If you pay fees for the management of your registered portfolio, be it an RRSP, RRIF or TFSA, these fees are not tax deductible. That being said, a question often asked by investors is how should investment management fees for a registered plan be paid? Should they come from inside the registered plan or be paid using outside funds?
To be clear, there are a variety of fees that may be associated with registered plans, such as annual administrative fees, commissions paid to buy or sell a security within the plan, as well investment management fees. But it’s the investment management fees, which are typically charged by your broker or investment counsellor as a percentage of assets under management, that has caught the attention of the Canada Revenue Agency in recent years.
In 2016, the CRA commenced a review of the payment of fees for registered plan accounts, and, specifically, looked at the question as to whether the payment of fees by the RRSP or RRIF annuitant or TFSA holder outside of a registered plan, while certainly not tax deductible, gave rise to an “advantage” under the Income Tax Act.
The advantage rules
The advantage rules are a set of lesser known anti-avoidance rules that apply to registered plans. Where a prohibited advantage has been received, a 100 per cent penalty tax on the fair market value of the advantage applies. The Canada Revenue Agency has described the rules as targeting “abusive tax arrangements that seek to artificially shift value into or out of a registered plan.”
There are a number of ways that an “advantage” can arise. One such method is where an increase in the value of a registered plan can be linked to a transaction that would not have occurred in a “normal commercial or investment context,” and a main purpose was to benefit from the tax-free status of the registered plan. The CRA reasoned that the payment of investment management fees from outside the registered plan resulted in an advantage since it would lead to an increase in value of the property in the registered plan. The financial services industry made various submissions to the CRA, explaining that this is not always the case, as we will see below.
The CRA subsequently referred the matter to the Department of Finance, which, in the fall of 2019, announced that they did not have policy concerns with the payment of investment management fees from outside of a registered plan, and that they were prepared to amend the law to ensure that the advantage rules would not apply. This announcement, while welcomed by the industry as it now gives investors flexibility, sparks the bigger question: where should investment management fees for registered plans be paid? From inside the plan or using outside funds?
Inside vs. outside
Intuitively, you might think that you would always be better off paying fees from outside the plan (i.e. using non-registered funds), as that leaves more money inside the plan to grow unencumbered by tax. That may be true for TFSAs, so that tax-free growth within the plan can be maximized; however, that’s not necessarily the case for other registered plans. That’s because when you pay a fee with non-registered funds (i.e. from outside the registered plan), you’re paying with after-tax dollars. When you use RRSP funds to pay the fees, these are pre-tax dollars. In essence, the CRA is sharing in part of the fee. Let’s take a look at an example.
Suppose you incurred a $100 fee on your RRSP investments that you could pay from inside your RRSP or outside your RRSP (using non-registered funds.) You’re in a 30% tax bracket.
By paying the $100 fee from outside your RRSP, you’d simply be out the $100. By paying the fee from within the RRSP, you’d only really be out $70. Why? Because you use pre-tax funds to pay fees from your RRSP but you use after-tax funds to pay fees from non-registered funds. With an RRSP, the government defers collecting tax on the funds you invest in your RRSP until the time you later withdraw those funds. If you paid the $100 fee from inside the RRSP, you never withdraw that $100, so the government never gets its 30 per cent tax on the $100 and, therefore, essentially shares in paying your fee.
Since you’d have less cash in hand if you paid fees from outside your RRSP (from non-registered funds), rather than from inside your RRSP, you may well wonder (as many of us did!) why the CRA initially thought that paying RRSP fees from non-registered funds would be beneficial and potentially result in an unfair advantage, subject to the harsh, 100 per cent penalty tax.
While paying fees from inside an RRSP may yield some savings, as described above, you’d also have less funds in your RRSP, so you’d have less tax-deferred growth over time. You might eventually reach a “breakeven point,” where the benefit of paying the fees from inside the RRSP is outweighed by the additional tax-deferred RRSP growth that could have accumulated inside the plan. After this breakeven point, you’d actually have been better off if you had initially paid the fees from funds outside your RRSP, preserving the extra funds inside your registered plan. Factors that influence the breakeven point include your rate of return and your tax rate.
The bottom line
Ultimately, to have any benefit from paying fees outside an RRSP/RRIF, you have to stay invested beyond the breakeven point, which can be several decades down the road. Unfortunately, most investors can’t predict with any certainty what their rates of return or tax rates will be in the future, so it’s nearly impossible to determine what your breakeven point would be. And even if you could, you can’t be certain that you’ll stay invested long enough to reach the breakeven point, much less go beyond it and realize that benefit.
As for whether fees should be paid from inside or out, with TFSAs, it seems pretty clear they should be paid from outside to maximize the tax-free growth inside the plan. For RRSPs and RRIFs, this is not an easy question to answer, as it will depend on your investment time horizon, rates of return and tax rates.
Jamie Golombek, CPA, CA, CFP, CLU, TEP is the Managing Director, Tax & Estate Planning with CIBC Financial Planning & Advice Group in Toronto.
Bank of Montreal CEO sees growth in U.S. share of earnings
Bank of Montreal expects its earnings contribution from the U.S. to keep growing, even without any mergers and acquisitions, driven by a much smaller market share than at home and nearly C$1 trillion ($823.38 billion) of assets, Chief Executive Officer Darryl White said on Monday.
