When filing taxes, understanding the rules can make the difference between receiving legitimate tax breaks and getting into hot water with the CRA.Getty Images
What’s the difference between paying fees to a professional investment advisor and slipping a few bucks to your uncle to thank him for his latest hot stock tip?
The advisor’s recommendations may be grounded in years of professional experience – and the fees may be tax-deductible.
The operative word is “may.”
It can be challenging to determine which investment costs – from carrying charges and administration fees to interest expenses – meet the tax criteria set by the Canada Revenue Agency (CRA). Wilmot George, managing director of tax and estate planning at Canada Life in Toronto, is not surprised by this confusion.
“Many Canadians have heard through the grapevine that they can deduct fees for investment advice and they go to the CRA website,” he explains. “They see a line that says ‘you can deduct investment council fees,’ so they assume all fees they’re paying are deductible, when we know they’re not. It’s worthwhile to go beneath the surface.”
To avoid mistakes, it’s important to know that not all financial advice is treated equally in the eyes of the tax system. How are the related costs structured? Do the fees cover the cost of managing investments meant to generate income, manage a portfolio or build a client’s retirement plan? The intent matters.
When filing taxes, understanding the rules can make the difference between receiving legitimate tax breaks and getting into hot water with the CRA.
Here’s what to keep in mind:
What’s deductible – and what’s not
If you pay for professional advice to buy or sell unregistered investments, they’re likely included. You may also write off any management and administration fees for the management or safekeeping of non-registered investments. Custodial fees for safekeeping securities could count too.
Or did you borrow money to add new stocks to your portfolio? The interest you paid on the loan may qualify for a deduction if it was borrowed solely to earn income.
There are also plenty of fees that seem like they should be deductible but are not. Examples include registered accounts such as the registered retirement savings Plan (RRSP), registered retirement income fund (RRIF), tax-free savings account (TFSA), first home savings account (FHSA), and the registered education savings plan (RESP). Because they’re already tax advantaged, advisory fees don’t get a pass at tax time.
It’s also not possible to write off your advisor’s commissions for buying and selling investments, or their management expense ratios (MERs), which are embedded in mutual funds or exchange-traded funds (ETFs). That makes sense. While investment advisory services are deductible, transaction fees are not, partly because commissions already form part of the security’s cost when you buy it or sell it.
That detailed retirement plan you and your fee-only certified financial planner meticulously drafted last year? It may be money well spent, but you paid for general financial advice rather than advice meant to earn income.
Finally, keep in mind that interest paid on a loan meant specifically to earn capital gains is not eligible either.
Keep it professional – and avoid comingling
Another key requirement is who you pay. To qualify as a deductible investment expense, the fee must go to someone whose primary business is offering investment advice, not a friend, a relative or an informal source.
“The fees have to be reasonable, and they have to be paid to a person whose principal business is advising others,” says Armando Minicucci, a partner in Grant Thornton’s tax practice in Mississauga, Ont.
In other words, your uncle’s stock tip – unless he’s a professional wealth advisor – is not tax-deductible even if you paid him. The same goes for financial books, magazines and YouTube investment influencer subscriptions you’ve been learning from.
Establishing that the advice came from a qualified professional may seem straightforward, but determining what the CRA considers reasonable may be less clear. Detailed accounting records are important. Fees that far exceed the industry norm might set off CRA alarm bells and trigger a post-assessment review. But more often, the issue isn’t outright fraud. It’s poor documentation and comingling of accounts.
Say you borrowed money from your line of credit to earn investment income. It’s a success. The company’s stock shoots up, and you use some of the earnings to pay back the loan. But you also tapped the same line of credit to pay for a renovation at the cottage. Come tax time, you fail to separate the interest you paid for each expense and try to deduct the whole amount as an investment expense. Oops.
“Being unable to trace the use of funds? If you talk about a mistake, that’s probably the one we see the most,” Mr. Minicucci says.
Keep those line-items separate. Or, better yet, divide to conquer.
“If you have a separate line of credit or a separate loan exclusively used for investment purposes,” he says, “that would make things a little easier.”