Are Investment Fees Tax-Deductible?

        The answer is, yes and no. It depends many factors, including the type of fee, the account it was charged on and to whom it was paid. Here are the qualifying characteristics of tax-deductible fees, and how they relate to the most common types of investment fees.

The Factors

        In order to qualify as tax-deductible, investment fees have to be paid for advice connected to the buying or selling of a specific investment within a non-registered account, the fee is not a commission, and the investment must be owned by the person making the claim.

        Further, the fees must be paid to a person whose principal business is advising others to buy or sell specific shares, or whose principal business includes the administration or management of shares or securities.

        So, let’s look at a few types of fees to determine if they qualify.

Fee-based account fees

        Under the fee-based account model, investors pay management fees directly to their advisor’s firm in exchange for advice. These fees are charged directly to one’s account with the firm rather than being embedded within investments or charged for trading securities such as stocks and bonds.

        Because the fees are connected to advice and not directly paid as a commission, fee-based charges on non-registered accounts are tax-deductible as a carrying charge.

Trading Commissions

        When investors trade securities such as stocks and bonds, they are typically charged a commission unless the trade is included in a fee-based account. So even though people generally receive advice from their advisor before trading, the fees paid to trade securities are considered commissions by the CRA, which are not tax-deductible.

        It should be noted, however, that commissions increase the adjusted cost base (ACB) of an investment at purchase and consequently reduce proceeds when the investment is sold. In other words, commissions reduce the potential capital gain (or increase a loss) on an investment and consequently, the resulting tax payable. Therefore, in a way, there is an element of tax savings built into trading commissions.

Annual Administration Fees

        All full-service brokerage firms charge an annual administration fee on transactional registered accounts such as RRSPs, RRIFs and TFSAs. Fee-based accounts are usually exempt. These fees are to co-ordinate the account with the CRA during the year.

        As these fees are only charged to registered accounts, they are not tax-deductible.

Mutual fund MERs

        Contrary to popular belief, investors in mutual funds do not pay fees directly. They pay a management expense ratio (MER) which is built into the fund, so the fee is implicit. There are tax savings, however, because mutual funds report distributions net of fees.

        Some people prefer to have a fee-based non-registered account and use f-class mutual funds. The fee-based account collects the advisor’s portion which is tax-deductible, and only the mutual fund company’s portion is charged as an MER. This strategy can be more cost-effective for some people depending on factors such as the account size and their overall tax situation.

Interest Paid on Investment Loans         

        Interest paid on a loan is tax-deductible if the loan is used to buy securities in a non-registered account, as long as the intention of the securities is to earn investment income.

        Even though people buy RRSPs or TFSAs to provide income, interest paid on these types of loans is not tax-deductible. This is chiefly because the income generated is not directly taxable to the owner. RRSP contributions themselves are tax-deductible, however, and income and growth from TFSAs is non-taxable, no matter how substantial.

Final thoughts

        Fees are a necessary part of professional investment management. If you are unsure of the fees you are paying and if they are tax-deductible, be sure to ask your advisor or accountant for assistance.