After-tax considerations for fee-based accounts
There has been quite a bit of confusion regarding the effects of taxation with respect to fees and fee-based accounts containing mutual funds.
Fees that are paid by investors are subject to GST/HST and vary between the provinces anywhere between 5% and 15%. Fees paid are deductible (on your tax return) for regular open accounts, but not for RRSPs, RRIFs, TFSAs, or other registered plans.
Mutual funds generate investment income, but there are many different types of investment income and taxes can be different for each type. Interest income, Canadian dividends, foreign dividends and capital gains are all taxed differently. On an after-tax basis, fee-based non-registered accounts could have an advantage for capital gains income (versus Class “A”) but in other cases, having the commission built-in (Class “A” shares) has an advantage or is the same as a fee-based account using “F” Class shares. However, at least one other tax expert argues that even after-tax, Class “A” is exactly the same as Class “F”.
There is one other thing to consider. Fees are only deductible providing you deduct them! If you don’t go through the extra work of reporting them annually on your tax return (or have someone do that work for you), then any tax advantages regarding fee-based accounts are lost. And not knowing the new tax rules may cost you dearly. In a recent CRA tax ruling, fees that investors pay for their registered fee-based accounts, such as RRSPs and RRIFs, cannot be paid from their open, non- registered account. If you do and paid say $1,000 in fees from the wrong account, you will have to pay a CRA tax penalty of the exact same amount. To avoid tax penalties, you must ensure that your fees are deducted from their proper accounts. For example, RRSP fees are deducted from the RRSP account, while TFSA fees are deducted from the TFSA account. I suspect, investment dealers will have to fine tune their systems to accommodate these new changes.
Note: RESPs (Registered Education Savings Plans) are treated differently. Fee withdrawals from RESP plans are not permitted and fees should be paid from outside the plan.
In all cases though, it is best to consult with your own tax professional.
Non-registered account: Sometimes interchangeably referred to as an “open” account. In plain language, an open non-registered account is just a regular account that is not “registered” with the government. A chequing account is one example of an open, non-registered account.
Registered account: It is an account that is “registered” with the government. Examples of registered accounts (or plans) are RRSPs, RRIFs, TFSAs, LIRAs, LIFs, and RESPs.
CRA: Canada Revenue Agency. I like the old name better – Revenue Canada. They are the tax people.
Class “A” shares: This type of mutual fund share has embedded commissions built-in.
Class “F” shares. This is the only type of mutual fund share that is allowed to be put in a fee-based account. Since you are already paying separate fees on your account, the embedded commission is stripped out of the Class “F” MER. If this wasn’t done, you would be paying double.
MER: Management Expense Ratio: This is the annual percent it costs to run/operate the mutual fund (excluding the Trading Expense Ratio).
Glenn Szlagowski is a Financial Advisor at Assante Financial Management Ltd. in Kitchener, Ontario. The opinions expressed are those of the author and not necessarily those of Assante Financial Management Ltd. This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. Before acting on any of the above, please make sure to see a professional advisor for individual financial advice based on your personal circumstances. Commissions, trailing commissions, management fees and expenses, may all be associated with mutual fund investments. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Please read the Fund Facts and consult your Assante Advisor before investing.