Many Canadians wonder if they can deduct the fees they pay to financial advisors. The short answer is that it depends on how those fees are paid and what type of advice you are receiving.
In this post, we will go through three common ways Canadians pay their financial advisors and whether those fees are tax deductible.
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Paying a Flat Fee or Hourly Fee for a Financial Plan
Many advisors offer fee-for-service options, where you pay a flat fee or hourly fee to have a financial plan created.
For example, you might pay an hourly rate of $250 or a flat fee of $5,000 for a full plan.
Unfortunately, fees paid for creating a financial plan are considered personal expenses. You cannot deduct them on your tax return.
Financial advisory fees are only tax deductible if they are directly connected to buying or selling investments.
Paying Through Mutual Fund Commissions
If you own mutual funds, your advisor may be paid through commissions.
This could be an upfront commission or an ongoing trailing commission that is built into the mutual fund’s fees.
While it might seem like these commissions qualify as advice related to investments, they are not tax deductible. The reason is that you are not paying these fees directly. The mutual fund company pays them to the advisor.
One small benefit is that commissions paid through mutual funds increase your adjusted cost base (ACB). This can reduce your capital gains when you eventually sell the investment, but it only applies in non-registered accounts.
There is no tax benefit from commissions in TFSAs or RRSPs.
Paying Through Fee-Based Accounts
Fee-based accounts are the most effective way to make financial advisory fees tax deductible.
In a fee-based account, you pay your advisor directly, typically as a percentage of assets under management. Since you are paying for advice related to buying and selling investments, these fees can be deducted.
However, the fees are only deductible in non-registered accounts. Fees paid in TFSAs, RRSPs, or other registered accounts are not deductible.
Here is an example. If you pay $5,000 in fees in your non-registered account and you are in a 40 percent tax bracket, you could save $2,000 on your taxes.
Final Thoughts
If you are unsure how you are paying your advisor or want to improve the tax efficiency of your accounts, speak to your advisor or accountant.
For more tax-efficient retirement and investment strategies, visit our website and book a free consultation.
