Investment Counselling Fees
Are they tax deductible?
by Jamie Golombek
Most advisors take for granted the deductibility of investment advisory fees they charge clients. The question of deductibility is an age-old one and sometimes misunderstood by investors, who often take a much broader view of which fees are properly tax deductible.
The basis for deductibility is firmly rooted in paragraph 20(1)(bb) of the Income Tax Act, which allows investors to deduct fees, other than commissions, paid for advice on the buying or selling of a specific share or security or for the administration or the management of the shares or securities.
For the fees to be deductible, they must be paid to a person (generally the advisor) whose principal business is advising others whether to buy or sell specific shares (or whose principal business includes the administration or management of shares or securities).
As with all expenses, the fees paid must be "reasonable". The Canada Revenue Agency (CRA) has accepted that fees determined or computed with reference to the fair market value of the portfolio at a particular time may be considered reasonable and, therefore, may be deductible.
The CRA has also stated that it will not question the reasonability of the fees paid provided the fees are paid to unrelated persons. If the fees are paid to a related person, the CRA would then look at the amount of time spent and the type of work done by the person providing the advice or service in order to assess the reasonability of the fees charged.
Note that the CRA has also cautioned that fees paid for other types of advice such as general financial counselling or planning do not fall within the gamut of paragraph 20(1)(bb) despite the fact that the principal business of the advisor or counsellor may otherwise qualify.
Clients often ask whether subscription fees paid for financial magazines and newspapers would also be deductible under paragraph 20(1)(bb). This issue came before the Tax Court of Canada most recently in a decision released in May 2006.
The case (Davies v The Queen, 2006 TCC 272) involved Yann Davies who in his 2003 tax return deducted, pursuant to paragraph 20(1)(bb) of the Act, $2,341.93 as fees paid to Fryan Inc., a corporation wholly owned by his wife.
Most of the $2,341.93 was in respect of the purchase of various publications ($1,900.93). Not only did the judge conclude that Fryan Inc. did not operate as investment counsel in 2003, but also, even if it did, "such an expense does not constitute "an amount ... paid ... to a person ... for advice as to the advisability of purchasing or selling a specific share or security of the taxpayer.' To be deductible, the amount must be paid for the advice itself and not for subscriptions to publications".
The judge also referred back to a 1991 decision of the Tax Court (Vatcha v MNR, 91 DTC 653) in which Khushroo Vatcha attempted to write off the costs of various investment publications subscribed to, such as the Money Reporter, the Investment Reporter and Northern Miner, arguing that the subscriptions were acquired to earn income from property.
In that case, Mr. Vatcha testified that he was "seeking a superior yield on his various investments, mainly by way of dividends albeit sometimes in the form of capital gains ... [and that] the information contained in the publications was used to monitor his investment program in order to increase his income".
The judge disagreed and concluded that general "subscription fees for an investment publication listing and analyzing hundreds and thousands of corporations and securities is not, in my view paying "an amount to a person for advice as to the advisability of purchasing or selling a specific share or security of the taxpayer.' In my opinion, what Parliament contemplated in enacting such a provision is a person-to-person relationship between a client seeking advice with respect to a specific share or security and the "advisor.' Moreover, to be deductible, the amount must be paid for the advice itself and not as a subscription fee for a publication".
Finally, what about subscription fees paid by advisors for business magazines and investment journals, which help you hone your investment management skills to better serve your clients' needs? These costs may be deductible if it can be shown that the expenses were incurred for the purpose of earning income - that is, income from providing specific investment advice to clients as opposed to investment income on your own portfolios.