The short list: deductible investment expenses

Sorry, Financial Post not deductible

Tax-filing season is upon us, and at this time of the year I get many questions about the kinds of expenses that investors can deduct. Novice investors, especially, have a kind of starry-eyed idea about deducting everything from their subscription to an investment newsletter to the fee they paid to their tax preparer to interest on money borrowed to invest. Unfortunately, the Canada Revenue Agency (CRA) long ago twigged to this type of thing, and the list of the deductible investment expenses (called “carrying charges” if you want to get technical) has dwindled and become very circumscribed. Here’s a quick review what’s allowed and what’s not.

Investment advice

This is right at or near the top of the list for most investors. What about the fee you pay your financial planner, your portfolio manager, the MER on your mutual fund or ETF? You may deduct fees paid for certain investment advice related to buying or selling a specific investment, or for recording investment income. According to CRA Interpretation Bulletin IT238R2, “The fees must be paid to a person whose principal business is advising others whether to buy or sell specific shares or whose principal business includes the administration or management of shares or securities.”

What about financial planning or general financial advice? There’s a fine line between what constitutes advice related to selling specific securities and what doesn’t. In its Interpretation Bulletin IT-238, the CRA attempts to make the distinction: It says fees paid for advice such as “general financial counselling or planning” are not eligible, even fees paid to the same advisor for advice on buying and selling investments are. However, it doesn’t actually specify what “general financial counselling or planning” is, but allows that fees paid for an advisor providing the following services generally qualify: the custody of securities; the maintenance of accounting records; the collection and remittance of income; and the right to buy and sell on their own judgement on behalf of some clients without reference to those clients (that is, discretionary portfolio management).

And what about your cable fee to get BNN Bloomberg, or subscription fees paid for financial newspapers, magazines, or newsletters, either digital or physical? Sorry, no dice. CRA says these expenses are not deductible. Likewise, safety-deposit box charges are not deductible.

Investment management

Here’s some good news. Fees you paid to professional investment managers to manage and administer your investments are deductible. However, CRA will not allow the deductibility of administration fees paid for your Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF) or Tax-Free Savings Account.

CRA will also not let you deduct the management fees charged to a mutual fund (that is, the management expense ratio). Because the MER is charged directly against the fund, it is not reported on individual income tax slips and so cannot be claimed as an investment management expense.

If you trade securities yourself through a broker, whether full service or online discount, you may not deduct brokerage fees or commissions paid to buy and sell securities. Instead, you may be able to use these costs when you calculate your capital gain or capital loss.

Investors who pay fees directly for separately managed accounts (SMAs) or wrap accounts may deduct those fees as carrying charges on their tax return.

Interest charges

Interest on money borrowed for investment purposes is deductible. “Investment purposes” means you’re using the borrowed money to try to earn investment income, including interest and dividends. However, generally you may not deduct interest if you use borrowed funds only for the purpose of generating a capital gain.

Interest on funds borrowed to contribute to an RRSP, a pooled RPP, a specified pension plan, a Registered Education Savings Plan (RESP), a Registered Disability Savings Plan (RDSP), or a Tax-Free Savings Account (TFSA) is not deductible with one rather complicated exception. If you had previously borrowed money to invest in a non-registered account and then transfer the investment to an RRSP after you’ve repaid the loan in full, you may still deduct the interest.

Deducting investment expenses and carrying charges can be a perilous undertaking. If your situation is complicated and there are large amounts involved, consult your financial advisor before making any claims on your tax return. And always retain supporting documents, slips, and receipts to back up your claim.

Robyn Thompson, CFP, CIM, FCSI, is the founder of Castlemark Wealth Management, a boutique financial advisory firm specializing in wealth management for high net worth individuals and families. Contact her directly by phone at 416-828-7159, or by email at rthompson@castlemarkwealth.com for a confidential planning consultation.

Notes and Disclaimer

The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned are illustrative only and carry risk of loss. No guarantee of investment performance is made or implied. It is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice. Please contact the author to discuss your particular circumstances.