The article “Are mutual fund fees tax deductible?” was originally published in MoneySense on April 24, 2023. Photo by Centre for Ageing Better from Unsplash.
Don’t go claiming a deduction for mutual fund fees on your tax return. Why? Because they’ve already been indirectly deducted.
“Are management fees within a mutual fund in a non-registered account deductible as carrying charges on my tax return?” – John
Tax treatment of mutual fund fees
The Canada Revenue Agency (CRA) allows taxpayers to claim carrying charges, interest expenses and certain other investment expenses as a tax deduction online 22100 of a tax return. This includes fees paid for investments to be professionally managed, fees for certain investment advice, interest on money borrowed for certain investment purposes, and in some cases, fees to prepare a tax return.
However, to answer your question, John,mutual fundfees cannot be deducted on your tax return. Fees paid to an investment advisor who manages your investments, excluding commissions paid to buy and sell investments, are generally deductible. The deductibility of fees is limited to taxable, non-registered accounts, so it does not apply to registered accounts likeregistered retirement savings plans (RRSPs)ortax-free savings accounts (TFSAs).
Why mutual fund fees aren’t deductible on your tax return
Commissions to buy and sell investments factor into the calculation ofcapital gainsand losses for a non-registered account, so there is some tax benefit. The commissions paid to buy and sell increase theadjusted cost base or reduce the proceeds of disposition accordingly.
Investment advisors may promote the tax deductibility of investment counsel or management fees as being a significant benefit of a fee-based account, where an investor pays a percentage of their assets in fees each month or each quarter. While these fees may be directly tax deductible on line 22100 of your tax return, the fees paid for a mutual fund are indirectly tax deductible.
This is because mutual funds flow through their net income to the fund’s unit holders. Net income is calculated by taking gross income, like interest, dividends and realized capital gains, and deducting expenses, including management fees. Mutual fund fees tend to be in the 2% range, but there are low-cost funds available.
A fee-based account may result in an investor paying lower fees than a traditional mutual fund, often in the 1% to 2% range. A fee-based account may also better align an advisor’s interests with those of an investor compared to a traditional transactional account. But to say that a fee-based account results in better tax efficiency may not be entirely accurate, since mutual fund fees reduce taxable income anyway.
Tax deductibility of ETF fees and other expenses
Exchange-traded funds (ETFs)have embedded fees like the ones attached to mutual funds, and those fees are not tax deductible directly on your tax return. However, like fees on mutual fund, those paid on ETFs are indirectly tax deductible because they reduce the net income flowed through to ETF investors to report on their tax returns.
Other non-deductible expenses include:
- Interest on money borrowed to invest in investments that can only earn capital gains
- Interest on money borrowed to invest in RRSPs, TFSAs, or similar tax-preferred accounts
- Safety deposit box charges (you used to be able to many years ago, so some people forget this)
- Subscription fees for financial newspapers, magazines or newsletters (though they may qualify for the digital news subscription tax credit)
- Fees paid for general financial advice, like financial counselling or planning
- Fees paid for tax return preparation, unless you were self-employed (reporting sole proprietorship or partnership income) or had a rental property
In summary, John, although you cannot deduct your non-registered mutual fund fees on your tax return, remember that they were already deducted from the net income reported on the T3 slip you claim on your tax return.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) atObjective Financial Partners Inc.in Toronto. He does not sell any financial products whatsoever.
FAQs
While these fees may be directly tax deductible on line 22100 of your tax return, the fees paid for a mutual fund are indirectly tax deductible. This is because mutual funds flow through their net income to the fund's unit holders.
Can you write off mutual fund fees? ›
Mutual fund management fees are tax deductible in non-registered accounts, but commissions or trading fees to buy stocks and other investments are not tax deductible. Note that mutual fund management fees are different from management expense ratios (MERs), which are not tax deductible.
Can a partnership deduct investment management fees? ›
Investment advisory fees for a family limited partnership (FLP) that are deemed ordinary and necessary business expenses can be deducted on Form 1065, U.S. Return of Partnership Income, on line 13, titled "Other Deductions." This line requires an attachment that itemizes each deduction not specifically provided for ...
Are mutual funds tax deductible? ›
Mutual funds in retirement and college savings accounts
Certain accounts, such as individual retirement and college savings accounts, are tax-advantaged. If you have mutual funds in these types of accounts, you pay taxes only when earnings or pre-tax contributions are withdrawn.
Can a partnership deduct accounting fees? ›
(1) Legal and accounting fees and costs incurred by a limited partner with respect to litigating and settling a lawsuit against general partners are not deductible under 162 as trade or business expenses, but such expenses are deductible under section 212 as expenses incurred in the production or collection of income.
What type of investment fees are tax deductible? ›
Professional investment advice or financial newspaper subscriptions are example of deductible items, as is safe deposit box rent when you use the box to store investment papers. You can also claim fees you incur for replacing stock certificates.
How are mutual fund fees deducted? ›
Investment management fees for exchange-traded funds (ETFs) and mutual funds are deducted by the ETF or fund company and adjustments are made to the net asset value (NAV) of the fund daily. Investors don't see these fees on their statements because the fund company handles them in-house.
Are financial management fees tax deductible? ›
No, they aren't. At least not anymore. The Tax Cuts and Jobs Act (TCJA) of 2017 put an end to the deductibility of financial advisor fees, as well as a number of other itemized deductions. As of January 2018, these fees no longer contribute to reducing your tax bill.
Can a partnership write off expenses? ›
Partners can deduct expenses on Schedule E of Form 1040 as long as they are the type that partners are expected to pay without reimbursem*nt according to the partnership agreement or firm policy, whether written or unwritten.
Is management fee a fund expense? ›
Management fees are fees that are paid out of fund assets to the fund's investment adviser (or its affiliates) for managing the fund's investment portfolio and for administrative fees payable to the investment adviser that are not included in the "Other Expenses" category.
Mutual funds, also known as Equity Linked Savings Scheme (ELSS), are great tax-saving instruments under Section 80C of the Income Tax Act, 1961. This section allows you to claim benefits from your taxable income if you put your money into certain investments.
Are brokerage fees tax deductible? ›
No. Any fees you pay to buy, sell, or hold an asset or to collect interest or dividends are not eligible for income tax deduction. This would include brokerage or transaction fees, management and advisor fees, custodial fees, accounting costs, and fund operating expenses.
How to report mutual fund on tax return? ›
Report the amount shown in box 2a of Form 1099-DIV on line 13 of Schedule D (Form 1040), Capital Gains and Losses. If you have no requirement to use Schedule D (Form 1040), report this amount on line 7 of Form 1040, U.S. Individual Tax Return or Form 1040-SR, U.S. Tax Return for Seniors and check the box.
Can you write off accounting fees? ›
You can deduct any accounting fees that you pay for your business as a deductible business expense. For example, fees you pay an accountant to set up or keep your business books, prepare your business tax return, or give you tax advice for your business.
Which is not an expense of a partnership? ›
EXPLANATION: The one that is not considered a legitimate expense in a partnership is interest paid to partners based on the amount of invested capital. Interest paid based on invested capital is considered a distribution of profit by the business and not an expense.
Are all accountancy fees tax deductible? ›
Yes, accountant fees are deductible in the tax year they are paid, even if the services were provided in a previous year.
Can you write off insufficient funds fees? ›
Any fees incurred due to overdrafts or insufficient funds, while not ideal, may be eligible for deduction.
Are investment subscriptions tax deductible? ›
No. The Tax Cuts and Jobs Act eliminated all miscellaneous itemized deductions, including subscriptions related to: Investments.
