From HST to advisory fees, are the charges for a TFSA tax deductible? What is the savviest way to pay these costs?
Can you also claim HST along with the advisory fees related to taxable investments that are non-registered investment accounts? I just want to be certain I can claim the HST that is paid with fee-based investments?
Can you claim HST on a TFSA and/or RRSP on a tax return?
Elvira, you’re in luck—you can claim the harmonized sales tax (HST) on your non-registered account advisory fees.
In your case, your advisor is not being paid by the investment company through commissions. Instead, your advisor is charging you a fee, and you are likely paying the fee out of the respective investment account.
However, you wouldn’t be so lucky if your advisor was earning trailing commissions because you can’t deduct those fees. Trailing commissions are paid to advisors through the management expense ratio (MER) of mutual/segregated funds.
Did you know you can pay the management fees from any account? For example, you don’t have to pay your RRSP management fees from your registered retirement savings plan (RRSP). Consider the different account types.
TFSA, a registered account, fees are not tax deductible
One goal for anyone holding a tax-free savings account (TFSA) is to grow it as much as possible in order to take advantage of the tax-free benefits. Paying fees from a TFSA reduces the amount held in a TFSA, meaning less money growing, leading to a smaller TFSA than if fees didn’t come from the account.
You can pay your TFSA fees from an RRSP or a non-registered account.
If you pay fees from a RRSP, they do come out tax free, but you reduce the amount of money in the RRSP and therefore reduce the tax-sheltered growth of the RRSP.
Paying TFSA fees from a non-registered or bank account, instead of an RRSP, allows the TFSA to grow tax free and the RRSP to grow tax sheltered until redeemed. You may have to pay capital gains tax if you have to sell an investment to generate the cash to pay a fee.
RRSP/RRIF, a registered account, fees are not tax deductible
Again, the more money you leave in your RRSP, the more money you will have growing that’s tax sheltered. You may think it makes sense to pay RRSP fees with a non-registered account. But it’s not that simple for deciding where to draw RRSP fees.
Think of it this way: If you have a $1,000 fee that you pay from a non-registered or bank account, you will be out that $1,000. Now consider the RRSP, assuming your marginal tax rate is 30%. When you invest $1,000 in a RRSP, you get a tax refund of $300. When you pay the fee from your RRSP, you have effectively only paid $700. Remember, the fee from the RRSP comes out tax free.
This means there is an advantage to paying RRSP fees from a RRSP in the short term, but over the long-term paying from a non-registered or bank account may be better because you have left more money in the RRSP to grow tax sheltered.
Are management fees from non-registered accounts tax deductible?
Yes. And, probably the best account to use for paying management fees on a non-registered account is your bank account. It’s the account with the lowest expected return. But most people do pay fees out of their non-registered investment account.
Where should you draw your RRSP fees?
It’s complicated, and the answer depends on your marginal tax rate, your expected return, as well as the length of time you plan for the money to be in your RRSP or registered retirement income fund (RRIF). Often, the longer the time frame you have, the more it could make sense to pay RRSP fees from a non-registered or bank account.
In the end most people will pay RRSP fees from their RRSP account.
I should also point out that if you pay TFSA or RRSP fees from a non-registered account, you can’t deduct the fees on your tax return.
It is worthwhile having the fee discussion with your advisor and reviewing which account(s) you should use to pay your fees. But don’t get too hung up on it. At the end of the day, where you draw your fees from may make a little difference on your overall investment growth. But there are likely other things you and/or your advisor can do that will have a much bigger impact on your financial growth and stability.
Allan Norman, M.Sc., CFP, CIM, RWM, is a fee-only certified financial planner with Atlantis Financial Inc. and a fully licensed investment advisor with Aligned Capital Partners Inc. He can be reached at atlantisfinancial.ca or [email protected].