Congratulations! You made it through another tax season. But it may not be over yet. As you sip your favorite summer beverage on the deck to celebrate, Canada Revenue Agency is quietly scanning your return looking for red flags that can trigger an audit. And one of the most common red flags is an improper claim for investment expenses.
It’s absolutely worth taking the time to claim your investment expenses—if it’s done properly, you can save thousands of dollars in taxes each year. But it’s pretty complicated and you have to do it correctly, or you could get into hot water. Read on and I’ll take you through the process of making the most common claims.
What are investment expenses anyway? There are two main types of investment expenses that can be claimed. The first is the most obvious: you can claim some—but not all—of the direct costs associated with investing, including some of the fees you pay your investment counsel or accountant for helping you with your taxes. You can also claim the interest paid on investment loans. So if you borrow money to purchase stocks, bonds or an investment property, you may be able to claim the interest on that loan to reduce your taxable income.
In general, claiming your investment expenses is lucrative because all of your other income for the year is reduced by doing so. In other words, this deduction reduces not only your taxable income, but your net income too, which means you may get more in both refundable and non-refundable tax credits.
What kind of direct investing costs can you claim? If you use a professional financial adviser to buy and sell investments, you can claim the fees you pay for that service. You can also claim any fees you pay for custody of your assets, account record keeping and administration costs. Ask your adviser or accountant to help you figure out exactly which fees qualify.
Keep in mind, however, that you can not claim any commissions incurred when you buy or sell investments. Nor can you claim fees for general financial planning services. So if you use a fee-only financial planner, you’re out of luck.
You can also claim some of the fees that you pay your accountant or tax specialist for helping you with your tax filing. But for most people, only the fees that directly relate to investment earnings are deductible. The rules and regulations surrounding this are pretty complicated, so you should probably just ask your accountant or tax specialist which fees are deductible and which aren’t—that is part of their job after all.
Finally, keep in mind that you used to be able to claim the cost of a safety deposit box, but no longer. That deduction was eliminated in 2013. You also can’t deduct fees paid for newspaper, newsletter or magazines—that means you can’t claim your MoneySense subscription, even if we do help you save money on your taxes!
When can you claim the interest on investment loans? If you borrow money to invest, you can make a claim if you meet these three criteria: First, the interest costs must be payable during the taxation year in question. Secondly, those costs must be reasonable. And finally (and most importantly), the borrowed money must be invested to earn either active business income or income from property, such as dividends from a stock or rent from a triplex.
That means if you borrow money to buy stocks or bonds, you can probably claim the interest on the loan. The only caveat is that if it’s a stock, the company you’re investing in has to either pay dividends or at least potentially pay dividends. Think about it this way: If the investment is only capable of earning capital gains (for instance, stock in a company that has stated it will never pay dividends), then it doesn’t qualify. If it can pay you dividends, interest or other income, it probably does.
The great thing about this deduction is that you can claim it even if the underlying asset hasn’t produced profits yet. There simply needs to be the potential to earn qualifying income.
What expenses can’t be claimed? Unfortunately, in most cases the government won’t let you deduct the interest if you borrow money to buy investments inside your RRSP or other registered accounts, such as an RESP. You also can’t make the claim if you borrow to buy investments inside your TFSA, or when you borrow to buy your principal residence.
The bottom line. If you have borrowed money to invest, or paid investment counsel fees, chances are you can make a deduction against all your other income. But to make it real—and prevent your post-tax filing celebrations from being interrupted by a nasty audit—you should make sure that the loan is directly traceable to the investments you purchased.
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