Like many investors, you use various sources of information in order to be better able to construct your portfolio. In addition, you turn to tools such as financial newsletters, specialty cable channels or financial satellite channels. These tasks involve expenses but can you deduct these from your income? Logically, such expenses should be deductible because they allow you to generate dividend income or capital gains from securities. However, you should know that this is not necessarily the case.
Some Details on the Nature of Expenses
For the purposes of calculating the income of a taxpayer, expenditures may be either of a current nature or a capital nature.
Expenses of a current nature are tax deductible in the year in which they were incurred provided it can be proven that they were incurred in order to produce income from property. Note that income from property includes interest, dividends and trust distributions. Contrarily, a capital gain is not income from property for the purposes of the Tax Act.
In general, to figure out whether an expense is of a capital nature, we verify whether it produces a permanent and durable good, or whether it is a one-time expenditure. In our tax system, an capital expenditure is deductible only when authorized by law. For example, the cost of a rental property can be depreciated because the Act expressly permits it. When the Tax Act is silent, no deduction may be taken by the taxpayer.
The Young Case
On April 13 1989, Leonard Young appeared before the Federal Court of Appeal for a similar question. Mr. Young claimed that the money he had paid for subscriptions to financial newsletters should be deductible because they allowed him to generate income from property.
According to the judge, in order for such expenditures to be deductible, Mr. Young had to demonstrate that his intention was to generate income property at the time they were incurred. In addition, such expenditures may not be incurred during the process of acquiring the shares.
In its analysis, the court agreed that Mr. Young had assembled a portfolio of securities with common and preferred shares. Some securities were purchased for their dividend; others were purchased solely for their growth potential.
Unfortunately, the court concluded that the payments for subscriptions to financial newsletters were not deductible because they were of a capital nature. According to the judgment’s reasoning, financial newsletters allowed Mr. Young to make decisions regarding acquisitions and dispositions of securities. Thus, it concluded that these are capital expenditures as they relate lasting benefits. Result: The law does not allow deductions for financial letters and no deduction was granted.
Following the Young case, taxpayers have asked the tax authorities to decide on other expenses incurred by investors. Below are some examples.
On February 3 2000, the Canada Revenue Agency reported that the cost of using a computer, software, printer and photocopier could be deducted but only if the taxpayer could clearly demonstrate that there is a link between the cost of the purchase and use of the equipment, and the process of generating income from property. In addition, only the proportion used for generating property from income could be deductible. The portion related to capital gains must be excluded as it is a capital expenditure and the tax law is silent in this regard.
This interpretation seems to be contradictory to the Young case, but input from the Canada Revenue Agency with respect to this issue would be welcome. In addition, demonstrating the percentage of use of such equipment would be difficult for taxpayers, especially when the composition of a portfolio changes from one year to the next (income versus capital).
On April 6 2006, travel expenses to get to annual meetings were denied because, according to the interpretation of the tax authorities, these are personal expenses.
On June 28 2011, the Canada Revenue Agency reiterated the non-deductibility of subscriptions to Internet services as well as the cost of renting a modem for access to financial market data and to facilitate the taxpayer’s financial management. The fact is that such expenditures are of a capital nature as they support the process of buying and selling securities, as determined in the Young case.
Addition to the Cost of Shares Acquired
It should be noted that the above expenses may not be added to the acquisition cost of securities since the Act does not mention such expenditures.
The Case of Speculators
The previous commentary does not apply to speculators whose profits are taxed as business income. Such taxpayers can deduct all expenses incurred to generate income.
As a reminder, the profits earned by a speculator are taxed fully as business income. As for the typical investor, they normally generate capital gains of which only 50% are taxable. For more details, please consult the D Bulletin of April 2014 at disnat.com/bulletin.
A corporation must also permanently maintain its financial statements and a complete record of its assets.
Fees Paid to an Investment Advisor
Paragraph 20 (1)bb) of the Income Tax Act provides a deduction among capital expenditures for fees paid to an investment advisor for advice regarding the purchase and sale of securities when the advice is received from a person whose principal business is to render such services. This is unfortunately the only expense that can be deducted from the income of an investor.
In short, the tax law allows deductions for expenses incurred for advice received, but not for expenses incurred by an investor who wishes to educate themselves.
Thus, the costs incurred by an investor for financial newsletters or for access to specialized cable channels or financial satellite channels remain non-deductible, as do fees for Internet subscriptions, modem rentals and travel costs to annual meetings.
There is every reason for the authorities to address this issue and finally recognize the active management of a portfolio. In fact, the judgment in the Young case was rendered when the Internet and other platforms in use today did not exist. For now, taxpayers must unfortunately comply with the law and the guidelines mentioned above.Since the levels and bases of taxation can change, any reference in this publication to the impact of taxation should not be construed as offering tax advice; as with any transaction having potential tax implications, clients should consult with their own tax advisors.