What investment expenses are deductible?
Several investment expenses (carrying charges) can be deducted from income for tax purposes. Investment management or counselling fees that you pay for someone to buy, sell and manage your non-registered investments are deductible. These fees are usually based on the value of the assets managed, and they may be paid inside a mutual fund (management expenses) or externally, directly to your advisor (counselling fees).
Interest paid on money that you borrow to purchase assets intended to earn investment or business income is tax deductible; it must be deducted in the year it is paid (or becomes payable).
Investment counselling fees
According to the Income Tax Act, you can deduct fees paid for advice about buying and selling specific investments and for administration or management of investments held in non-registered accounts. Commissions, however, are not deductible because they are paid as a result of a transaction, not for advice or management. The fees must be paid to a person, such as your investment advisor, whose job is to give advice about and to manage investments. The courts have determined that the cost of getting your advice from investment magazines or newsletters is not deductible.
Note that fees paid for general financial planning advice, such as tax and estate planning, and fees related to RRSPs, RRIFs, TFSAs and RESPs are also not tax deductible. If you pay a fee to your advisor for overall advice, including investment management, your advisor or your accountant must separate the investment advice portion for tax deduction.
Internal vs external fees
With mutual funds, investors do not pay fees separately and it may appear that management fees have not been deducted for taxation purposes because the amount paid does not appear on investment account statements or income tax slips. But it has been rolled into the net return shown. Fees paid directly to the advisor are clearly shown on statements and on your tax return.
Because external fees and the related tax deduction are clearer, some investors believe this is the better way to pay fees. But in the end, there is no difference, tax-wise, between paying your advisor directly and paying a fee within a mutual fund as long as the mutual fund has enough distributable income to cover the fees.
If you take out a loan to purchase income-earning property or to purchase investments that pay or are expected to pay interest or dividends, you may deduct the interest payments on your tax return. If the property or investment is not expected to earn interest or pay dividends (that is, if it has been purchased to earn capital gains), the interest on the loan is not tax deductible.
So a loan to buy shares of a company that does not pay dividends at present but is planning to in the future would qualify; interest on a loan to purchase shares of a company that has never paid dividends and seems unlikely ever to do so would probably not be deductible. Mortgage interest to buy a house that you plan to rent out to earn income would qualify; mortgage interest to buy a house you plan to sell at a profit in the future would not.
Even if the interest costs are greater than the income earned from the investment, the interest is still usually deductible, but work with your accountant to ensure all rules are followed. The Canada Revenue Agency also requires a direct path from the loan to the investment, so ensure you keep proper records of where the money goes. If it’s not traceable, the deduction could be disallowed.
As with investment counselling fees, interest on loans taken to contribute to your RRSP or TFSA, or to purchase life insurance or an annuity contract, is not deductible.
Other deductible and non-deductible expenses
If you have earned income from your investments, you can also deduct the cost of having your tax return professionally prepared.
Some investment-related costs are not deductible. These include the cost of a safety deposit box for storing your investment certificates – that used to be a deductible expense, but no longer is.
Talk to your accountant about ensuring your investment-related expenses are deducted to the full extent possible – these deductions can be easy to miss.