Are Tax Preparation Fees Deductible?

April 2017

The General Income Tax Guide (for 2016) states that you may deduct “fees to have someone complete your return, but only if you have income from a business or property, accounting is a usual part of the operations of your business or property, and you did not use the amounts claimed to reduce the business or property income you reported.” Further detail is available in Canada Revenue Agency (CRA)  Interpretation Bulletin IT-99R5 (see excerpts at the end of this article).

Business Income

If you have business income, the deductibility of your fees is normally readily allowed, as long as they are reasonable for your situation.  Where you hire an accountant for business and personal purposes, only a portion of the fees would be deductible.

Property / Rental / Investment income

The question arises as to what constitutes producing income from a “property”. (“Business” income is normally obvious.) Property income generally arises from rental properties and investment holdings. If you have a rental property, tax preparation fees should normally be deductible as a rental expense if they are reasonable for the services performed.

However, how extensive do investment holdings and related activities need to be to justify a deduction?

It is my opinion that you may deduct tax preparation fees if your investment holdings are of such complexity that you require professional assistance with record keeping and other matters to determine your income, i.e. that “accounting is a usual part of the operations of your property” as stated above.  If you only hold guaranteed investment certificates (GIC’s) and similar fixed income investments, it is unlikely that you will be allowed to deduct your tax preparation fees unless you have some complexities in determining your annual income to be reported – for example, accrued interest to calculate, a lot of GIC certificates to account for, various types of fixed income instruments that need to be summarized, etc.  But what if you have several kinds of investment income/expenses, such as a combination of some of the following – interest, dividends, capital gains, limited partnership allocations, income trust distributions, return of capital, carrying charges, commissions, investment counsel fees, etc.?  Or, maybe your income comes from a number of different sources, such as several financial institutions and varying types of investments (stocks, bonds, GICs, mutual funds, exchange traded funds, segregated funds, limited partnerships, etc.)?  Finally, some investment transactions may come from foreign sources and require foreign currency conversion and calculation of foreign tax credits.  In these situations, a certain amount of accounting is required to determine your total investment income.

In these more complex situations, I think you may have a very good argument to claim your tax preparation fees, even if all of your income is reported on tax slips and your accountant uses computer software to prepare your return.  In such cases, the tax preparer is using software to do your investment accounting in much the same way as an accountant uses accounting software to prepare financial statements.  Certainly, the point at which you require “accounting” services as part of your investment operations is not clear.  However, if you and your accountant believe you can present the case successfully to a tax auditor, and are prepared to pay the additional taxes and the interest arrears should you fail to do so, you should consider making the claim.

Other Situations

Other than for business and property, there are certain other situations where tax preparation fees are also deductible.  These include fees paid by commission salespersons with authority to sell and negotiate contracts and who are required by their employment contract to pay their own expenses. In addition, anyone who receives an inquiry or re-assessment from the Canada Revenue Agency regarding their tax return may deduct professional fees to obtain assistance in responding to such matters. There are other limited situations where fees are deductible, and if you have any questions in this regard, please refer to Interpretation Bulletin IT- 99R5.

We have extracted certain information from the Canada Revenue Agency Interpretation Bulletin IT-99R5 related to the above discussion:

Excerpts from Canada Revenue Agency Interpretation Bulletin IT- 99R5

General Deductibility

1. Except where there is a specific provision in the Act dealing with legal or accounting fees, such as paragraphs 8(1)(b) or 60(o.1), legal and accounting fees are deductible only to the extent that they (a) are incurred for the purpose of gaining or producing income from a business or property, and (b) are not outlays of a capital nature,…
2. Generally, legal and accounting fees are allowable deductions where they are incurred in connection with normal activities, transactions or contracts incidental or necessary to the earning of income from a business or property. A deduction may therefore be taken for legal and accounting expenses in connection with a broad range of routine business functions…

…

Income Tax Returns

6. Reasonable fees and expenses incurred for advice and assistance in preparing and filing of returns for income tax purposes are normally deductible by virtue of section 9 and are not limited under paragraph 18(1)(a) in computing business or property income to which such tax returns relate. A taxpayer who is employed in connection with selling property or negotiating contracts and who is entitled to deduct expenses pursuant to paragraph 8(1)(f) (see the current version of IT-522, Vehicle, Travel and Sales Expenses of Employees), may deduct a reasonable amount paid during the year to comply with the requirement to file an income tax return. 7. Under paragraph 60(o), all taxpayers, including those persons who report income from sources other than business or property (such as salary or capital gains), may deduct fees or expenses incurred and paid for advice or assistance in preparing, instituting or prosecuting an objection or appeal in respect of
   1. an assessment of tax, interest or penalties under the Income Tax Act or a similar provincial law,
   2. a decision of the Canada Employment and Immigration Commission, the Canada Employment and Insurance Commission, or a board of referees or an umpire under the Unemployment Insurance Act or the Employment Insurance Act,
   3. an assessment of income tax, interest or penalties levied by a foreign government or political subdivision thereof, if the tax is eligible for a foreign tax credit, or
   4. an assessment or decision under the Canada Pension Plan or a similar provincial plan. A taxpayer may deduct amounts expended in connection with legal and accounting fees incurred for advice and assistance in making representations after having been informed that the taxpayer’s income or tax for a taxation year is to be reviewed, whether or not a formal notice of objection or appeal is subsequently filed.
7. Any costs awarded or reimbursed to a taxpayer in respect of expenses deducted or deductible under paragraph 60(o) must be included in income by virtue of paragraph 56(1)(l) for the year in which the award was received. As indicated in above, where other legal and accounting expenses were deducted under the general provisions of the law, any recovery of such expenses will reduce the expenses originally allowed.”

As a final note, fees for providing personal financial planning advice are generally not deductible unless paid by an employer for certain employees. Fees for investment advice are only deductible when paid to someone licensed to sell securities. In addition, subscriptions to investment newsletters are not deductible unless you are in the investment business.

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Blair Corkum, CPA, CA, R.F.P., CFP, CFDS, CLU, CHS holds his Chartered Professional Accountant, Chartered Accountant, Registered Financial Planner, Chartered Financial Divorce Specialist as well as several other financial planning related designations. Blair offers hourly based fee-only personal financial planning, holds no investment or insurance licenses, and receives no commissions or referral fees. This publication should not be construed as legal or investment advice. It is neither a definitive analysis of the law nor a substitute for professional advice which you should obtain before acting on information in this article. Information may change as a result of legislation or regulations issued after this article was written.©Blair Corkum