The Enlightened Investor: Registered Account Investment Fees Are Not Deductible

In November 2016, Canada Revenue Agency warned investors who are deducting investment fees charged for the management of their registered accounts that they are subject to a tax penalty perhaps as great as that fee. A registered account is a TFSA, RSP, RIF and the various locked in versions.

Investment fees charged to registered accounts by your advisor’s firm are not a deductible expense. For a fee to be deductible it must be paid by the person. Registered accounts however, are trusts holding investor assets. The fee is charged to the trust and thus, the fee is not a deductible expense for the person.

subject to a tax penalty

Explicit versus Implicit Investment Fees:

If you own a mutual fund you are subject to a manager fee, which is included in the management expense ratio and automatically deducted from your funds. This is an implicit fee, which is not deductible for tax purposes regardless of what type of account holds the mutual fund.

If you hire a portfolio manager to manage your registered and non-registered accounts you will pay a fee, which is a separate expense and reported to you annually. This is referred to as an explicit fee. Fees incurred in the management of non-registered accounts, often referred to as cash accounts, are a deductible expense for tax purposes. However, the fees charged to registered accounts are not deductible for the reason stated above.

Investors who are redirecting fees would be advised to unwind this arrangement

An occasional practice is for explicit registered account management fees to be paid from a cash account. This is often done to avoid reducing the value of registered accounts or to try to make these fees deductible. It is this latter practice of redirecting explicit registered account fees to cash accounts and then deducting them for tax purposes that CRA has announced they are cracking down on.

Investors who are redirecting fees would be advised to unwind this arrangement rather than attract the attention and the punitive fines of the Canada Revenue Agency.

If you would like more information or have any questions, feel free to contact us at 780.466.6204, or click here to send us an email.

Thanks to Chris Turnbull of The Index House for providing this article.

The Index House is a division of Polaris Financial Inc.

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