Understanding investment fees and taxes
What are the fees that investment may qualify for tax deductions?
Working with your advisor to build a portfolio of investments is an important part of the development of a life plan that will help you reach your goals. You can choose from a wide range of investment products, including mutual funds, segregated funds, and exchange-traded funds (ETFs). Although the objective is to grow your money, the fact is that fees are often required.
The development and maintenance of financial products and services require a great deal of expertise. The fee you pay may be considered an investment in the expertise. They are sometimes included in the price of the product itself or invoiced separately under a program to block fees. The good news is that some of these expenses may qualify for a tax deduction.
Expenses eligible for deduction
In accordance with the tax Act on the revenu1, a taxpayer can deduct the investment fees charged for advice on the purchase or sale of shares or of specific titles, or to the administration or the management of securities held by it, provided that the amount of the fee paid is reasonable.
In addition, to be deductible, the lump sum fee requested with respect to the service must be provided by a person (e.g., a consultant) or an entity (e.g., an investment company), whose main activity is to provide advice for the purchase or sale of specific titles or to administer or manage securities. The investment costs that meet these criteria may be deducted from any source of taxable income earned during year 2.
A taxpayer may also deduct any applicable sales taxes: The tax on goods and services tax (GST), the harmonized sales tax (HST), and the Quebec sales tax (QST).
What is not deductible?
Certain items relating to investments may not be subject to a tax deduction, including :
- Commissions paid on the trading of shares and FNB3
- Transaction fees for the purchase and sale of investments
- Charges for services general consulting or financial planning
- Subscription fees paid for the magazines and newspaper’s financial
Cool in a registered account
The investment fees associated with registered accounts, such as savings accounts tax-free (TFSA) or registered retirement savings plans (RRSP), are the subject of other considerations. The fees of counsel and other investment fees charged to the registered assets, regardless of the investments held, are not deductible from taxable income.
However, the placement fee charged to a registered account can be paid to the registered account or through other capital. It depends on the type of account that is registered.
In regards to a TFSA, in which after-tax dollars can grow tax-free, the payment of expenses out of funds outside of a TFSA can maximize the savings tax-free, as it is not directly reduced costs.
For what is RRSP and investment funds registered retirement income fund (RRIF), in which the money is taxed at the time of the withdrawal, the answer depends on your investment horizon, your rate of return, and your tax rate. The investment fees paid to the RRSP or RRIF are using pre-tax dollars. While this reduces the value of your investment with tax deferral, it also reduces the amount of tax that the Canada Revenue Agency (CRA) will collect on future withdrawals.
Segregated fund contracts
At the present time, the CRA does not provide a tax deduction for investment expenses related to segregated fund contracts. This position is due to the fact that a segregated fund contract is a contract of insurance. Being neither an action nor a security owned by the investor, this product does not meet one of the main criteria of the deductibility of expenses.
Costs and integrated MER
The expenses related to mutual funds and ETFs are built into the product itself, in the management expense ratio (MER), which also includes the operating expenses and taxes charged to a fund. While these costs are not eligible for a tax deduction, they are deducted by the fund until the income is distributed to investors, which reduces the amount of their taxable income.
Investments are often associated with costs, but knowledge is power. In the context of the planning of your portfolio this year, ask your advisor to review the potential tax savings related to your investment options.
Canadians have access to a wide variety of investment products – and the costs are part of the equation. The fees charged by investment companies to help offset the costs associated with the administration of accounts, the management of investment products, and the operations carried out on your behalf. Whether you’re a novice in the world of investing or contribute periodically
The investment fees are paid to a portfolio manager or investment advisor to cover a range of services from managing your investments. The fees are based on a fixed percentage of the value of the portfolio.
MER (management expense ratio)
The management expense ratio is the total operating expenses of a mutual fund or an ETF, such as legal fees, accounting, and management. It is expressed as a percentage of the value of the fund, and the reported performance of the fund is net of MER.
Trading Commissions and brokerage fees
These investment fees are usually charged each time you buy and sell stocks, bonds, and ETFs. The fees may vary from one investment company to another. They generally require a basic amount per transaction, which can add additional fees depending on the number of operations and the size of the account.
A fee may be charged by an adviser or investment firm for advice regarding the purchase or sale of shares or securities accurately.
Costs play an important role and may be subject to an annual discussion on the investments. For more information, contact your advisor.
1 the Canada Revenue Agency, IT238R2 ARCHIVED – the Fees paid to an investment advisor.
2 for The purposes of Québec income tax (for individuals and trusts, and not companies), the deductibility of the fees of the investment advisors (as the placement fee according to the rules of Quebec) paid in a year is limited to the aggregate investment income realized during the year (including interest, capital gains taxable Canadian dividends increased, and foreign income, gross). The investment costs that are not deducted in the current year can be used with respect to the previous three years or carried forward to future years. They are only tax-deductible investment income.
3 commissions paid on purchases are added to the adjusted cost base (ACB) of these securities, while the commissions paid on the sale are subtracted from the product received. Therefore, the commissions will reduce the capital gains and increase the capital losses. 4 Although the interest income after tax of an investor is the same, regardless of the type of expense ratio (MER or expenses deductible from taxable income), there may be slight differences in their after-tax income when the MER is used to reduce other types of distribution of income, including foreign income, Canadian dividends or capital gains.
© 2023 look for insurance. People and situations referred to are fictional, and any resemblance to persons living or dead would be pure coincidence. This document is indicative only. It is not intended to give specific advice on financial, tax, legal, accounting, or other, and the information it provides should not be considered as such. Many of the items discussed will vary by province.
Any individual who has taken note of the information contained here should ensure that they are appropriate, and seek the advice of a specialist. Except for errors or omissions. The subscription of mutual funds can give rise to the payment of commissions or trailing commissions, and the payment of investment fees or other fees. Please read the prospectus before making an investment.
Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Any amount that is allocated to a segregated fund is placed at the risk of the contract holder and may increase or lose value.