19 November 1996 External T.I. 9737005 - INVESTMENT MANAGEMENT FEES OF RRSP & RRIF

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

RRSP & RRIF investment management fees

Position:

Confirming and elaborating on our standard position that investment management fees paid by annuitant are considered payment of a premium to RRSP to RRSP for section 146 and Part X.1 purposes; confirming that payment of such RRIF expenses by annuitant is forbidden by 146.3(2)(f) and would cause income inclusion under 146.3(11).

Reasons:

1)routine;

2) routine.

XXXXXXXXXX							963700

November 19, 1996

Dear XXXXXXXXXX:

Re: Investment Management Fees of a Registered Retirement Savings Plan ("RRSP")

This is in reply to your letter of November 1, 1996, in which you ask several questions concerning investment management fees of an RRSP and a registered retirement income fund ("RRIF"). Our answers follow.

Question 1:

If the investment management fees of an RRSP are paid within the RRSP trust, then there are no tax consequences. In other words, if the investment management fees are deducted from the self-directed RRSP, the annuitant will not be penalized nor will the annuitant be permitted to deduct such fees on the annuitant's income tax return. Is this correct?

Answer 1:

These fees are properly expenses of the trust and when paid with trust funds there are no tax consequences to the annuitant. It is also true that where the trust pays the expense the annuitant cannot be permitted to deduct such an amount from his or her income.

Question 2:

I understand that if the annuitant paid the investment management fees of an RRSP with funds outside the RRSP, such payment would constitute the payment of a premium to the RRSP for purposes of section 146 and Part X.1 of the Income Tax Act (the "Act"). Would you please define the word "premium" for me.

Answer 2:

"Premium" is defined in subsection 146(1) of the Act and the relevant part of that definition which relates to an RRSP trust is:

any periodic or other amount paid or payable under a retirement savings plan ... as a contribution ... referred to in paragraph (b) of (the definition "retirement savings plan") for the purpose stated in that paragraph....

Paragraph (b) of the definition of "retirement savings plan" as it relates to an RRSP trust reads as follows:

an arrangement under which payment is made by an individual or the individual's spouse ... in trust to a corporation licensed or otherwise authorized under the laws of Canada or a province to carry on in Canada the business of offering to the public its services as trustee, of any periodic or other amount as a contribution under the trust ... to be used, invested or otherwise applied by that corporation ... for the purpose of providing for the individual, commencing at maturity, a retirement income.

In short, a premium is the amount paid by an annuitant or the annuitant's spouse to the trust company which is invested with the intent that on maturity the amount in the RRSP can be used to provide periodic retirement income to the annuitant.

Question 3:

Payment of RRIF trust expenses by the annuitant is prohibited by paragraph 146.3(2)(f) of the Act. Does "payment by the annuitant" mean the annuitant is paying with funds from outside the RRIF?

Answer 3:

Payment by the annuitant means that the annuitant is paying the expense with funds outside the RRIF trust. In other words, payment is not being made by the RRIF trust.

Question 4:

You have advised that if a payment is made by the annuitant, in the year the payment is made there will be an income inclusion to the annuitant equal to the fair market value of the RRIF property pursuant to subsection 146.3(11) of the Act. Kindly explain your meaning in layman's terms.

Answer 4:

Paragraph 146.3(2)(f) of the Act prohibits the registration of a retirement income fund which allows the RRIF carrier to accept any property (including cash) except property transferred from another registered plan or the Saskatchewan Pension Plan, and then only in certain specified circumstances which are not relevant to this discussion. In short, an individual cannot make a payment to a RRIF. If a payment is made by the annuitant, the RRIF will be considered, in accordance with subsection 146.3(11) of the Act, not to be registered any more and the annuitant is required to include in income at that time an amount equal to the fair market value of all property held in the RRIF.

Where an annuitant pays the investment management fees of the RRIF the annuitant is considered to have paid an amount to the RRIF.

Question 5:

Will you please advise if and when this proposed legislation is passed.

Answer 5:

There is no proposed legislation respecting investment management fees of RRSP or RRIF trusts. The annuitant has never been entitled to pay such fees outside the trust and claim a deduction from income. The fees relate to property owned by the trust and a third party, such as the annuitant, is not entitled to claim the fees as his or her own expense. This is so even where the annuitant directs how the trust is to invest its monies. The Department's position on this matter with respect to RRSP trusts is contained in Interpretation Bulletin IT-238R2 at paragraph 7. A copy is enclosed for your information. There is no comment in this publication with respect to RRIFs but the principle being applied is the same.

We trust our comments will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch