Deducting investment fees

If you’re an advisor who charges clients fees for investment counselling, each tax season you likely remind them that these fees are tax deductible. Paragraph 20(1)(bb) of the Income Tax Act allows investors to deduct fees (other than commissions) paid for advice when buying or selling a share or security, or when an advisor administrates or manages shares or securities, provided they’re in non-registered accounts. For the fees to be deductible, however, they must be paid to a person whose principal business is advising others to buy or sell specific shares (or whose principal business includes the administration or management of shares or securities).

A recent tax case (The Estate of Freda Wickham v The Queen, 2014 TCC 352) dealt with the deductibility of $40,000 of investment counselling fees for 2011, the year of client Freda Wickham’s death. Keith Sanders was employed as a financial advisor with the North Shore Credit Union in B.C., and looked after Wickham and her late husband’s investments.

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In May 2005, Sanders retired from the credit union. And, due to Wickham’s mental infirmity, the B.C. Supreme Court appointed Sanders as her committee, since he’d promised Wickham’s husband that he’d take care of her. As her committee, Sanders arranged for home and healthcare, and managed her financial affairs. Her assets consisted of a large portfolio of securities, which was maintained at HSBC, and a RRIF. HSBC charged an annual fee of 75 basis points to manage this portfolio. As Wickham got older, her health deteriorated, and healthcare costs escalated. By 2010, the year prior to her death, these costs were more than $137,000. Sanders stated “he had to ensure that her assets were invested in a way that would produce sufficient income to cover these escalating expenses […] he reviewed the investments in Ms. Wickham’s account regularly and instructed HSBC [to] purchase a number of investments in order to provide income growth.”

Sanders filed reports with the Public Trustee detailing Wickham’s personal circumstances and health, as well as listing her assets, liabilities and income. He also provided her bank and investment statements, which were used to pass Sanders’ accounts as committee, and determine his fees. The Public Trustee approved Sanders’ report and fixed his remuneration at $45,000. Yet Sanders took only $40,000 of the approved fees, which were then deducted on the late Ms. Wickham’s tax return as investment counselling fees.

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CRA disallowed the deduction, arguing, “Since Mr. Sanders was responsible for handling all of Ms. Wickham’s affairs, including her personal and medical care, the primary purpose of the fees was for the care of Ms. Wickham and not for the purpose of gaining or producing income from a business or property.”

The judge disagreed and referred to the letter from the Public Trustee authorizing Sanders to take the fees, which stated, “The payment was made for asset and income management.” The judge also stated that paragraph 20(1)(bb) of the Act permits the deduction of the fees, since it was clear that Sanders was still providing investment management services while acting as Wickham’s committee.

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But the judge agreed that since part of $40,000 of fees related to Wickham’s RRIF, a portion of the fees shouldn’t be tax-deductible. The fees were calculated based on the value of AUM, so the judge felt it would be logical to prorate the total fees paid based on the assets in the RRIF, relative to the value of the non-registered securities portfolio. Using this formula for a RRIF value of $360,000 and a non-registered portfolio worth $1.4 million, the judge determined the fees payable in respect of the RRIF were 20% of the total fees paid, or $8,000 (i.e., 20% of $40,000). He ruled the estate should be entitled to a deduction of $32,000 ($40,000 minus $8,000) under paragraph 20(1)(bb).

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by Jamie Golombek, CPA, CPA (Illinois), CFP, CLU, TEP is the managing director, Tax & Estate Planning with CIBC Wealth Advisory Services in Toronto. Jamie.Golombek@cibc.com

Jamie Golombek

Tax & Estate

Managing Director, Tax and Estate Planning, CIBC Private Wealth Team Jamie Golombek is Managing Director, Tax and Estate Planning with CIBC in Toronto. As a member of the CIBC Private Wealth team, Jamie works closely with advisors from across CIBC to support their clients and deliver integrated financial planning and strong advisory solutions. He joined the firm in 2008 after 12 years with a global investment company, where he was involved in both internal and external consulting on all areas of taxation and estate planning. Jamie has also worked for Deloitte as a tax specialist in the Toronto office, where he specialized in both personal and corporate tax planning. Jamie is quoted frequently in the national media as an expert on taxation. He writes a weekly column called “Tax Expert,” in the National Post, has appeared as a guest on BNN, CTV News, and The National, and for several years was a regular personal finance guest on The Marilyn Denis Show. He received his B.Com. from McGill University, earned his CPA designation in Ontario and qualified as a US CPA in Illinois. He has also obtained his Certified Financial Planning (CFP) and Chartered Life Underwriting (CLU) designations. In 2023, Jamie was named a CPA Ontario Fellow. The FCPA is the highest distinction that can be bestowed upon a CPA who brings distinction to themselves and to their profession through leadership and achievement in their professional, community or personal lives. Jamie is a past chair of the Investment Funds Institute of Canada’s Tax Working Group. He is also a member of CPA Ontario, the Illinois CPA Society, the Estate Planning Council of Toronto, the Canadian Tax Foundation and the Society of Trust and Estate Practitioners. For nearly two decades, Jamie taught an MBA course in Personal Finance at the Schulich School of Business at York University in Toronto.