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New CRA Folio - Advantages Tax Rules

New CRA Folio - Advantages Tax Rules

However, CRA’s stance on rules for investment management fees are still under review

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The CRA recently released the long awaited Income Tax Folio chapter S3-F10-C3, "Advantages - RRSPs, RESPs, RRIFs, RDSPs and TFSAs". It addresses the "advantage tax rules", which levy a 100% tax on certain advantages related to individuals' registered plans. This new folio was released on October 1, 2018, and is open for comments until December 31, 2018. It does not replace any previous CRA Interpretation Bulletin.

The folio contains examples that illustrate when an advantage may or may not arise. However, other than in the context of rebates of mutual fund commissions, it provides limited comments on how investment fees and expenses may result in an advantage.

Investment Management Fees - Still under review
The folio does not address the CRA's position, stated at the 2016 Canadian Tax Foundation Conference, that the advantage rules could apply to certain investment management fees paid outside of a registered plan. The folio only states that a "future update" will include comments on the tax treatment of fees and expenses incurred in connection with a registered plan and its investments.

The implementation date of this new CRA position is being deferred yet again, according to a technical interpretation (2018-0779261E5) the CRA released at the same time as this Folio. The technical interpretation indicates that this deferral is pending Finance's review. Originally, the CRA announced it would begin applying its new position as of January 1, 2018, which it then subsequently deferred to January 1, 2019.

Rebates of mutual fund commissions
The new folio comments on how the CRA will apply the advantage rules to challenge arrangements for allocating mutual fund commission rebates in a way that does not reflect a pro-rata allocation among an individual's registered and non-registered accounts. The folio also includes an example illustrating how the rules would apply in such a situation.

Other selected highlights
The new folio also discusses:

  • The advantage rules, their consequences, and the definition of "advantage"
  • When an advantage may arise because a certain benefit or debt is conditional on the existence of the plan, including an example related to investor discounts, and specific comments on life insurance annuities and security arrangements
  • Examples of common promotional incentives offered by financial institutions and investment firms that are excluded from these rules
  • The treatment of contest prizes awarded to a registered plan
  • Examples of transactions the CRA would generally not consider "commercially reasonable" that would give rise to an advantage, including potential scenarios related to employee-owned securities
  • The inclusion of all swaps (even if entered into at fair market value) as transactions treated as an advantage, and the CRA's expectation that issuers will therefore not process swap transactions
  • The implications of registered plan strips (described as transactions to remove or devalue property of an RRSP, RESP, RRIF or RDSP without an income inclusion for the controlling individual or beneficiary)
  • Third party penalties that may apply where an issuer, carrier or promoter knowingly facilitates an advantage in relation to a registered plan
  • Filing and reporting requirements in respect of the advantage tax rules
  • Relevant factors and information taxpayers should provide when they request CRA waive or cancel all or part of the tax on advantages.

Background
This new folio should be read in conjunction with Income Tax Folio S3-F10-C1, "Qualified Investments-RRSPs, RESPs, RRIFs, RDSPs and TFSAs" and Income Tax Folio S3-F10-C2, "Prohibited Investments-RRSPs, RESPs, RRIFs, RDSPs and TFSAs". When these folios were first released approximately two years ago, the CRA had indicated it would release an additional folio discussing the advantage tax rules. Consequential amendments have also been made to these folios to add cross-references to the new "Advantages" folio, and to reflect changes to the qualified investment rules for RDSPs and RESPs and the extension of the prohibited investment rules to RESPs and RDSPs (initially introduced with the 2017 federal budget and generally applicable after March 22, 2017, subject to transitional rules).

For more information, contact your KPMG adviser.

Information is current to October 09, 2018. 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

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