Investment Expenses Can Lower Your Tax Liability

As an investor, you incur many expenses related to your investment activities.

Some of these costs are tied to the purchase and sale of securities and others are for maintaining and administering an account.

Basic Rules for Fee Tax Deductions

There are two main types of investment expenses that can be deducted. First, you can claim some, but not all, of the costs associated with investing, including some fees you pay your investment advisor and your accountant.

Much of the interest on investment loans can be deducted, provided the money is used to earn investment income. However, the interest isn’t deductible if your investments earn only capital gains.

Because investment income is added to your income, it makes sense to take advantage of these tax breaks. By reducing your taxable income, you might wind up in a lower tax bracket with a lower tax rate.

For 2016, the tax rates for individuals are:

As an example of how your tax bracket can be lowered, let’s say your taxable income is $150,000.

You would owe $43,500 in taxes, based on the 29% rate, before taking any tax credits or deductions. If you reduced your taxable income to $142,353, you reduce your tax rate to 26% and your tax liability to $41,282.

Understanding what Lies under the Fees

You can’t deduct just any fees. You need to understand what they are for.

For example, fees for advice on what to buy, sell or hold are deductible. But any portion that relates to financial planning doesn’t qualify. Fees you pay for retirement-planning advice aren’t deductible. Generally, you may claim fees to manage or take care of your investments (other than administration fees for your registered retirement savings plan or registered retirement income fund) and for certain types of investment advice (your advisor can guide you on this.

Commissions paid for the purchase or sale of securities are transaction fees that can’t be claimed. Commissions on stock purchases are added to the cost of the investment. Sales commissions reduce proceeds from the deal. Ultimately, however, commissions will reduce any capital gain or increase any capital loss you claim.

Non-Registered Accounts

Another key element in the tax deduction of management fees is that they have to relate to advice only on  non-registered-account investments. Canada Revenue Agency (CRA) won’t allow any fee deductions that relate to Registered Retirement Savings Plans, Registered Retirement Income Funds, Registered Education Savings Plans or Tax-Free Savings Accounts.

Another consideration is how you pay the fees. You don’t deduct mutual fund fees because they’re part of the management expense ratio. They’re deducted from the income reported on the annual tax slip the fund sends to you.

But it’s different if you invest in a wrap account, where brokerage account costs are “wrapped” into a single or fixed fee. Because you pay the fees directly, you can deduct them.

Tax Preparation

You may deduct fees for the preparation of income tax returns when they relate to accounting and to reporting various investment activities on the return. If you own a business, the fees are generally deducted when you calculate net business income. You may also deduct payments for advice and assistance when appealing a CRA assessment or reassessment of tax, interest or penalties.

The CRA requires that investment management fees be reasonable. Generally, fees that are based on a sensible percentage of the fair market value of investments are considered acceptable.

Also take into account the amount of time spent and type of work done by the person providing the investment services. Arm’s length terms and conditions also should apply to fees, although this doesn’t come into play if you have no familial or corporate relationship with the investment manager.

Documentation

Hold onto any proof you have of your expenses, including receipts, statements and bills — in case the CRA requests it later.

Deducting investment fees and expenses is complex. Consult with your tax advisor, who can help ensure you use those costs to your advantage.