You work hard for your money, you invest it wisely, and you expect it to grow. But what if I told you that right now, you’re probably paying a fee that’s quietly taking thousands of dolars from you? And the worst part? Most investors have no idea. Let’s break down five of the biggest hidden investment fees in Canada—starting with…
1. Hidden Investment Taxes
Even if you aren’t actively selling investments, taxes can eat away at your returns in ways you might not expect. Two of the biggest hidden tax costs are capital gains distributions and foreign withholding taxes.
Capital Gains Distributions – Unexpected Tax Bills
If you hold mutual funds in a non-registered account, you may be hit with capital gains distributions, even if you haven’t sold anything. This happens when the fund manager sells assets inside the fund, triggering capital gains that get passed on to investors. These distributions increase your taxable income and can result in surprise tax bills.
Example:
You invest $100,000 in a mutual fund. The manager sells stocks inside the fund, realizing $5,000 in capital gains. You get a tax slip for those gains and must pay tax, even though you didn’t personally sell anything.
How to Avoid It
- Hold mutual funds in a TFSA or RRSP to avoid capital gains taxes.
- Use ETFs instead of mutual funds, as they are usually more tax-efficient and distribute fewer gains.
Foreign Withholding Taxes – Lost Investment Income
If you invest in U.S. dividend-paying stocks or ETFs in a TFSA, the IRS automatically withholds 15% of your dividends. This one is truly hidden, as you won’t even realize it as it is deducted at the source.
Example:
You hold $50,000 of Microsoft stock (MSFT) in your TFSA, earning $1,750 in dividends annually. The IRS withholds 15% ($262.50) before you receive the payout, meaning you only get $1,487.50. Over 20 years, that adds up to $5,250 in lost dividends—money that could have been reinvested and compounding.
How to Avoid It
- Hold U.S. stocks and ETFs in an RRSP, where withholding taxes don’t apply due to the Canada-U.S. tax treaty.
- Use Canadian-listed ETFs that hold U.S. stocks, as some structures reduce withholding tax exposure.
Taxes are one of the most overlooked costs in investing. Making the right account choices can save thousands in unnecessary taxes over the long run.
If you’re wondering how to minimize taxes on your investments, I actually covered this in detail in my video on tax-efficient investing in Canada—check it out on my channel!
2. Currency Conversion Fees (FX Fees) – The Silent Killer
If you invest in U.S. stocks or ETFs, you might be losing money without realizing it due to currency conversion fees (FX fees). Every time you convert CAD to USD (or vice versa), most brokerage firms charge an FX fee of 1.5%–2.5% per transaction, and it’s often hard to notice it. These hidden costs can add up quickly, eating into your investment returns.
Why FX Fees Matter
Let’s say you want to invest in Apple stock (AAPL) and need to convert $50,000 CAD to USD. If your brokerage charges a 2% FX fee, you immediately lose $1,000, meaning only CAL is available to buy Apple shares.
Now, assume you decide to sell. After selling, you convert the proceeds back to CAD. Your brokerage charges another 2% FX fee, taking another $1,000.
Even if your investment was profitable, you’ve lost $2,000 just in currency conversion fees, without accounting for any other trading costs. If you trade U.S. stocks frequently or rebalance your portfolio often, these hidden fees can cost you tens of thousands over your lifetime—money that could have been compounding in your investments.
How to Avoid or Minimize FX Fees:
- Use discount brokerages with lower FX fees, such as Interactive Brokers (though it’s not the most user-friendly platform).
- Use Norbert’s Gambit – You can buy an interlisted stock, journal it to the other currency, and sell it to avoid FX fees for the most part.
- Keep a U.S. dollar brokerage account – This allows you to trade U.S. stocks without converting CAD to USD each time, avoiding repeated fees.
“Beware of little expenses; a small leak will sink a great ship.” – Benjamin Franklin.
3. Segregated Funds – Insanely High Fees
Segregated funds are often marketed as safe, insurance-protected investments, but they come with some of the highest fees in the Canadian investment industry. These funds combine elements of mutual funds and life insurance policies, offering principal protection guarantees after a set period (usually 10+ years). However, this perceived safety comes at a massive cost in fees and restrictions.
How Much Do Segregated Funds Cost?
