Update: Note that, this ‘advantage tax’ on investment management fees has been delayed until 2019 since the CRA wants to consider the requests/petitions submitted by various firms in the investment industry.
Many Canadian individuals tend to pay the fee for their registered accounts, such as an RRSP, RRIF and TFSA, from their non-registered, non-qualified or open account. This is done to preserve the registered (non-taxable) capital and reduce taxable capital and potential taxable income.
Tax Penalty on Paying Candian Registered Plan Fee Through Savings or Checking Account
At the November, 2016 Canadian Tax Foundation Conference, the Canada Revenue Agency (CRA) announced that Canadian taxpayers paying their registered plan investment management fees or other fees from non-registered, or open, accounts, will be liable to a tax penalty of an amount equal to the registered account/plan fee.
The CRA, further clarified that this is necessary because Canadians who pay their registered plan fee from their non-registered account tend to have an ‘advantage’ (i.e. any benefit that increases the total fair market value (FMV) of the property held in the RRSP or RRIF) over those who do not follow this practice, as this provides an indirect increase in the value of the registered plan.
For example, a taxpayer who contributes $2,000 to his plan and pays $150 of fees inside the plan will only have capital of $1,850 in the RRSP. If the fees are paid outside the plan, the plan would have capital of $2,000.
Since the above situation is considered as an ‘advantage’, the CRA will be applying the rules related to tax payable on an RRSP/RRIF advantage to this situation. That is, if a person pays an RRSP investment management fee of $150 from his non-registered or open account, i.e. a checking account or credit card, he will be liable to a tax penalty of $150 by the CRA.
Although this tax penalty rule will be applicable from January 1, 2018 onward, it is highly recommended that Canadian taxpayers notify their investment managers to deduct any fee applicable to the registered plan from the plan itself, and review their RRSP, RRIF, and TFSA statements for these deductions. Many taxpayers pay a lump-sum fee to their investment manager which includes all of their investment accounts. These individuals should ask their investment manager to break out the fee for managing the RRSP separately and deduct it from their RRSP account.
Another possible risk that could result is that the CRA could potentially consider the payment of the fees an over-contribution to the RRSP. For a taxpayer who contributes $2000 to an RRSP and pays the fees outside the plan of $150. the CRA could consider that the taxpayer made a contribution of $2,150.
Taxpayers should be aware that having the fee deducted from the qualified plan only results in a small tax deferral difference since the qualified/registered investment will be taxed as regular income upon withdrawal in the future. However, for tax advice specific to your personal situation, it is suggested to consult your tax practitioner.
Note that, this ‘advantage tax’ on investment management fees has been delayed until 2019 since the CRA want to consider the requests/petitions submitted by various firms in the investment industry.
Other Informative Articles:
Tax Treatment of Income from Non-Qualified Mutual Funds
Tax Treatment of Interest Payable on Money Borrowed For Investment Purposes
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