This was a reversal of a position first communicated in 2016, when a Canada Revenue Agency representation stated that paying registered plan fees from non-registered, or open, accounts would incur a tax penalty equivalent to the fee.The Corporate Tax Administration Redesign ( CTAR), or Corporate Tax Administration for Ontario ( CTAO), as the Canada Revenue Agency calls it, is an initiative between the federal and Ontario governments that implemented a harmonized federal and Ontario corporate income tax administration, with a single tax return. In 2019, the Department of Finance wrote in a “comfort letter” that it would recommend the minister amend the Income Tax Act’s definition of “advantage” to exclude the practice of paying for investment management fees from funds outside of registered plans, including TFSAs. Provost noted that management fees for an individual’s TFSA are generally not tax-deductible. The additional contribution room “may be, at the beginning, a negligible amount per year, the difference in accumulation can climb to several tens of thousands of dollars over long periods.” Nonetheless, the strategy can work for high-net-worth clients who won’t touch their TFSAs until they die. There is always a trade-off between the complexity and administration of this and what you can save in taxes.” “It’s interesting, but the tax savings, in the grand scheme of things, are often marginal given that most of the money remains tax-free. “The tax savings will be lower if the return comes from capital gains and the comparison is made with a mutual fund,” Provost noted. Using the same assumptions, Provost calculated that the annual incremental contribution room added by paying fees from outside the TFSA would be $253 in year 10 and $1,934 in year 25 of the strategy. Further assume that annual TFSA contribution room gradually increases to $10,000 over the 25 years due to indexing, that the client maxes out her contributions each year (and never makes withdrawals), and that the TFSA returns 4% each year in interest income.Īs of December 2045, and assuming a constant 45% marginal tax rate, the client would amass an extra $15,500 in contribution room by paying the fees from outside the TFSA, Provost said. Suppose the client’s annual management fee for the TFSA remains 1% over the next 25 years and she pays her management fees from outside the TFSA instead of from within. Including returns, the client’s TFSA balance in December 2020 was $80,000. Provost provided an example of a client who has been eligible for the TFSA since its inception and maxed out their contribution room every year from 2009 to 2020 ($69,500). Some clients might find it too complicated.” “There aren’t many negatives, except for the administrative follow-up that goes with it. It’s interesting, but you don’t have to go crazy about it,” Provost said. “It’s like picking up money from the floor. Provost said the strategy is most useful for clients who have significant assets in their TFSAs and who are likely to maximize their TFSA contribution room each year. That way, if the client doesn’t have enough liquidity in a non-registered account to pay the management fees, the client could withdraw the fee amount from their TFSA and be able to re-contribute the amount quickly: as of January 1 of the following year. Provost also suggested that a client could arrange for their fees to be paid once a year, in December.