First of all, only carrying charges and interest expenses related to non-registered accounts are eligible.
In other words, registered accounts such as the Registered Retirement Savings Plan (RRSP), the Registered Education Savings Plan (RESP), the Registered Disability Savings Plan (RDSP) and the Tax-Free Savings Account (TFSA) are not eligible for these deductions.
Most people put their savings into registered accounts; that’s why few of them are able to take advantage of tax deductions when filling out their income tax return. But there are exceptions, and certain strategies can be used to pay less tax.
How do you know what is eligible?
“While carrying charges can only be claimed for non-registered accounts, interest fees can be deducted by people who are more tolerant of risk, as the goal is to generate a higher yield than the cost of the loan,” explains Marc-Olivier Godbout, Senior Financial Investment and Planning Advisor at National Bank.
For example, a personal loan taken out to buy consumer goods (cars, furniture, etc.) will not be eligible, as this kind of good does not generate any revenue. In fact, quite often it decreases in value after being purchased.
However, if you borrow money and invest it in a financial product, the fees can be deductible. The same goes when purchasing real estate with the goal of renting it out.
The amount borrowed by the entrepreneur for things like investments or real estate or for starting a new business will also be taken into account when asking for deductions.
What carrying charges can be claimed?
“Two things are eligible to be claimed when it comes to carrying charges: custodial and administration fees, and advisor fees,” says Godbout.
“Custodial fees refer to the fees incurred by the trustee, while advisor fees represent the costs for an advisor or broker. This cost is often calculated as a percentage of the asset being managed.”
What interest expenses can be claimed?
Interest expenses paid on a loan can only be claimed if the loan is used to generate investments. Any amount borrowed to buy stock market shares or any other investment product (such as mutual funds or exchange-traded funds) is also eligible.
So a portion of the carrying charges and interest expenses paid in a year can be claimed on your income tax return. However, this privilege is only available to a small group of people who have a certain tolerance for risk. To determine whether you’re able to take advantage of this tax benefit, we strongly recommend you speak with a professional accountant and a specialist from your financial institution about your investments and investment strategy.