Not an advantage is advantageous: investment fees paid outside registered plans

For almost three years, investors and their advisors were in a state of uncertainty concerning investment management fees paid outside of RRSP, RRIF and TFSA accounts (collectively “registered plans”).

It is not uncommon for investment management fees to be paid directly by a registered plan’s holder/annuitant rather than by the assets held inside the plan. At a roundtable discussion on November 29, 2016, hosted by the Canadian Tax Foundation, Canada Revenue Agency (CRA) representatives advised of an intended new rule that management fees paid outside of registered plans would trigger the advantage rules. The rule was to be implemented as of January 1, 2018.

The advantage rules were designed to prevent investors from increasing the value of their registered accounts in inappropriate ways. Where an advantage was created, the rules would levy a special tax equal to 100 per cent of the amount of the advantage. For example, if an investor paid a management fee of $100 outside their registered plan, a tax of $100 would apply. The CRA indicated that it is not commercially reasonable for an arm’s-length party to pay for the expenses of another party; in such cases, there would be a strong inference that a motivating factor underlying the transaction is to maximize the savings in the plan and benefit from the plan’s tax exemption. The CRA’s position was that the value of the property in the registered plan had indirectly increased as result of the management fee being paid by a person outside the plan.

Multiple reprieves have been announced since the initial announcement. The CRA advised in September 2017 that the implementation would be postponed to January 1, 2019, in order to allow for more time to review submissions made by stakeholders. Then, in October 2018, the implementation was deferred indefinitely pending the completion of a review by The Department of Finance Canada. On August 26, 2019, the Department of Finance issued a comfort letter with its recommendation. The letter expressed that there is no policy concern with the payment of the investment management fees directly by the holder/annuitant of the plan. In addition, the Department of Finance recommended an amendment of the advantage definition in the Income Tax Act so that it would not apply to payments by a holder/annuitant of a registered plan where the fees do not exceed a reasonable amount.

While this is welcomed news, the comfort letter did not specifically address situations in which one investor pays for the investment management fees of their entire family unit (spouse and children). In such cases, the fees are paid outside the plan but the payor would not be the holder/annuitant of their spouse’s or children’s plans.

We will have to stay tuned for the actual legislative changes. In addition, further guidance is expected in the update to the CRA Folio on Advantages, which currently does not have any information on fees and expenses. Contact your Baker Tilly advisor for more information.