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 deduct mutual fund fees from taxes? ›
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 fees? ›
It is crucial to document the purpose and benefit of these expenses to the partnership's operation to substantiate their deductibility.In conclusion, investment advisory fees for a family limited partnership that holds stocks passively may be deductible on the partnership's 1065 tax return if they meet the criteria of ...
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 investment fees tax deductible? ›
As of January 2018, these fees no longer contribute to reducing your tax bill. Before the TCJA, investors could deduct financial advisor fees if they exceeded 2 percent of their adjusted gross income (AGI) in 2017 and prior tax years.
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.
Can I deduct investment management fees in a trust? ›
For example, under California and New York law, investment advisory fees continue to be fully deductible for state income tax purposes. Contrast this to the federal law, which provides for a federal deduction on certain incremental investment advisory fees.
What deductions can a partnership claim? ›
Expenses and Deductions
Deductible expenses include start-up costs, operating expenses, travel costs, and product and advertising outlays, as well as a portion of the money you spend on business-related meals and entertainment.
What type of investment fees are tax deductible? ›
Investment interest expense
If you itemize your deductions, you may be able to claim a deduction for your investment interest expenses. Investment interest expense is the interest paid on money borrowed to purchase taxable investments. This includes margin loans for buying stock in your brokerage account.
What expenses can a partner deduct? ›
According to the IRS, “You can deduct unreimbursed ordinary and necessary partnership expenses you paid on behalf of the partnership on Schedule E if you were required to pay these expenses under the partnership agreement.” This deduction is reported on line 28 of Schedule E and can reduce your income subject to self- ...
A 12b-1 fee is an annual marketing or distribution fee on a mutual fund. The 12b-1 fee is considered to be an operational expense and, as such, is included in a fund's expense ratio. It is generally between 0.25% and 0.75% (the maximum allowed) of a fund's net assets.
How are mutual fund fees applied? ›
Sales Loads
They are expressed in percentages, such as 3%, 2% or 1% (3% is the typical maximum load). Sales loads are paid at the time you purchase a mutual fund. If there is a 2% sales load, you will pay $100 for purchasing a $5,000 position in a mutual fund.
What is a mutual fund management fee? ›
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. Distribution [and/or Service] (12b-1) Fees.
Where do investment advisory fees go on a tax return? ›
The place to input the investment management fee for the taxable portion of your account is under the Federal area Deductions and Credits. Way down at the bottom under Other Deductions and Credits, enter it as Other Deductible Expenses, not as Tax Preparation Fees.
What is the management fee of an investment? ›
Management fees are fees paid to professionals entrusted with managing investments on a client's behalf. Typical management fees are taken as a percentage of the total assets under management (AUM). Management fees can also be referred to as investment fees or advisory fees.
What is the accounting treatment for investment in a partnership? ›
Assets contributed to the business are recorded at the fair market value. Anytime a partner invests in the business the partner receives capital or ownership in the partnership. You will have one capital account and one withdrawal (or drawing) account for each partner.
Where to report investment fees on 1065? ›
If the partnership has investment income or other investment expenses, it will report the taxpayer's share of these items in Box 20 using codes A and B of the Schedule K-1 (Form 1065) Partner's Share of Income, Deductions, Credits, etc.
Can a partnership deduct legal fees? ›
Legal fees are tax-deductible if the fees are incurred for business matters. The deduction can be claimed on business returns (for example, on Form 1065 for a partnership) or directly on the Schedule C of personal income tax returns.
How do you account for investment in a partnership? ›
Investments are usually credits in the form of liabilities or equity. A partner's investment in a firm is recorded by debiting the asset account being increased and crediting the owner's equity account being increased.
