Can You Write Off Your Advisory Fee?
These days, many forward looking investors are making the switch from traditional mutual fund and investment accounts to fee based accounts. These fee based accounts are similar in almost every way to the more traditional accounts that you’ve used to hold your RRSP, RRIF, TFSA, or Non-Registered investments. The difference lies in how you pay for the services you receive. Instead of paying commissions up front, through a back-end or low load, or through an ongoing management expense ratio, you now pay a monthly or quarterly fee that is deducted directly from your account.
With the more traditional method, investors have often had a difficult time deciphering exactly how much they’re paying for advice, whereas the fee based approach to investment management adds a level of clarity that truly allows you to understand the value that your advisor is providing you.
The fee based approach to asset management offers another advantage as well; the potential to write off a portion of your advisory fee for tax purposes.
The Canada Revenue Agency (CRA) allows investors to claim “fees to manage or take care of your investments” or “fees for certain investment advice” on Line 221 of their tax return. The rules, which are specifically, spelled out by the CRA “allows a taxpayer to deduct fees, other than commissions, paid for advice on buying or selling a specific share or security by the taxpayer or for the administration or management of the shares or securities of the taxpayer.”
In other words, if you’re paying an advisory fee for investment advice, you may be able to deduct the fee on your tax return.
The deductibility of fees comes with a few caveats. Here are some of the key items that you need to know about the deductibility of your investment advisory fees.
- Fees paid on RRSPs, RRIFs, TFSAs, or Segregated Funds are not deductible. With RRSPs and RRIFs, tax on income is deferred until the money is withdrawn from the account. As a result, a taxpayer can’t write off a reduction against income they don’t have to claim yet. Income on TFSAs is not taxable, therefore fees paid to manage a TFSA account is not tax deductible. Fees on segregated funds are treated differently because they are considered an insurance product.
- The individual or business charging the fee’s principal business must be advising people on investing, and administering and managing investment accounts.
- The fees must be reasonable. To determine whether a fee is reasonable, the CRA will look at the work that is being done and the amount of time that is being spent on the work.
- Fees paid on commissions or for mutual fund management expense ratios are not deductible.
- The fees may not be paid for specific financial planning advice, nor can they be for counselling on a specific security an individual might like to buy or sell (unless that is the individual’s principal business as previously described).
Manulife Securities provides all their fee based clients with information on the fees they’ve paid at the end of each year (please see the sample statement below). These will help you determine the amount that may be entered on Line 221 of your tax return.
And don’t forget, there are other advantages to fee based accounts as well:
- The potential to lower overall fees as your account is transitioned from A-Series mutual funds to F-Series.
- The elimination of the $150+GST annual administration fee on registered accounts.
- Zero change to service level.
Also, please remember that we are always open to your calls and would welcome a discussion on your accounts and the fee based service that we offer here at Manulife Securities. If you’d like to talk, please give us a call at (780) 426-2400, or e-mail us at email@example.com.