“We do think we have plenty of scale,” and the ability to compete with both banks of similar as well as smaller size, White said at a Morgan Stanley conference, adding that the bank’s U.S. market share is between 1% and 5% based on the business line, versus 10% to 35% in Canada. “And we do it off the scale of our global balance sheet of C$950 billion.”
($1 = 1.2145 Canadian dollars)
(Reporting by Nichola Saminather; Editing by Leslie Adler)
GameStop falls 27% on potential share sale
Shares of GameStop Corp lost more than a quarter of their value on Thursday and other so-called meme stocks also declined in a sell-off that hit a broad range of names favored by retail investors.
The video game retailer’s shares closed down 27.16% at $220.39, their biggest one-day percentage loss in 11 weeks. The drop came a day after GameStop said in a quarterly report that it may sell up to 5 million new shares, sparking concerns of potential dilution for existing shareholders.
“The threat of dilution from the five million-share sale is the dagger in the hearts of GameStop shareholders,” said Jake Dollarhide, chief executive officer of Longbow Asset Management. “The meme trade is not working today, so logic for at least one day has returned.”
Soaring rallies in the shares of GameStop and AMC Entertainment Holdings over the past month have helped reinvigorate the meme stock frenzy that began earlier this year and fueled big moves in a fresh crop of names popular with investors on forums such as Reddit’s WallStreetBets.
Many of those names traded lower on Thursday, with shares of Clover Health Investments Corp down 15.2%, burger chain Wendy’s falling 3.1% and prison operator Geo Group Inc, one of the more recently minted meme stocks, down nearly 20% after surging more than 38% on Wednesday. AMC shares were off more than 13%.
Worries that other companies could leverage recent stock price gains by announcing share sales may be rippling out to the broader meme stock universe, said Jack Ablin, chief investment officer at Cresset Capital.
AMC last week took advantage of a 400% surge in its share price since mid-May to announce a pair of stock offerings.
“It appears that other companies, like GameStop, are hoping to follow AMC’s lead by issuing shares and otherwise profit from the meme stocks run-up,” Ablin said. “Investors are taking a dim view of that strategy.”
Wedbush Securities on Thursday raised its price target on GameStop to $50, from $39. GameStop will likely sell all 5 million new shares but that amount only represents a “modest” dilution of 7%, Wedbush analysts wrote.
GameStop on Wednesday reported stronger-than-expected earnings, and named the former head of Amazon.com Inc’s Australian business as its chief executive officer.
GameStop’s shares rallied more than 1,600% in January when a surge of buying forced bearish investors to unwind their bets in a phenomenon known as a short squeeze.
The company on Wednesday said the U.S. Securities and Exchange Commission had requested documents and information related to an investigation into that trading.
In the past two weeks, the so-called “meme stocks” have received $1.27 billion of retail inflows, Vanda Research said on Wednesday, matching their January peak.
(Reporting by Aaron Saldanha and Sagarika Jaisinghani in Bengaluru and Sinead Carew in New York; Additional reporting by Ira Iosebashvili; Editing by Sriraj Kalluvila, Shounak Dasgupta, Jonathan Oatis and Nick Zieminski)
U.S. to work with allies to secure electric vehicle metals
The United States must work with allies to secure the minerals needed for electric vehicle batteries and process them domestically in light of environmental and other competing interests, the White House said on Tuesday.
The strategy, first reported by Reuters in late May, will include new funding to expand international investments in electric vehicles (EV) metal projects through the U.S. Development Finance Corporation, as well as new efforts to boost supply from recycling batteries.
The U.S. has been working to secure minerals from allied countries, including Canada and Finland. The 250-page report outlining policy recommendations mentioned large lithium supplies in Chile and Australia, the world’s two largest producers of the white battery metal.
President Joe Biden‘s administration will also launch a working group to identify where minerals used in EV batteries and other technologies can be produced and processed domestically.
Securing enough copper, lithium and other raw materials to make EV batteries is a major obstacle to Biden’s aggressive EV adoption plans, with domestic mines facing extensive regulatory hurdles and environmental opposition.
The White House acknowledged China’s role as the world’s largest processor of EV metals and said it would expand efforts to lessen that dependency.
“The United States cannot and does not need to mine and process all critical battery inputs at home. It can and should work with allies and partners to expand global production and to ensure secure global supplies,” it said in the report.
The White House also said the Department of the Interior and others agencies will work to identify gaps in mine permitting laws to ensure any new production “meets strong standards” in terms of both the environment and community input.
The report noted Native American opposition to Lithium Americas Corp’s Thacker Pass lithium project in Nevada, as well as plans by automaker Tesla Inc to produce its own lithium.
The steps come after Biden, who has made fighting climate change and competing with China centerpieces of his agenda, ordered a 100-day review of gaps in supply chains in key areas, including EVs.
Democrats are pushing aggressive climate goals to have a majority of U.S.-manufactured cars be electric by 2030 and every car on the road to be electric by 2040.
As part of the recommendations from four executive branch agencies, Biden is being advised to take steps to restore the country’s strategic mineral stockpile and expand funding to map the mineral resources available domestically.
Some of those steps would require the support of Congress, where Biden’s fellow Democrats have only slim majorities.
The Energy Department already has $17 billion in authority through its Advanced Technology Vehicles Manufacturing Loan program to fund some investments.
The program’s administrators will focus on financing battery manufacturers and companies that refine, recycle and process critical minerals, the White House said.
(Reporting by Trevor Hunnicutt in Washington and Ernest Scheyder in Houston; Editing by Mary Milliken, Aurora Ellis and Sonya Hepinstall)
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