The article “Are Investment Fees Tax Deductible?” was originally published on MoneySense on August 22, 2017.
Jerry pays a few thousand dollars in monthly fees but they may not be tax deductible
Q: I pay a few thousand dollars in monthly fees to the various RRSP funds that I have—all with one institution and at a preferred rate. Since these fees are to earn money, are they an allowable tax deduction?
—Jerry
A: Fees paid to a financial institution may be tax deductible, Jerry. It depends on the nature of the fees.
You refer to your “various RRSP funds” and I assume you are referring to mutual funds or pooled funds held in your RRSP accounts. Fees paid for RRSPs, whether embedded fees in your funds or fees charged separately to your account for investment management are specifically not tax deductible. If you pay an annual administration fee, this too is not eligible for a tax deduction.
This lack of tax deductibility applies for all registered accounts, whether an RRSP, LIRA, RRIF, LRIF, LIF, etc.
As a rule, Jerry, if the income isn’t taxable – registered accounts are tax-deferred – costs related to earning that income are not deductible. This applies to investment fees as well as interest costs. That’s why interest on an RRSP loan isn’t tax-deductible, but interest on a loan to invest in a non-registered account may be. I say “may be” because technically, it should only be tax deductible to the extent you borrow money to earn non-registered investment income like interest or dividends. If your investments only produce capital gains, you cannot deduct the interest.
According to the Canada Revenue Agency, you can deduct fees for only specific types of investment advice. In particular, Jerry, a taxpayer can “deduct fees, other than commissions, paid for advice on buying or selling a specific share or security by the taxpayer or for the administration or the management of the shares or securities of the taxpayer.”
This means that transaction fees to buy and sell investments – commissions, sales charges, etc. – cannot be deducted. Management fees charged on an ongoing basis for managing your investments are deductible. Acquisition and selling costs like commissions reduce the capital gain or increase the capital loss when the investment is ultimately sold.
Of note, Jerry, is that some financial institutions have structured management fees so that little to no fees are paid in an investor’s RRSP and higher fees are paid in an investor’s non-registered account. This amounts to having an RRSP fee paid in a non-registered account in order to make it tax-deductible.
CRA recently addressed this practice, saying that as of January 1, 2018, they will begin to assess a penalty tax to taxpayers who do so. The tax payable will be equal to the amount of the fee, such that a $1,000 fee deducted would attract a $1,000 tax penalty.
Of note is that safety deposit box fees are no longer tax deductible. Subscription fees for newspapers, newsletters or magazines are not tax deductible either.
A final note, Jerry, about your fees. I can’t help but comment on your reference to a “preferred rate” of “a few thousand dollars in monthly fees”. If you’re paying even $2,000 in monthly fees, that’s $24,000 or more in annual fees. On a $1 million RRSP, that’s 2.4%. On $2 million, that’s 1.2%. Unless you have a multi-million-dollar RRSP, I hate to tell you, but you’re not exactly paying a preferred rate.
So, while your question related primarily to the tax deductibility of your investment fees, you might also want to spend some time investigating whether your fees are reasonable and represent a good value in the first place – whether they are tax deductible or not.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.
