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Buried in the more than 300 pages of Canada’s latest federal budget are three short paragraphs that caught many financial advisors by surprise.
Starting in the 2023 taxation year, banks will be required to report the total fair market value of property held in the registered retirement savings plans (RRSPs) and registered retirement income funds (RRIFs) they administer. The purpose behind increasing disclosure requirements to the same level as tax-free savings accounts (TFSAs) is to “assist the Canada Revenue Agency (CRA) in its risk-assessment activities regarding qualified investments held by RRSPs and RRIFs,” the document said.
Ottawa hasn’t given a lot of detail in terms of what it’s looking for or trying to avoid by adding this requirement, says Wilmot George, vice president of tax, retirement and estate planning at CI Investments Inc. in Toronto.
“But we do have enough information to know that they have some concerns,” he says.
Ted Rechtshaffen, chief executive officer and president at TriDelta Financial in Toronto, says it was surprising to see those details in the April 7 budget because it wasn’t on the radar and not “very clear in terms of what it means.”
The implication, he says, is that retirement accounts with “particularly high” balances are going to be tracked and reviewed – with CRA attention most likely to be focused on particular private or “non-arm’s-length securities.”
By introducing these new rules, the government might be looking at people who put shares of private companies or maybe highly illiquid types of securities into their RRSPs, says Jamie Golombek, managing director, tax and estate planning, at CIBC Private Wealth Management in Toronto.
While “99 per cent of people” have nothing to worry about, Mr. Golombek says, “where you need to be worried is if you’ve done any of these weird transactions … schemes out there over the past couple of decades such as RRSP maximizers where the government is concerned about how stuff got in there and how balances got so big.”
Last year, the CRA issued a warning about TFSA maximizer schemes that claimed investors could transfer funds from RRSPs or RRIFs into a TFSA without paying taxes by investing in a special-purpose mortgage investment company. Participants risk “significant tax liabilities, penalties, court fines, and even jail time,” the CRA said then.
The government is always trying to stay on top of these tax schemes and shut them down, says Frank Di Pietro, assistant vice president of tax and estate planning for Mackenzie Investments in St. Catharines, Ont. “They are really not in the spirit of the tax rules.”
What is a ‘too big’ balance?
Meanwhile, in terms of calculating what the CRA might consider “too big” under the new rules, Mr. Golombek says it’s a very straightforward matter.
The CRA could simply calculate what a given taxpayer’s contribution limit was for each year they held a registered account, apply an average rate of return and see how far off the result is from the actual balance.
“I suspect they’re looking for outliers,” he says. “They are looking for RRSPs [or RRIFs] in the tens of millions or hundreds of millions [of dollars], which do exist.”
However, the definition of what’s considered a “qualified investment” that’s allowed to be held in registered accounts is not straightforward.
Christine Van Cauwenberghe, head of financial planning at IG Wealth Management in Winnipeg, calls one CRA folio on the topic a “minefield.”
“There are a number of rules regarding what you can or can’t hold in your RRSP, [and] some people are trying to use their RRSPs in ways that were not intended by the government,” she says.
CRA spokesperson Hannah Wardell said in an e-mail that the new reporting requirements will provide “the same level of information currently reported for other deferred income savings plans, such as tax-free savings accounts.”
“A formal audit” is required to get a similar level of details under existing rules, she says. Providing annual reporting of fair market values within RRSPs and RRIFs “will result in a more efficient and accurate risk assessment system.”
The agency has been cracking down on what it calls “aggressive tax planning” in TFSAs since 2017.
Mr. Di Pietro of Mackenzie Investment says TFSAs are a newer product, so it has been easier for the government to build out rules around them.
“But they are still playing catchup with RRSPs and RRIFs to have the same sort of tax compliance requirements they have with TFSAs,” he says.
What could be grounds for an audit
For advisors with clients who might be affected, there is still time to prepare for a potential audit.
“When it comes to private company shares, it really comes down to the type of RRSP that you’re holding – whether it is client-held or self-directed and what the administrator of that RRSP will allow you to do,” says Mr. George at CI Investments.
Those with a self-directed – also known as a nominee-held – RRSP “might have more flexibility to acquire share certificates and those kinds of things,” he says. Investors in that situation would be wise to ensure those holdings have been valued properly.
“Some securities are easily valued and some are not, that’s the challenge,” Mr. George says. “Sometimes, you’ll have to get a professional valuator involved for that purpose.”
Overall, CIBC’s Mr. Golombek stresses the risk profile of RRSPs and RRIFs are much lower than that of TFSAs as they only allow for tax deferral as opposed to tax avoidance.
“Most people are following the rules, but that being said, if you did engage in any schemes or RRSP plans that are somewhat questionable, now is the time to get some tax advice,” he says.
“If you do have a very large balance, you might want to get the documentation in order now to make sure that should the CRA ever come calling, you have all of your ducks in a row,” Mr. Golombek adds.
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