The CRA is postponing its new policy to tax certain investment management fees.
In a recent technical interpretation, the CRA says the implementation date for the policy, which could potentially tax investment management fees paid outside of certain registered plans as an "advantage" at a rate of 100% (TI 2017-0722391E5), is now January 1, 2019. In the TI, the CRA says this delay is to allow time to consider submissions on the topic that it has received from the investment industry.
At the 2016 Canadian Tax Foundation Conference last November, the CRA said that it would work with the investment community to determine the fee structures where advantage rules could apply, and stated that it would not apply the advantage rules to fees paid outside of plans until January 1, 2018. Now that the implementation date has been delayed, affected taxpayers have an extra year to make any necessary changes related to new fee structures.
At the 2016 Canadian Tax Foundation Conference, the CRA said that if paying an investment management fee outside of a plan (such as an RRSP, RRIF or TFSA) results in an indirect increase in the plan's value, this likely represents an advantage and the advantage tax rules could apply to tax 100% of the fees paid.
At the conference, the CRA noted that the definition of "advantage" in subparagraph 207.01(1)(b)(i) includes benefits that increase the fair market value of a plan's property, where the increase is because of a transaction or event that would not have occurred in a normal commercial or investment transaction made by arm's length parties, and when the transaction was made in order to benefit from the plan's exempt status. In the CRA's view it is not commercially reasonable for an arm's length party to agree to pay the expenses of another party. The CRA also said that the motivation behind paying the fees outside the plan is to maximize the savings inside the plan.
The CRA said at the conference that the advantage rules will not automatically apply, given there is a purpose test; however, there is a strong inference that there is an advantage-especially if the fees paid outside the plan are large and are paid on a percentage basis. Further, the CRA said that existing plan arrangements should be changed so that plan fees are charged to the plan itself. The CRA said it would give the industry time to make system changes related to new fee structures.
The CRA also said that there would be no adverse tax consequences if the payment of plan fees inside the plan causes the plan to go into an overdraft position.
The CRA also noted that paragraph 18(1)(u) denies the deduction of fees paid by an individual for services related to a RRIF or TFSA under which the individual is the annuitant.
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Information is current to October 10, 2017. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500