Should Your Investment Fees be Paid Out of Non-Registered Accounts?
Do you have a registered RRSP/RRIF/TFSA account? Do you also have a non-registered investment account? If your answer was ‘yes’ for both the questions, you could potentially increase the value of your registered account and defer the incremental taxes by paying all your fees from the non-registered account.
There are various benefits to paying your investment fees from a single non-registered account rather than across all your investment accounts. For one, it allows the administrative process to be easier to have the fees deducted from one account rather than a spread of multiple accounts. Your registered account could also have assets which are held for the long term and may not be liquid. So, paying the fees from a non-registered account can provide an ease of cash management in the portfolio.
The main advantage of this strategy is that registered accounts usually have an ability for greater returns than non-registered accounts due to the tax advantages of those plans. For example, let’s assume that you have an equal amount in both your TFSA account and non-registered account currently. By paying the fees out of the non-registered account, it results in more assets in the TFSA account growing tax-free as they will not be reduced by the investment fees.
This strategy is the same for a registered RRSP investment account, except the fact that income from the RRSP will be fully taxable when withdrawn. In this case, we are deferring the tax today in favour of a much larger payment in the future. It is presumed that by the time the RRIF is taxable, the investor will be in a lower tax bracket than today and therefore will pay less taxes.
The Canada Revenue Agency had been considering whether this arrangement provided an unfair advantage to the RRSP resulting in stiff penalties. In 2019, the Department of Finance provided a comfort letter to the CRA indicating that they did not have a tax policy concern if reasonable investment management fees for a registered account are paid by the controlling person.
In either scenario, the fees for the registered account are still not deductible on your personal tax return but could be set up to help defer some tax and increase the value of your TFSA/RRSP accounts.
If you have any questions relating to this matter, contact your tax professionals at Wilkinson & Co. LLP
This publication is a general discussion of certain tax matters and should not be relied upon as professional advice. If you require tax advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.