Clients can claim portfolio management fees directly charged to their non-registered accounts, as well as some legal and accounting fees.Yulia Sutyagina/iStockPhoto / Getty Images
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Many clients misunderstand carrying charges and interest expenses when filing their taxes, believing that most interest and fees for professional services are tax-deductible, advisors say.
Take the fees clients pay their financial advisors. Commissions on products don’t qualify as a carrying charge, says Frank DiPietro, assistant vice-president of tax and estate planning at Mackenzie Investments in Toronto.
“Those aren’t tax-deductible expenses. They’re a cost of trading investments, so they’re generally added to the adjusted cost base of the investment,” he says. “They help to reduce capital gain or increase any losses.”
Fees for financial planning and managing registered accounts are also not tax-deductible, Mr. DiPietro notes.
However, clients can claim portfolio management fees directly charged to their non-registered accounts. So, if an advisor manages several accounts for a particular client – say $500,000 in a non-registered account, $100,000 in a registered retirement savings plan and $200,000 in a tax-free savings account – only fees related to the non-registered account may be eligible for a tax deduction.
“Fees that are within the provisions of the investment counsel fees for non-registered accounts may be tax-deductible. These include portfolio investment management and administrative services, such as advice for buying and selling specific investments,” Mr. DiPietro says.
To qualify for the carrying charge deduction, these fees should not be embedded within products, he says.
“A management fee paid to the mutual fund company is not an expense of the investor. That’s the expense of the fund, so it’s deducted at the fund level,” he explains.
“Only when the fees are unbundled and paid by the investor directly is where it may be tax-deductible. Clients need to go deeper to understand where the fees are being charged – and what are the fees being charged for – to determine what portion of those expenses are tax-deductible.”
Mr. DiPietro says he encourages advisors to break down their fees to clients in a way so they understand what they can and cannot claim.
“Specify the various accounts that are managed on behalf of clients,” he says. “Also outline specific services provided and that will help determine what portion of fees may be tax-deductible.”
Claiming legal and accounting fees
Specific legal fees may be tax-deductible in certain circumstances. Dan LeBlanc, chief financial officer at Verecan Capital Management Inc. in Dartmouth, N.S., says legal fees to recover, establish or increase support payments qualify as carrying charges.
“If you’re separated and you’re battling legally with a spouse about support payments, there is some deductibility for some of those legal fees,” he explains.
Accounting fees are also deductible in specific situations. A sole proprietor who reports business income, for instance, can claim fees related to tax preparation of those income statements. Self-employed professionals can also claim interest costs incurred to earn business income, but there may be some restrictions, says Evelyn Jacks, president of Knowledge Bureau Inc. in Winnipeg.
For example, she notes that interest costs on a car were restricted to $300 in 2023 and $350 in 2024.
Claiming interest expense deductions
Clients who borrowed money to invest in a non-registered account may be entitled to claim the interest, Mr. DiPietro says.
“Those investments have the ability to produce investment income, so the interest costs should be tax-deductible,” he says.
Ms. Jacks says interest paid on an inter-spousal loan drawn up for investment in income-producing assets is also tax-deductible. She notes that interest must be paid by the spouse who is taking the loan to the spouse who provided the capital, at the prescribed rate of interest and within 30 days of the end of the calendar year.
“That interest cost is deductible to the borrower,” she says. “It must be included in the income of the lender.”
With real estate, if a client borrows money to acquire a property, the interest may be deductible if the property was bought for “the purposes of earning income,” Ms. Jacks says. “There can be restrictions when the property is vacant land.”
Finally, if the CRA paid interest on a tax refund, the amount must be reported as interest income. But if the return is reassessed and any of that refund interest is repaid, a deduction can be claimed on line 22100 up to the amount previously reported as income,” she says.
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