When are Fees Paid to Advisors Deductible?

Fees paid to financial advisors are in focus these days, as new fee transparency and account performance reporting is being introduced under the third phase of CRM2 next month.

Here’s a primer on what’s deductible to make it all a bit more palatable:

To begin, fees paid on assets in registered accounts such as RRSPs, RRIFs, RDSPs, RESPs and TFSAs are not deductible when paid as the investments are owned by the trust and not the taxpayer.  However, only  the net amount in the account, after deducting the fees paid, will be taxed in the future. In the case of the TFSA, it is the net amount left that is disbursed on a tax free basis.

Turning to non-registered accounts, as a general rule, fees paid to a financial, investment or wealth advisor or advisory firm, other than commissions, are deductible on the tax return under Paragraph 20(1)(bb) of the Income Tax Act,  if, according to IT 238R:

(a) “. . .they are paid for advice on buying or selling securities or for the administration of those assets “ and
(b) “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

These fees, including investment counsel fees,  are generally referred to as carrying charges and will be deductible in full as long as they are reasonable and provided that income earned on those securities is taxable.

Management fees on mutual funds are treated differently:  they are not deducted on the tax return but are deducted from investment returns before they are paid to the investor, thereby reducing the taxable amount reported.

Where fees paid relate directly to the acquisition or disposition of an asset in a non-registered account, those fees, generally commissions, will reduce the capital gain (or increase the capital loss) on the asset when it is sold but, these are not deductible as carrying charges.

Fees to acquire an asset are added to the cost base of the asset.  Fees for the disposition of an asset are deducted from the capital gain or loss on the disposition as an outlay or expense.  Thus, fees paid to stockbrokers are not deductible as a carrying charge, unless the broker also provides investment portfolio management and administration services for which a separate fee is charged.

Also noteworthy, as per IT 238:  “Fees paid for other types of advice such as general financial counselling or planning are not within the provisions of paragraph 20(1)(bb), even though the principal business of the advisor or counsellor otherwise qualifies.”  That rules out the tax deductibility of fees for financial planning.

Carrying charges, claimed on Line 221 of the tax return, will offset all other income of the year and reduce net income, the figure on which refundable and non-refundable tax credits are calculated.  They are therefore lucrative and, taxpayers should be prepared to provide supporting documentation should CRA decide to follow up on a post-assessment audit.

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