Earning investment income can involve various expenses. Luckily, tax rules in Canada provide allowances for individuals to deduct certain costs associated with earning income from property. These deductible expenses, often referred to as carrying charges, can significantly reduce your tax liability if utilized appropriately. Below, we delve into the intricacies of these tax-deductible items.
Approved Carrying Charge Deductions
The following carrying charges are generally accepted by the Canada Revenue Agency (CRA) for deduction purposes:
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Interest Paid on Borrowed Funds: If you borrow funds to earn investment income, such as interest and dividends, the interest paid on these borrowed funds can be deducted.
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Certain Investment Advice Fees: Fees paid to receive certain types of investment advice are deductible.
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Management, Administration, or Safe Custody Fees: Charges incurred for the management, administration, or safe custody of investments can be written off.
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Accounting Fees for Investment Income: Costs associated with accounting services for recording investment income are deductible.
Note
Additional deductible carrying charges may exist for specific circumstances that are not covered in this course. For detailed guidelines, always refer to the CRA website.
Non-Deductible Expenses
Not all investment-related expenses qualify for tax deductions. The following charges can’t be deducted from investment income:
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Interest Paid on Borrowed Funds Exclusively for Capital Gains: Interest paid on money borrowed solely to buy investments that only generate capital gains isn’t deductible.
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Brokerage Fees or Commissions: The fees or commissions paid to brokers for buying or selling securities cannot be deducted.
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Non-Deductible Interest Payments: Interest on borrowed funds for contributions to RRSPs, RESPs, RDSPs, or TFSAs is not deductible.
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Certain Administration or Trustee Fees: Administrative, counselling, or trustee fees for regular or self-directed registered plans like RRSPs or RRIFs aren’t deductible.
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Financial Planning Advice Fees: Fees related to general financial planning are also non-deductible.
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Safety Deposit Box Charges: Expenses for using a safety deposit box cannot be written off.
Key Takeaways
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Eligible Deductible Items: Notable tax-deductible items include interest on borrowed funds for investment, specific investment advice fees, management fees, and accounting expenses related to investment income.
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Ineligible Deductibles: Common non-deductible items comprise interest for capital gains-focused investments, brokerage fees, interest on RRSP/RESP/TFSAs, and financial planning fees.
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Reference to CRA: Always check the CRA for clarity on all items considered as valid carrying charges for tax deductions.
Frequently Asked Questions (FAQ)
What counts as ‘investment advice’ for tax-deductible services?
Tax-deductible investment advice usually pertains to fees paid to advisors for direct investment services. General financial planning costs fall outside this scope.
Can I deduct administrative fees for my RRSP?
No, administrative, counselling, or trustee fees for RRSPs and other registered plans are generally ineligible for deduction.
Are brokerage commissions deductible?
No, brokerage fees or commissions for the purchase or sale of securities do not qualify as tax-deductible expenses.
For the most comprehensive and up-to-date information, always check the CRA website here.
Glossary
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Carrying Charges: Deductible expenses for tax purposes, incurred to earn income from property.
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CRA: Canada Revenue Agency, the governing body for tax collection and regulation in Canada.
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Registered Plans: Accounts such as RRSPs, RESPs, RDSPs, or TFSAs designed with specific tax advantages for saving and investing.
📚✨ Quiz Time! ✨📚
## Which of the following expenses is tax-deductible for earning investment income?
- [ ] Fees paid for financial planning advice
- [x] Interest paid on funds borrowed to earn investment income from interest and dividends
- [ ] Brokerage fees for buying securities
- [ ] Safety deposit box charges
> **Explanation:** Interest paid on funds borrowed to earn investment income, such as interest and dividends, is deductible. Fees paid for financial planning, brokerage fees, and safety deposit box charges are not deductible.
## Which of these fees can be deducted from investment income for tax purposes?
- [x] Fees paid for the management, administration, or safe custody of investments
- [ ] Brokerage fees paid to sell securities
- [ ] Interest paid on funds borrowed to contribute to a TFSA
- [ ] Fees paid for advice on financial planning
> **Explanation:** Fees for the management, administration, or safe custody of investments are deductible, while brokerage fees, interest for contributions to a TFSA, and financial planning fees are not.
## Can fees paid for investment advice be deducted from investment income?
- [x] Yes, if the advice is specific to certain types of investments
- [ ] No, any investment advice cannot be deducted
- [ ] Yes, all types of investment advice can be deducted
- [ ] No, only financial planning advice can be deducted
> **Explanation:** Fees paid for certain types of investment advice directly related to earning investment income can be deducted.
## Which of the following cannot be deducted from investment income?
- [ ] Interest paid on funds borrowed to earn interest and dividends
- [x] Brokerage commissions paid to buy or sell securities
- [ ] Accounting fees for recording investment income
- [ ] Fees for management of investments
> **Explanation:** Brokerage commissions paid to buy or sell securities cannot be deducted, whereas interest for earning dividends, accounting fees, and management fees are deductible.
## Interest paid on borrowed funds to contribute to which of the following is not tax-deductible?
- [ ] A brokerage account
- [ ] Investments yielding interest and dividends
- [ ] A non-registered investment account
- [x] A registered retirement savings plan (RRSP) or a tax-free savings account (TFSA)
> **Explanation:** Interest paid on borrowed funds for contributions to registered accounts such as RRSPs or TFSAs is not deductible.
## Can you deduct interest paid on funds borrowed to buy investments that generate only capital gains?
- [ ] Yes, all investment-related interest is deductible
- [ ] Yes, if the capital gains come from stocks
- [ ] Yes, if the investments are non-registered
- [x] No, interest paid on funds for investments generating only capital gains is not deductible
> **Explanation:** Interest paid on funds borrowed to buy investments that can only generate capital gains cannot be deducted.
## Which type of fee for registered accounts cannot be deducted from investment income?
- [ ] Fees for safe custody of investments
- [ ] Accounting fees for recording income from property
- [ ] Management fees for investment accounts
- [x] Administration or trustee fees for a registered retirement income fund (RRIF)
> **Explanation:** Administration or trustee fees for registered retirement accounts like RRIFs cannot be deducted.
## Are fees paid for recording investment income deductible from investment income?
- [x] Yes, accounting fees for recording investment income are deductible
- [ ] No, any accounting fees are not deductible
- [ ] Yes, but only if recorded for a non-registered account
- [ ] No, they are only deductible under specific conditions
> **Explanation:** Accounting fees paid for recording investment income are deductible.
## Fees paid for which of the following cannot be deducted from your investment income?
- [ ] Investment advice
- [x] Financial planning advice
- [ ] Management of investments
- [ ] Custody of investments
> **Explanation:** Fees paid for financial planning advice cannot be deducted from your investment income, unlike fees for investment advice, management, and custody.
## Which expenses related to RRSPs, RESPs, RDSPs, or TFSAs are not deductible?
- [x] Interest paid on borrowed funds to contribute to these accounts
- [ ] Fees for management and safe custody of eligible investments within these accounts
- [ ] Accounting fees for recording income generated within these accounts
- [ ] None of the above
> **Explanation:** Interest paid on borrowed funds to contribute to RRSPs, RESPs, RDSPs, or TFSAs is not deductible.