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
Tax treatment of mutual fund fees
However, to answer your question, John, mutual fund fees 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.
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 ...
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.
Is mutual fund tax deductible? ›
Mutual funds are not tax-free except for ELSS (equity-linked savings schemes or tax-saving funds) and some retirement funds. As per the Income Tax Act, under Section 80C, you can claim a deduction of up to Rs. 1.5 lakh for investments made in ELSS and can save taxes up to Rs.
Can brokerage fees be deducted? ›
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.
Are financial advice fees tax deductible? ›
Fees paid for initial investment advice or general financial advice are typically not tax deductible. These fees are considered to have not yet contributed to your assessable income (annual taxable income). Fees associated with preparing a financial plan, such as a Statement of Advice, are generally not tax deductible.
What are mutual fund fees called? ›
Mutual fund fees generally fall into two categories. Both categories, “shareholder fees” and “annual fund operating expenses,” are disclosed in the fee table in the front of a fund's prospectus. Loads or sales charges. Some funds charge a commission to be paid to brokers when you buy or sell your shares.
What is a reasonable fund management fee? ›
The management fee varies but usually ranges anywhere from 0.20% to 2.00%, depending on factors such as management style and size of the investment. Investment firms that are more passive with their investments generally charge a lower fee relative to those that manage their investments more actively.
How do fees affect the return on a mutual fund? ›
Even small differences in fees can translate into large differences in returns over time. For example, if you invested $10,000 in a fund that produced a 5% annual return before expenses and had annual operating expenses of 1.5%, then after 20 years you would have roughly $19,612.
What are the tax rules for mutual funds? ›
Mutual Funds classified as equity funds have an equity exposure of at least 65%. As previously stated, when you redeem your equity fund units within a holding period of one year, you realize short-term capital gains. Regardless of your income tax bracket, these gains are taxed at a flat rate of 15%.
This income can be capital gains, capital gains dividends, dividends, foreign income, interest, other income, return of capital, or a combination of these amounts. are taxed on the capital gain, if any. This is because your mutual fund investment is considered capital property for tax purposes.
How much mutual fund is tax free? ›
Tax-saving mutual funds are funds whose investment qualifies for tax exemption under Section 80C of the Income Tax Act, 1961. These funds are called Equity Linked Savings Schemes (ELSS). The exemption limit per annum is INR 1,50,000.
How are mutual funds treated in income tax? ›
An Overview of Taxation on Mutual Funds
The gains are considered short-term and taxed at the investor's applicable Income Tax Rate, if held for less than three years. Gains from units held for more than three years are treated as Long-Term Capital Gains (LTCG).
What interest payments are tax deductible? ›
The Internal Revenue Service (IRS) allows taxpayers to deduct several interest expenses, including home mortgage interest and student loan interest. You can itemize investment interest and qualified mortgage interest (including points if you're the buyer) on Schedule A of Form 1040 or 1040-SR.
Can you deduct investment interest expense against capital gains? ›
You can only take a deduction for investment interest expenses when the assets you buy produce taxable income, such as interest, dividends, capital gains or royalties. In other words, if you use that borrowed money to buy assets that generate tax-free income, you are not allowed to take a deduction.
