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Tax rule change could punish those saving for retirement

Canadians are still behind in saving for retirement, and any day now the tax community is expecting the Canada Revenue Agency (CRA) to make saving for retirement a little more difficult.

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The RRSP contribution deadline for 2016 came and went this week without much fanfare. So, all is well on the retirement savings front, I suppose. Not so fast. Canadians are still behind in saving for retirement, and any day now the tax community is expecting the Canada Revenue Agency (CRA) to make saving for retirement a little more difficult.

You see, the CRA is due to release an Income Tax Folio providing information related to your registered retirement savings plan (RRSP), registered retirement income fund (RRIF), and tax-free savings account (TFSA).

This folio will provide CRA's views on something called the "advantage rules," which were introduced in 2009, revised in 2011, and apply to these registered plans.

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Now, it appears the taxman is poised to apply these rules in ways that can impact your ability to grow your plan assets.

Let me explain.

The rules

The advantage rules are designed to prevent investors from increasing the value in their RRSPs, RRIFS and TFSAs in creative but inappropriate ways (swap transactions, deliberate over-contributions, prohibited and nonqualified investments and certain types of withdrawals were shut down with the introduction of the advantage rules). If someone has created an "advantage," the rules will levy a special tax that is equal to 100 per cent of the amount of the advantage. But how does this affect the average Canadian who is not looking to cheat the system?

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The issue

The CRA was asked last year, at the annual Canadian Tax Foundation conference, to comment on a situation where an investor chooses to pay his RRSP, RRIF or TFSA investment management or administration fees from outside the plan. Many Canadians do this, and it makes good sense. Why? Because this will allow the assets in your plan to grow without being hindered by small, but regular, withdrawals to pay the annual fees on the account.

CRA has already said, in the past, that if you pay these fees from outside your plan, the amount will not be considered a contribution to the plan for purposes of the over-contribution rules – which is a good thing. As an aside, it's always been the case that you can't deduct the fees related to your registered plan, even if you pay them from outside the plan.

At the conference, CRA suggested that paying your fees from outside your plan should trigger the advantage rules. Since the fee is a liability of your RRSP, RRIF or TFSA, the taxman has suggested that the plan should pay the fee. If you pay the fee from outside the plan, you will have increased the value inside your plan, creating an advantage, and you should pay the special tax.

Suppose you pay a $100 RRSP administration fee from outside your plan. The advantage you have bestowed on your plan would be $100. The tax under the advantage rules would be 100 per cent of that advantage, or $100. You'd have to voluntarily pay that tax by filing a special tax return – Form RC339, due by June 30 each year.

The right answer

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If you were to pay an annual registered plan fee of, say, $100, and paid it on behalf of your RRSP from outside the plan, it would amount to $2,000 in total fees over 20 years. That's an extra $2,000 in your RRSP over that time since your RRSP didn't have to make the payments. What is so offensive about hard-working Canadians – who are already behind in saving for retirement – trying to save an extra $2,000 or so in a registered plan? It's not as though Canadians are better off by $2,000 – they're still paying their registered plan fees from outside the plan. And don't forget, the taxman has already said that $2,000 inside an RRSP is no big deal; the RRSP over-contribution allowance is $2,000.

The CRA can very easily make an administrative exception to payment of these fees from outside the plan (there's still time – the Income Tax Folio hasn't been published yet). For the CRA to levy the advantage tax on middle-class Canadians just trying to save a (very) little more for retirement is completely inconsistent with the approach to the middle class taken by the Liberals leading up to and since the last election.


Last week, I mentioned that you must file Form T2091 to take advantage of the principal residence exemption. As it turns out, Schedule 3 of your tax return has been recently revised and is all you need to file if you are designating a property you've sold as your principal residence for all years you've owned it. If you've owned more than one property at the same time, talk to a pro.

Tim Cestnick, FCPA, FCA, CPA(IL), CFP, TEP, is an author and founder of WaterStreet Family Offices

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