non-registered accounts would 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). The CRA said the practice creates an unfair advantage because it’s equivalent to a tax-free increase in the value of the registered plan. At the time, the CRA said it would implement this position in January 2018. The federal tax agency later delayed that implementation to January 2019 before postponing it indefinitely.

Connolly said she’s “surprised” that the CRA has not yet updated the folio with guidance, given the scope of the issue.

“Canadian investors have paid registered account investment counsel fees using open, non-registered funds to maximize their registered assets and to accelerate future income generated in the registered plan,” she said. “Where this planning has been utilized by registered account controlling individuals who have maximized their contributions annually, […] the annual investment counsel fees are not inconsequential.”

Her view is that such planning “likely” constitutes an advantage, she said, because it “artificially shifts value into a registered plan while avoiding the statutory limit for contributions, and the purpose of such is tax motivated. The payment of the investment counsel fee by an open, non-registered account results in the fair market value of the registered plan property increasing.”

As a result, she said it’s “doubtful” that the CRA will reverse its yet-to-be-implemented position that paying registered plan fees out of open accounts constitutes an advantage, “unless Finance wants to take a policy position to allow such planning to promote and augment savings by Canadians for life events including retirement.”

The Investment Funds Institute of Canada (IFIC), one of the industry groups that has been consulting with the Department of Finance on this issue, has stated since 2017 that it hopes the CRA’s position will not encompass RRSPs and RRIFs.

“IFIC continues to hold the same position. We also made additional efforts to make the point to the government that paying the fee outside of a TFSA should not be considered an advantage,” said James Carman, senior policy advisor, taxation at IFIC.

Back in 2017, Carman explained that “it can’t be assumed that the investor is always going to be better off paying investment management fees outside the registered plan.” At the time, Carman also pointed 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.)

It remains to be seen how the Department of Finance review will go. In the meantime, industry observers will keep waiting.

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.