Carrying Charges
Filing taxes can be complicated, especially, when it comes to understanding which expenses are deductible. One area that is often overlooked is carrying charges.
What Are Carrying Charges?
Carrying charges are expenses that you incur to earn income from your non-registered investments. These expenses can reduce your overall taxable income. They must be directly related to your efforts to generate an income. If you’ve taken out a loan to invest in stocks, bonds, or rental properties, or if you are managing an investment portfolio, some of those costs may qualify as carrying charges.
These expenses can only be deducted against non-registered investments.
Registered accounts such as RRSPs, TFSAs, FHSAs, and similar plans, their carry costs do not qualify for deductions.
Here’s a list of common expenses that may qualify:
- Accounting or tax preparation fees: If you incur costs for tax preparation related to your investments, they might be deductible.
- Investment management or safe custody fees: Fees paid to financial advisors or for services to manage non-registered investments.
- Investment counsel fees: These are costs incurred for investment advice
- Interest on investment loans: If you borrowed money to invest to earn interest, dividends, and royalties
How to Claim Carrying Charges on Your Tax Return
Carrying charges are reported on Line 22100 – Carrying charges and interest expenses of the T1 tax return. It is important to maintain detailed records of these expenses to substantiate your claims.
When you file, you’ll typically be required to:
- Report any income earned from your investments, such as interest, dividends, or royalty income.
- Provide documentation for the related carrying charges. These carrying costs are usually found on the non-registered (not TFSA, nor RRSP) year-end or Q4 investment statement.
- Ensure that your deductions are directly tied to your investment income-generating activities.
Why Should You Care About Carrying Charges?
Maximizing your allowable deductions is one of the most effective ways to reduce your taxable income and, ultimately, lower the amount of tax you owe. If you make significant investments, carrying charges can add up quickly—making it even more crucial to stay on top of your expenses and ensure you claim everything you’re entitled to.
Common Mistakes to Avoid
While carrying charges are a great way to reduce your tax liability, there are a few common mistakes to watch out for:
- Claiming personal expenses: Only expenses related to investment income activities qualify. Personal expenses cannot be deducted.
- Not keeping records: Always keep receipts and records for carrying charges. If you’re ever audited, you’ll need proof that these expenses are legitimate and tied to your taxable investment income-earning purposes.
- Double-dipping: Some carrying charges may have limits or specific conditions. An example is if you claimed your accounting fees on your T2125 (Statement of Business Activities), you can no longer claim this expense again on Line 22100 (Carrying charges and interest expenses).
Key Takeaways
Carrying charges can be an excellent way to reduce your taxable income if you’re generating income from investments. By keeping thorough records and understanding which expenses qualify, you can ensure you take full advantage of these deductions when filing your tax return.
If you are unsure whether your expenses qualify or need help with your personal tax return, it’s a good idea to consult with a tax professional who can guide you through the process and ensure you’re taking advantage of every deduction available. As always, we are here to help!