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
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 fund fees cannot be deducted on your tax return.
Are mutual fund account fees tax deductible? ›
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.
Are mutual fund investment tax deductible? ›
Can mutual fund investments help me get a rebate on income tax? Under Section 80C of the Income Tax Act, tax benefits are applicable in the case of ELSS or Equity Linked Saving Schemes. You can get up to Rs.1.5 lakh in tax deduction and save around Rs.46,800 each year on taxes.
Are fund management fees tax deductible? ›
The implementation of the TCJA brought significant changes for investors in terms of tax deductions, policies, rates, and credits. Now, the law doesn't allow deductions of investment management fees and other related expenses.
Are investment fees tax deductible for a partnership? ›
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.
Can you deduct financial advisor fees? ›
The Tax Cuts and Jobs Act (TCJA) of 2017 eliminated the deductibility of financial advisor fees for tax years 2018 through 2025. The IRS allows you to deduct up to $3,000 (or $1,500 if married filing separately) in capital losses from your ordinary income each year.
Are mutual funds considered for tax purposes? ›
Just as with individual securities, when you sell shares of a mutual fund or ETF (exchange-traded fund) for a profit, you'll owe taxes on that "realized gain." But you may also owe taxes if the fund realizes a gain by selling a security for more than the original purchase price—even if you haven't sold any shares.
How much mutual fund is tax free? ›
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.
How do I claim mutual fund losses on my taxes? ›
Treatment of Capital Loss on Mutual Funds
Long-term capital loss can be set off only against long-term capital gains, and it cannot be set off against short-term capital gains, though both of them fall under the same head of capital gains.
A fiduciary fee is a typical example of such an administration expense that would not commonly or customarily be incurred by an individual. Therefore, a fiduciary fee related to trust or estate administration is an allowable deduction in arriving at AGI, and is not subject to the 2% floor.
Can you deduct funding fees on your taxes? ›
Yes, you can exempt the amount you paid for the VA funding fee along with your mortgage interest on your taxes. However, if you roll the funding fee into your mortgage, you can only deduct the amount you paid that year.
Are advisor fees tax deductible for trusts? ›
Generally, the fees are not deductible since they are the same fees that would be incurred if the property (securities, typically) were not held in trust but by a hypothetical individual (and the fees are definitely not deductible on an individual income tax return after tax reform, the TCJA).
Are brokerage fees tax-deductible? ›
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.
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- ...
Are investment fees deductible for net investment income tax? ›
Some common investment deductions are brokerage fees, investment advisory fees, tax preparation charges, local and state income taxes, fiduciary expenses, investment interest expenses and any costs involved with rental and royalty income.
Are brokerage fees tax deductible? ›
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.
Is a mutual fund account taxable? ›
The funds report distributions to shareholders on IRS Form 1099-DIV after the end of each calendar year. For any time during the year you bought or sold shares in a mutual fund, you must report the transaction on your tax return and pay tax on any gains and dividends.
Is the PMS fee tax deductible? ›
Deductions for Service Charges and Fees
If the income is classified as capital gains, such expenses are not admissible. However, if the investor categorizes PMS income as business income, these expenses automatically become admissible.
Are trust account management fees deductible? ›
Generally, the fees are not deductible since they are the same fees that would be incurred if the property (securities, typically) were not held in trust but by a hypothetical individual (and the fees are definitely not deductible on an individual income tax return after tax reform, the TCJA).
