Provost also suggested that a customer could pay their fees once a year, in December. If the customer does not have enough liquidity in an unregistered account to pay the management fees, the customer could withdraw the fee amount from their TFSA and quickly deposit the amount back: from January 1st the following year.
According to Provost, the strategy is most useful for customers who have significant assets in their TFSAs and who are likely to maximize their TFSA contribution space each year.
“It’s like picking money off the floor. It’s interesting, but you don’t have to go crazy, ”said Provost. “There aren’t many negatives [to the strategy], with the exception of the associated administrative follow-up. Some customers may find it too complicated. “
But the benefits can add up.
Provost provided an example of a client who has been eligible for the TFSA since its inception and who has reached their contribution space each year from 2009 to 2020 ($ 69,500). Including returns, the client’s TFSA balance as of December 2020 was $ 80,000.
For example, suppose the client’s annual administration fee for the TFSA remains 1% for the next 25 years and she pays her administration fees from outside the TFSA instead of from within the TFSA. Suppose further that the TFSA annual contribution space gradually increases to $ 10,000 over the 25 years due to indexation, that the customer maximizes contributions (and never withdraws) each year, and that the TFSA returns 4% in interest income each year.
As of December 2045, assuming a constant marginal tax rate of 45%, the customer would amass an additional $ 15,500 in contribution space by paying the fees from outside the TFSA, Provost said.
Using the same assumptions, Provost calculated that the annual additional contribution space added by paying fees from outside the TFSA would be $ 253 in year 10 of the strategy and $ 1,934 in year 25 of the strategy.
“The tax savings will be less when the return is from capital gains and compared to a mutual fund,” noted Provost. “It’s interesting, but the tax savings, by and large, are often marginal as most of the money is tax-free. There’s always a tradeoff between the complexity and management of it and what you can save in taxes. “
That said, the strategy may work for high net worth clients who don’t touch their TFSAs until they die. The additional contribution area “can initially be a negligible amount per year, [but] the difference in accumulation can rise to tens of thousands of dollars over long periods of time. “
Provost found that administration fees for an individual’s TFSA are generally not tax deductible.
In 2019, the Treasury Department wrote in a “comfort letter” that it would recommend that the Minister amend the definition of “benefit” in the Income Tax Act to eliminate the practice of paying investment management fees from funds outside of registered schemes, including TFSAs.
This was a reverse of a position first communicated in 2016 when a representative for the Canadian Revenue Service stated that paying registered plan fees from unregistered or open accounts would incur a tax penalty equal to the fee.