There is common misconception that there is a tax advantage to deducting investment management fees separately as compared to the fees deducted inside of a mutual fund. In fact, there is no difference between deducting management fees directly on your income tax return compared to having the fee included in the MER of a mutual fund.
Traditional Mutual Funds vs WRAP Accounts
In a traditional mutual fund, the investor is not permitted to deduct the investment management fee. Instead, the investment management fee is deducted from the income the mutual fund distributes. This is done through the mutual fund who first deducts the fee from interest income and then dividend income and the amounts that show on your T3 are therefore, net of the investment management fee.
In a WRAP account, the management fee is charged separately. The investor receives a T3 with the full amount of investment income and reports this on their tax return. The investment management fee deduction is also reported on the tax return.
The End Result Is The Same
Consider a the comparison of a mutual fund and a WRAP account that each generates $1,000 of income and charges you an investment management fee of $75. From the chart below, you can see that there is no difference whatsoever between the two:
The Difference Is In The Visibility
With WRAP accounts, the fee is visible and in plain view! With a mutual fund the fee is embedded into the management expense ratio and may lead some to believe the fee is not deductible.
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