CRA Halts Phasing-In Application of Advantage Rules to Investment Management Fees

 In Alerts, News

Investment managers make their money by charging investors fees for services such as portfolio management, record keeping, and custody. Recently, the CRA has taken a position that would result in very negative tax consequences to investors who directly pay their investment manager these fees for services rendered for their registered plan.

At the 2016 CTF Conference CRA Roundtable, the CRA opined that where investment management fees for services rendered with respect to an RRSP, RRIF, or TFSA (and more recently, an RDSP or RESP) are paid outside of the plan, the advantage rules apply to the amount paid. Since the fees for the costs of investment management would indirectly increase the value of the plan, the CRA asserts that the amount paid would be an advantage. As a result, investors are subject to a 100% advantage tax on the amount of the fees paid outside the plan—imagine having to pay a 100% tax on money that you don’t even have anymore!

Recognizing that existing fee arrangements would need to be altered to avoid these negative consequences, the CRA stated that this position would not apply until January 1, 2018. See 2016-0670801C6 for the full discussion.

The following year, the CRA published a technical interpretation (2017-0722391E5) announcing that the application of this new position would be further delayed until January 1, 2019. The delay was needed to provide the CRA adequate time to consider submissions from industry stakeholders.

This week, the CRA provided another update on the progress of this change in a technical interpretation (2018-0779261E5). The Department of Finance is apparently reviewing this issue, so the implementation of this position changed is on hiatus until the review is complete.

Like all tax laws, the advantage rules were drafted by the Department of Finance, and the CRA is merely interpreting how they should apply to a specific transaction. The fact that the Department of Finance is reviewing this issue may be an indication that they did not intend for the rules to apply to these situations. After all, if the CRA is accurately enforcing the rules as they were intended to function, this would be a non-issue. The Department of Finance frequently issues comfort letters to taxpayers in situations where the outcome is otherwise not the result that the government intended. Often these letters conclude with a recommendation to the Minister of Finance to amend the law to alleviate the negative consequences. So there is a chance that relief is coming for investors and the industry.

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