Article by Jared Burns, CPA, CA for the Times & Transcript published October 19, 2019

There has always been a negative connotation when it comes to the word “advantage”. That’s likely because many often assume the word “unfair” should be in front of it. The truth is, it’s not always clear whether the advantage is in fact fair or unfair. 
Until recently this very dilemma created all kinds of uncertainty when it came to your registered investments (think TFSAs and RRSPs) and the investment management fees (fees) that you pay to have those accounts managed.  

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history.. 

Therelegislated tax law and then there is the interpretation and enforcement of that law. It’s good to remember that over the years the definition of “advantage” in the Income Tax Act has not changed. The law is currently written so that paying fees using funds outside of the registered account could be considered a taxable advantage subject to a 100% tax penalty (the penalty).  If your TFSA fees were $400 and you paid them with funds outside of the TFSA account, the penalty is $400. But, before 2016, the Canada Revenue Agency (CRA) had a long-standing administrative policy that they would not enforce that interpretation of the law and allow fees to be paid from outside of the registered plan without penalty.  

Then in 2016, the CRA changed its administration position and said starting January 1, 2018 they would view paying registered plan fees outside of the registered account as a taxable advantage because there would be more tax-sheltered principal in the account.   This later got delayed to January 1st, 2019 and then was pushed in definitively 

Fast forward to this Fall, the uncertainty seems to finally have ended for investors. The Department of Finance (DoF) wrote a letter to the CRA stating they intend to recommend that the Minister amend the Income Tax Act’s legal definition of “advantage” to exclude penalizing taxpayers for paying fees from funds outside of registered plans.  

Why the change? 

It became clear to DoF that paying fees for a registered account with funds outside of that account is often not a tax decision. More often it was for convenience.  Besides, as stated in the Letter from the DoF; "generally the direct payment of fees versus paying fees from the registered plan can result in either a net loss, or negligible gain, for the plan holder long-term". 

It’s important to remember fees in relation to registered plans are not deductible for tax purposes no matter where they're paid from. 

Now let's look at what to consider when deciding where you should pay fees from for Registered accounts. 

Ever find yourself with too many options? Above, I explained how there will no longer be a penalty to taxpayers for paying their investment management fees (fees) for registered accounts (TFSA and RRSP etc.) from funds outside the registered account. Investors now have the green light to pay fees with funds from inside or outside their registered account. Having more options is great.  It also means more opportunity to pick the wrong choice, creating anxiety and taking time to analyze. You know there’s a reason that Costco only offers a limited amount of options when it comes to underwear. They want to reduce decisions, keeping you happy and moving you towards the checkout. So, now that we have choices when it comes to how we pay our fees for our registered accounts, we need to decide what we want to do.  

Here the top 3 things you should consider when making your decision.  
 
  1. Convenience 
Many investors have fees automatically taken from their registered account.  If you are one of these, you have come to enjoy a certain amount of convenience to the automatic transaction. No calendar reminders to transfer money or surprise bills, or if you’re old fashion, no writing a cheque to mail in. You would see the fees on your statement.   

Be sure to ask your financial institution if you can pay fees outside of the registered account.  They may or may not be able to accommodate. 

  1. Cash flow and liquidity
If you are paying outside of your registered account.  You need to consider the cash flow or liquidity of coming up with the funds to make the payments. Many Canadians operate their personal finances on a cash flow basis.  They think in month to month payments (it’s a reason why companies like Spotify and Netflix are so popular). So, having to conjure up the fees from your monthly budget may or may not be workable or desired.  

You also may be able to use funds from a non-registered account to pay all your fees with one payment.  Meaning you do not have to move actual cash to the financial institution from your monthly budget.  Be careful come tax time if this is your approach. Ensure your accountant knows how much of your total fees are tax deductible non-registered fees and the non-deductible registered account fees.  
 
  1. Tax sheltered principal
It can't be assumed that an investor is always going to be better off paying fees outside the registered account.  An investor could be worse off doing so. But if the time horizon is long there could be a benefit to preserving the higher registered principle by paying fees outside of the plan. Be sure to ask your advisor.