- Advisory fees are deductible against any type of income at the federal level. However, Quebec has its own rules in this area.
- Commissions paid by an investor are specifically excluded from the definition of advisory fees. But, as commissions paid increase the adjusted cost base (ACB) of an investment at purchase or sale, this then can reduce capital gains or increase capital losses when the investment is eventually sold.
- Advisory fees can be deductible if paid for advice regarding the purchase or sale of the securities or administration of the securities (seg funds not included).
- If an advisory fee is charged directly to the investor, the fee would normally be deductible against income for the investor, if other criteria are met.
Many dealers have been switching to a fee-based model. The perceived benefit, from the investor’s point of view, could be the potential ability to deduct advisory fees on a non-registered account.
This raises the question: When are advisory fees tax-deductible?
Advisory fee deductibility rules
The rules for deductibility of advisory fees1 can be found in section 20 (1) (bb) of the Income Tax Act.
20. (1) (…) in computing a taxpayer’s income for a taxation year (…), there may be deducted (…)
(bb) an amount, other than a commission, that
- is paid by the taxpayer in the year to a person or partnership the principal business of which
- (A) is advising others as to the advisability of purchasing or selling specific shares or securities, or
- (B) includes the provision of services in respect of the administration or management of shares or securities, and
- is paid for
- (A) advice as to the advisability of purchasing or selling a specific share or security of the taxpayer, or
- (B) services in respect of the administration or management of shares or securities of the taxpayer;
The rules above allow a taxpayer to deduct fees paid for advice on buying or selling a specific share or security, or for the administration or the management of them, provided the amounts deducted are reasonable. A reasonable fee is defined as a fee charged normally in an arm’s length relationship.
In all provinces except Quebec, advisory fees are deductible against any type of income at the federal level. In Quebec, advisory fees are only deductible against investment income from:
- Canadian dividends,
- foreign income and
- taxable capital gains.
If there isn’t enough income generated by the investments to use the deduction, the unused portion of the deduction can be accumulated in Schedule N and used at any time in the future, subject to investment income earned in those years.
Fees paid for other types of services are not within the provisions of paragraph 20(1) (bb), and, thus, are not deductible. Examples of these include financial planning fees and financial newsletter subscription fees.
Commissions paid by an investor are specifically excluded from the definition of advisory fees. So, commissions paid to stockbrokers to process transactions or deferred sales charges2 incurred by investors for early redemptions of mutual funds are generally not deductible.
All is not lost, however, as commissions paid increase the adjusted cost base (ACB) of an investment at purchase or sale, thus reducing capital gains or increasing capital losses when the investment is eventually sold.
Although not specified in paragraph 20 (1) (bb), fees charged by the trustee of a registered retirement savings plan are also not deductible. This is because the shares or securities held in the plan belong to the trust and not the investor This means that no fees are deductible if paid in relation to:
- Registered Retirement Savings Plans (RRSPs),
- Registered Retirement Income Funds (RRIFs),
- Tax-Free Savings Accounts (TFSAs),
- Registered Education Savings Plans (RESPs), and
- Registered Disability Savings Plans (RDSPs).
To learn more about advisor fees charged outside of an RRSP or RRIF, read this article.
Paragraph 20 (1) (bb) also mentions that the advice given has to be related to a share or a security owned by the taxpayer. What is considered a share or security? Generally, the following would all qualify:
- mutual funds,
- corporate class mutual funds and
- Exchange traded funds (ETFs).
Do segregated funds constitute a security? It seems not. Canada Revenue Agency (CRA) has taken the position that, for the purpose of paragraph 20(1) (bb), a segregated fund contract is an insurance contract and not a share or security.3 Consequently, according to CRA, paragraph 20(1) (bb) does not apply to fees paid by a taxpayer in respect to the management of segregated funds.
Please note that to be deductible, an advisory fee must be paid by the taxpayer and needs to be paid for advice or service pertaining to shares or securities held directly by the taxpayer. These requirements, described in 20 (1) (bb), create many ramifications.
In the case of a traditional mutual fund, the fund itself pays the management fee (which is similar to an advisory fee) to the fund’s portfolio manager. As the investor is not charged this fee directly, it is not deductible. Similarly, any trailing commission paid to the dealer in respect of the sale of the mutual fund is also paid by the mutual fund and not the investor directly. So, such commissions are also not deductible.
If an advisory fee is charged directly to the investor, [i.e., not embedded as part of its Management Expense Ratio (MER)], the fee would normally be deductible against income for the investor, if other criteria are met. That is, the fee is paid in respect of advice regarding the purchase of eligible securities (including mutual fund units or shares) owned directly by the investor. However, mutual fund portfolio management fees themselves are not normally deductible at the investor level. Why? Again, par. 20 (1) (bb) specifies that the shares or securities must be held directly by the investor for deductibility to be possible. The CRA has supported this position in several technical interpretations.
1Referred to by CRA as “investment counsel” fees. We are using advisory fees, as it is a more familiar term.
2As of June 1, 2022, deferred sales charges (DSC) are banned. This means the deferred sales charge option, including the low load option, are banned. Fund companies can no longer pay upfront sales commissions to dealers in connection with the sale of mutual funds.
3Conference for Advanced Life Underwriting (CALU), 2014-0523321C6.
Information contained in this article is provided for information purposes only. Its not intended to provide or be a substitute for professional, financial, tax, insurance, investment, legal or accounting advice and should not be relied upon in that regard. It also does not constitute a specific offer to buy and/or sell securities. You should always consult your financial advisor or tax specialist before undertaking any of the strategies discussed in this article to ensure that all elements and your personal circumstances are taken into consideration in developing your individual financial plan. Information contained in this article has been compiled from sources believed to be reliable, but no representation or warranty, express or implied, is made with respect to its timeliness or accuracy and SLGI Asset Management Inc. disclaims any responsibility for any loss that may arise as a result of the use of the strategies discussed.