2016-0670801C6 2016 CTF - Q5 - Investment management fees

Principal Issues: Whether the advantage tax rules apply where investment management fees incurred by an RRSP, RRIF or TFSA are paid outside of the plan by the annuitant or holder.

Position: Likely

Reasons: Investment management fees represent a liability of the registered plan trust, and thus would be expected to be paid by the trustee using funds from within the plan. If paid outside of the plan, the resulting indirect increase in value of the plan assets would likely constitute an advantage under subparagraph (b)(i) of the definition of “advantage” in subsection 207.01(1) of the Act. It is not commercially reasonable for an arm’s length party to gratuitously pay the expenses of another party. There is a strong inference that a motivating factor underlying the transaction is to maximize the savings in the plan so as to benefit from the tax exemption afforded to the plan.

Author: Wurtele, Dave
Section: 207.01(1) "advantage"

2016 CTF Annual Conference
CRA Roundtable

Question 5: Investment management fees for RRSPs, RRIFs and TFSAs

Investment management fees relate to services of an investment manager for providing custody of securities, maintenance of accounting records, collection and remittance of income, and buying and selling securities on behalf of the owner. 

In the case of an RRSP, RRIF or TFSA, investment management fees represent a liability of the registered plan trust, and thus would be expected to be paid by the trustee using funds from within the plan. However, the CRA has a long-standing administrative policy accepting that the payment of these expenses outside of the registered plan by the plan annuitant or holder (referred to as the “controlling individual”) will not be considered to be a contribution or gift to the plan for purposes of the over-contribution rules.

Has the CRA considered whether the advantage tax rules in Part XI.01 of the Income Tax Act (the “Act”), which have been in force since 2009 for TFSAs and 2011 for RRSPs and RRIFs,  apply in this situation?

CRA Response

In the course of preparing an Income Tax Folio on the advantage tax rules, the CRA has reviewed the application of these rules to various fees and fee rebates in respect of registered plans.  The full results of this review will be published in the Folio, which is expected in early 2017.

Of relevance to this specific question is subparagraph (b)(i) of the definition of “advantage” in subsection 207.01(1) of the Act. This provision applies where there has been an increase in the total fair market value of the property held in connection with a registered plan that can reasonably be considered to be attributable, directly or indirectly, to a transaction or event (or series) if two conditions are met:

*     the transaction or event would not have occurred in a normal commercial or investment context in which parties deal with each other at arm's length and act prudently, willingly and knowledgeably; and
*     one of the main purposes of the transaction or event is to benefit from the plan’s tax-exempt status.

It is the CRA’s view that an increase in value of the property of a registered plan has indirectly resulted from the plan’s investment management fees being paid by a party outside of the plan. This increase in value of the property of the registered plan would likely constitute an advantage by virtue of this provision. Our reasons are twofold:

*     it is not commercially reasonable for an arm’s length party to gratuitously pay the expenses of another party; and
*     there is a strong inference that a motivating factor underlying the transaction is to maximize the savings in the plan so as to benefit from the tax exemption afforded to the plan.

As a result, the plan’s controlling individual could be subject to advantage tax of 100% of the amount of fees paid.

To avoid the adverse tax consequences from the application of the advantage tax rules, any existing arrangements in which investment management fees are charged directly to the plan’s controlling individual will have to be changed so that the fees are charged to the registered plan.  Should there be insufficient cash in the registered plan to pay the expense immediately and this gives rise to an overdraft, there wouldn’t be any adverse tax consequences.

The CRA is working with the investment industry in identifying the different types of fee structures and the application of the advantage rules to these structures.  We appreciate that this review and the application of the advantage rules to these structures will require a period of transition so that the investment industry can review how registered plan fees are processed.  To give the investment industry time to make any system changes that may be required, the CRA will defer applying this position until January 1, 2018.

Investment management fees that are reasonably attributable to periods ending before 2018 may be paid by either the registered plan or the controlling individual with no adverse tax consequences. Where the controlling individual pays the fees, paragraph 18(1)(u) of the Act will apply to deny the individual a deduction in computing income for the payment (as with any registered plan fees).

Dave Wurtele
2016-067080
November 29, 2016

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