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Dan's Reports
Perspective on the bear
Dilution excessive
Fund fees revisited
T class funds
Bonds vs. bond funds
Bear market protectors
Investing in bonds
Ignore bonds at your peril
Coping with change
Future of trust funds
Dilution trumps
Are fees excessive?
Performance anxiety
Top advisory model?
81-106 a step back
Poor fund classifications
Pension shortfall
A longer-term report card
Information overload
About Dan
Privacy Policy
Misconceptions remain
Promoters of wrap programs and individually managed accounts boast of such programs' tax-deductible fees. At times, the deductibility potential is used to downplay the relatively high cost of many programs by noting an after-tax fee amount. While such fees often are deductible, many myths proliferate.
Basic rule
Paragraph 20(1)(bb) of the Income Tax Act permits taxpayers to deduct from income an amount paid for what are called "investment counsel fees". More specifically, Canada Revenue Agency's (CRA) interpretation includes fees paid for advice on the buying and selling of securities, custodial or trustee services, and keeping accounting records with respect to such securities.
CRA's official interpretation is found in IT238R2 Fees paid to investment counsel interpretation bulletin. Therein, fees paid for general financial planning, subscriptions to financial publications, trading commissions, and any investment fees otherwise deductible that are paid in respect of tax-deferred trusts (i.e. RRSP, RRIF, and other provincial version thereof) are specifically excluded from 20(1)(bb).
Principal business
IT 238R2 specifies, in part, that the fees "must be paid to a person whose principal business is advising others whether to buy or sell specific shares or whose principal business includes the administration or management of shares or securities".
Since stock brokers and others grouped into the broad category of 'financial advisors' generally are licensed to sell not to advise, the CRA bulletin further states that "where a stockbroker's principal business also includes the provision of investment portfolio management and administration services for which a separate fee is charged, that fee will be deductible under paragraph 20(1)(bb)".
Reasonableness test
The concept of reasonableness is a key concept in many pieces of legislation, as with tax laws. In the context of this subject, CRA holds that investment counsel fees will only be deductible to the extent that they are reasonable. Interestingly, CRA maintains that its determination of whether a fee is reasonable will include an examination of the time spent and the type of work performed. This is interesting given that most advisors are licensed - and get paid - to sell products. (However the know your client rule indirectly requires the provision of advice.)
Deductibility test
The income tax act generally permits the deduction of certain expenses, if incurred to generate taxable income. Fees incurred to ensure the efficient transfer of assets to heirs upon death, to save taxes in a particular year, or to more effectively manage cash resources are not deductible since none of these activities can be reasonably expected to generate any taxable income.
Hence, fees paid by clients for tax planning, estate planning, and general financial planning are not deductible under paragraph 20(1)(bb) of the income tax act. Further, the general test for deductibility lends no support for those asserting that such fees are or should be deductible. This is consistent with the fact that individuals cannot generally deduct tax preparation or legal fees.
(A couple of the many exceptions to this include: accounting or legal fees incurred for the preparation of a notice of objection and legal fees incurred to obtain a larger retiring allowance from a former employer.)
I've just scratched the surface of this topic, but it should be clear that financial planning fees are not deductible. Next week, I'll apply current trends and scenarios in the context of the above rule.
Dan Hallett, CFA, CFP is the President of Dan Hallett & Associates Inc. in Windsor Ontario. DH&A is registered as Investment Counsel in Ontario and provides independent investment research to financial advisors. He can be reached at dha@danhallett.com
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A Dan Hallett and Associates Inc. publication. Norm Rothery, Ph.D., CFA, is the Chief Investment Strategist at Dan Hallett and Associates Inc. (DH&A) and the founder of StingyInvestor.com. DH&A is registered as Investment Counsel in the province of Ontario. Norm, DH&A, or related-parties may have an interest in the securities mentioned. More...