The Management Expense Ratios (MERs) for segregated funds often exceed 3%–4%—far higher than standard mutual funds or ETFs. To put this into perspective:
- RBC Emerging Markets Dividend GIF Fund – MER 2.94%
- Manulife Global Dividend GIF Select Fund – MER 3.69%
- iShares Core S&P/TSX Capped Composite Index ETF (XIC) – MER 0.06%
If you invest $100,000 in a segregated fund with a 3.5% MER, and the fund earns 6% annually before fees, after 20 years you’d end up with around $163,000. Meanwhile, the same investment in a low-cost ETF with a 0.06% MER would grow to around $317,000—a $87,000 difference lost entirely to fees.
How to Spot a Segregated Fund
Many investors don’t realize they own a segregated fund until they’re already locked in. Here’s how you can tell, first go to the fund facts and look at these things:
- Comes with a maturity guarantee (often 75% or 100% of your principal after 10–15 years).
- Higher MERs (typically above 3%).
- Includes estate planning benefits, like avoiding probate fees.
- May have early withdrawal penalties (surrender charges).
If your advisor is offering a fund with these features, ask them directly if it’s a segregated fund and request full details on fees and restrictions.
When Does It Make Sense to Use a Segregated Fund?
There are a few niche cases where they may make sense:
✅ Estate Planning: Assets go directly to beneficiaries, avoiding probate delays.
✅ Creditor Protection: Business owners can protect assets from lawsuits or bankruptcy.
📌 Pro Tip:
If you absolutely need the insurance benefits, consider a term life insurance policy and a low-cost ETF instead—this often works out cheaper than a segregated fund.
Before we continue to our next hidden fee, a great way to stay on top of fees is to track your net worth. If you’re not tracking your net worth yet, check out my free Net Worth Tracker for Canadians. Download it free!
4. Trading Fees – The Cost of Buying and Selling Investments
Trading fees can quietly eat into your investment returns, especially for frequent traders. These costs come in two main forms: brokerage fees and the bid-ask spread.
Brokerage Fees
Most Canadian brokerages charge a flat fee per trade, usually between $5 and $10. This means that every time you buy or sell a stock or ETF, you’re paying extra. For active traders, these fees can add up quickly. If you make 10 trades per month at $9.99 per trade, that’s $1,200 per year in fees—money that could have been invested instead. Some actively managed mutual funds also charge short-term trading fees if sold within a set period, typically 30 to 90 days.
Bid-Ask Spread – The Hidden Cost of Trading
The bid-ask spread is the difference between what buyers are willing to pay and what sellers are asking for. For example, if you buy an ETF at $20.10 (ask price) and later sell at $20.00 (bid price), you lose $0.10 per share. If you’re trading 1,000 shares, that’s a $100 hidden cost. Lower-volume stocks and ETFs often have wider spreads, making them more expensive to trade.
How to Reduce Trading Fees
- Use low-cost or commission-free brokers like Wealthsimple Trade for ETFs and stocks.
- Minimize frequent trading and stick to a long-term strategy.
- Use limit orders instead of market orders to control your buy/sell price.
- Trade high-volume ETFs and stocks to reduce bid-ask spread losses.
5. Early Redemption Fees – A Costly Exit Penalty
Some mutual funds and investment products charge early redemption fees if you sell too soon after buying. These fees, often called short-term trading fees, are meant to discourage quick turnover and protect fund stability, but it can take a big chunk out of your investment returns.
Where You’ll Find Early Redemption Fees
- Mutual funds: Many charge fees if sold within 30 to 90 days, usually 1% to 2% of the investment. They might be under a different name,
How to Avoid Early Redemption Fees
- Review the fund’s short-term trading policies before investing. The details will be listed in the Fund Facts document, for example, this RBC U.S Equity fund short-term trading fee is 2% of the value of units you sell or switch within 7 days of buying them.
- Hold investments for longer periods to avoid triggering redemption penalties.
- Consider ETFs instead of mutual funds—most ETFs do not charge early redemption fees, making them a more flexible alternative for investors.
Hidden fees and taxes chip away at your wealth, but there are smart ways to protect your money. If you want a clear strategy tailored to your financial goals, Blueprint Financial offers fee-only financial planning to help you optimize your investments, reduce taxes, and build long-term wealth. See our services to book a free consultation!
