Are Investment Fees Tax-Deductible in Canada?
Are brokerage fees tax deductible? Whenever tax season pops up, this becomes a common question people ask their accountants. But, there’s no need to rush to your accountant in a panic, we’ll break it down for you right here.
If you’re looking for the quick answer, then it really depends. Some investment fees are tax-deductible, while others aren’t.
As for the long answer, keep reading to get the full picture. Let’s take a closer look at the various types of brokerage fees, which investment fees you can claim on your tax return, and how to actually go about claiming them.
In This Article:
What Are Brokerage Fees?
Brokerage fees, or broker fees, are fees brokers charge. For instance, you might pay a broker fee to purchase investments, trade investments, or simply for the brokerage managing and maintaining your investment account. You might even pay a fee for research subscriptions, assistance on trading platforms, and an inactive fee if you don’t perform a transaction in your investment account for a long period of time.
Brokerage fees are common in financial services. You will also pay a brokerage fee in the real estate or insurance industries, but here, we’ll focus on investment fees related to the investment industry.
Different Brokerage Fee Types
If you’ve just started investing, or you’re about to start, you might not yet be familiar with all the different fees. Let’s look briefly at the most common types of brokerage fees.
Each time you buy or sell investments, you’ll usually pay an investment commission on the trade. This is often referred to as a per-trade fee. When choosing the brokerage to invest with, you’ll want to review the brokerage’s fee schedule. A brokerage may charge you high Management Expenses Ratios (MERs), but low trade commission or vice versa. You’ll want to know this information upfront so you can make a fully informed decision.
Expense ratios are annual fees that investments charge. Expenses ratios are most commonly charged with ETFs, index funds, and mutual funds. It’s almost always based on a percent of your assets managed by the fund.
It’s fairly common for even the most seasoned investors to mix up management fees with expense ratios. A management fee is charged to cover the expense of operating the fund. (This includes hiring and employing investment advisors.) Similar to expense ratios, you’ll usually pay a management fee based on the percent of your assets managed by the fund.
Investment brokers and salespeople have to make a living too. Sales loads are to help compensate these financial professionals for their time. A sales load is usually paid to the financial professional who sold you the investment. You might also have to pay something referred to as a “mutual fund transaction fee” when buying and selling specific mutual funds.
Are you thinking about transferring your investment account to another brokerage? You’ll often pay a transfer fee for that. The cost of transferring your investment account from one brokerage to another is usually around $65. Some brokerages will actually cover the fee if you’re a new client, so be sure to ask.
Investment Fees You Can Claim on Your Tax Return
Brokerage and investment fees paid in the management of a non-registered account should be tax-deductible. In case you’re not familiar with the term, non-registered refers to an investment account that’s not registered with the government. This basically means a regular investment account, opposed to a registered one like an RRSP or TFSA.
Brokerage and investment fees, referred to as “carrying charges and interest expenses” on your tax return, are one of the most overlooked tax deductions. In a nutshell, carrying charges are expenses you pay to earn investment income in a non-registered account. Some of the most common carrying charges include fees for the management of your investments, fees for specific investment advice, and fees for someone to complete your tax return in some cases.
If your investment charges ongoing management fees, those fees are tax-deductible when held in a non-registered account.
If you borrow money to invest, that’s where it gets a bit murkier. Interest incurred to invest in a non-registered account may be tax-deductible. In order for that to happen, you have to borrow money to earn investment income, such as dividends or interest. If your non-registered investment only has the ability to make capital gains, you’re not able to deduct the interest.
Note, if your non-registered investments have the potential to produce dividends or interest, you may be able to claim a tax deduction, even if it doesn’t actually pay them.
That’s when it’s handy to have a good accountant. If you feel comfortable and are already experienced with filing taxes, then you can use tax return software to do it yourself. However, if your return is more complicated or you want a professional opinion, an experienced accountant can look at your unique tax situation and help you determine whether specific brokerage and investment fees are tax-deductible or not.
Investment Fees You Can’t Claim on Your Tax Return
It may come as a surprise, but you’re not able to claim brokerage and investment fees for any registered accounts. Commonly registered accounts include RRSPs, TFSAs, RRIFs, and RPPs, to name a few.
At first glance, this may not make any sense. Registered accounts are investment accounts with preferential tax treatment. The government encourages you to invest in these accounts by offering you this preferential tax treatment. It’s only natural then that you’d think you could claim brokerage and investment fees on your tax return.
The truth of the matter is that it boils down to a simple rule. If the investment income isn’t taxable, then you cannot claim costs related to earning that investment income. It’s as simple as that. While you do have to pay tax on RRSP and TFSA income eventually, you aren’t required to pay tax when your money is inside these registered accounts. This is why you can’t claim money borrowed to invest in these accounts (i.e. an RRSP loan) on your tax return.
It doesn’t matter whether you pay the brokerage or investment fee separately or the fees are embedded in your investments. The fees are not tax-deductible, case closed. If you pay an annual administration fee for a registered account or financial planning fees, you can’t deduct those either.
Transaction fees to purchase and sell investments are never tax-deductible regardless of the investment account type. You cannot deduct commission and sales charges on investments in registered nor non-registered accounts.
One investment expense that used to be tax-deductible is safety deposit fees. However, that hasn’t been the case since 2013. Similarly, if you’re subscribed to newspapers, newsletters, and magazines for investment purposes, those aren’t tax deductible either.
How to Claim Brokerage Fees on Your Tax Return
When filing your taxes, eligible brokerage and investment fees can be claimed on Line 22100 (which was previously known as Line 221 until the 2019 tax year when the CRA changed all the line numbers by adding a pair of zeros at the end to most of them.)
On line 22100, carrying charges and interest expenses, you can claim fees paid for the management of your non-registered investments. You can also claim fees paid for recording investment income, fees for specific investment advice, and eligible interest when you borrow to invest when the investments have the potential to pay interest and dividends.
When you’re looking for an investment brokerage, you’ll want to ask about the fees upfront so you aren’t blindsided by them later on. Once you have a list of the fees, you’ll want to check with your accountant to confirm which fees are tax-deductible and which aren’t. It’s also a good idea to brush up on your investing terminology so that you have a good understanding of what’s going on with your money. With these tips and tools, you’ll be able to set yourself on for investing success.