Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: Whether a salesperson is legally precluded under Ontario's Securities Act (the "OSA") from transferring or assigning to his or her non-registered corporation the commissions earned from mutual fund sales.
Position: There are exceptions to the strict enforcement of the OSA in terms of whether or not the corporation must be registered.
Reasons: It is apparent that the Ontario Securities Commission, in conjunction with the Canadian Securities Administrators, the Mutual Fund Dealers Association, and the Investment Dealers Association, will permit a non-registered corporation to have a salesperson trading on its behalf through a registered dealer in certain circumstances.
April 14, 2003
Mr. Serge Vallieres HEADQUARTERS
Ottawa Tax Services Office Randy Hewlett, B.Comm
Verification & Enforcement Division 613-957-8973
2003-000908
Mutual Fund Sales Reported By A Professional Corporation
We are writing in response to your memorandum of March 18, 2003, wherein you asked for our opinion on a situation in which a corporation reported the commission income earned from mutual fund sales that were made by its individual shareholder.
Facts
Our understanding of the relevant facts is as follows:
? You have recently conducted an audit of XXXXXXXXXX ("ACO") and its sole-shareholder, XXXXXXXXXX ("Mr. A").
? ACO is not registered as a "dealer" under Ontario's Securities Act (the "OSA").
? Mr. A is registered as a "salesperson" in accordance with subsection 25(1) of the OSA.
? Under the OSA, only an individual can be a salesperson and must be "acting on behalf of a dealer" to "trade in a security or act as an underwriter".
? The income reported by ACO is commission income that is mainly derived from the sale of mutual funds that were made by Mr. A while trading through a registered dealer (XXXXXXXXXX, hereafter the "Dealer".)
? Mr. A executed the mutual fund sales on behalf of the Dealer. The Dealer paid the commissions directly to Mr. A and a T4A was issued in his name. All commissions and related expenses were reported by ACO.
? You requested, but were not provided with agreements governing the relationship between the Dealer, Mr. A, and ACO. Mr. A indicated that no such agreements are in existence.
? In your opinion, the CCRA's position on this issue, outlined in Income Tax Technical News No. 22 (ITN 22), requires that Mr. A report the commission income since ACO is not registered under the OSA.
? Mr. A is of the view that, notwithstanding the absence of any written agreements, he is not legally precluded from assigning the commission income to ACO.
Your Request
You have requested an opinion on whether ACO is legally precluded from reporting the commissions from the sale of mutual funds.
As noted in your memorandum, the CCRA's position on this issue is discussed in ITN 22. In general terms, if a salesperson is legally or contractually precluded from transferring or assigning to his or her corporation the commissions earned from mutual fund sales, the income must be reported by the salesperson. However, where no legal or contractual prohibition exists, the corporation can report the commissions provided it is carrying on the business. Whether or not the corporation is actually carrying on the business is a question a fact, normally supported by adequate documentation.
We have reviewed the relevant provisions of the OSA governing the registration requirements for a person or company to legally trade in a security or act as an underwriter. In addition, we have also reviewed the following documentation concerning this issue:
(a) Notice 33-304 published by the Canadian Securities Administrators [available at http://www.osc.gov.on.ca/en/Regulation/Rulemaking/Notices/csanotices/33-304_csadistributionstructurescommitteepaper_199908.html].
(b) MR-0002 published by the Mutual Fund Dealers Association [available at http://www.mfda.ca/notices.html ].
(c) Bulletin #2703 and Notice MR-086 published by the Investment Dealers Association [available at http://www.ida.ca ].
These documents indicate that the Ontario Securities Commission will not strictly enforce the registration requirements of the OSA. In particular, they support that there are circumstances under which a non-registered corporation can have a salesperson trade securities on its behalf through a registered dealer.
In view of the above, the position that the OSA legally precludes Mr. A from trading mutual funds on ACO's behalf may not be supportable. Further, based on the information we have reviewed, there is no indication that ACO is not carrying on the business or is contractually prevented from doing so (although you might consider directly requesting information from the Dealer in this regard to be sure). Consequently, it is our view that the position outlined in ITN 22 should not be used as a basis of assessment it this case.
We trust our comments are of assistance. For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Customs and Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the electronic library version, or they may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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