| 24(1) | 3-901785 |
| K.J. Donnelly | |
| (613) 957-8953 |
19(1)
November 6, 1990
Dear Sirs:
Re: Advance Income Tax Ruling Request 24(1)
This is in reply to your letter dated July 30, 1990 requesting an advance income tax ruling with respect to the application of paragraph 20(1)(bb) of the Income Tax Act (the "Act"). As we advised by telephone, we are unable to provide the requested advance income tax ruling because a particular taxpayer has not been identified who proposes to undertake the transaction described in your letter. As noted in Information Circular 70-6R2, an advance income tax ruling can only be given in respect of definitely proposed transactions involving specifically identified taxpayers. The only exception to this practice is referred to in paragraph 8 of Information Circular 70-6R2 which refers to share issue and similar transactions undertaken pursuant to a prospectus.
Although we are unable to respond to your request in the form of an advance income tax ruling, we can provide you with our general comments with respect to the interpretation of paragraph 20(1)(bb) of the Act.
The Department's interpretation of paragraph 20(1)(bb) is contained in Interpretation Bulletin IT-238R2. The following comments are made in paragraph 6 of IT-238R2:
"Fees paid to stockbrokers are not deductible under paragraph 20(1)(bb) as a stockbroker's principal business is not that of advising others regarding the buying and selling of stock and securities. However, where a stockbroker's principal business also includes the provision of investment portfolio management and administration services, as discussed in 4 above, for which a separate fee is charged, that fee will be deductible under paragraph 20(1)(bb)".
This extract from IT-238R2 makes it clear that, in evaluating the availability of a paragraph 20(1)(bb) deduction for amounts paid to a stockbroker, the initial requirement to be satisfied is subparagraph 20(1)(bb)(iv), i.e. does the stockbroker's principal business include the provision of services in respect of the administration or management of shares or securities ("portfolio management")?
It would always be a question of fact whether a particular stockbroker's principal business at a particular time included the provision of investment advice and portfolio management as a separate and distinct service from the investment advice and custodial services traditionally provided by stockbrokers for which commissions only are charged.
The preamble of paragraph 20(1)(bb) specifically excludes amounts paid as commissions. If a separate amount is not charged for commissions, the next concern would be to determine if an all inclusive monthly or annual amount, charged and sought to be deducted by a taxpayer under paragraph 20(1)(bb) of the Act, included any amount for portfolio management or for advice as to the advisability of purchasing or selling specific shares of the taxpayer ("investment advice"). Clearly, it would be incumbent upon the taxpayer in these circumstances to demonstrate the fair market value of any investment advice or portfolio management services included in the monthly or annual amount paid. Since a full service broker's usual commission fees would ordinarily entitle the client to some advice, we do not believe that the elimination from a periodic fee of an amount in respect of commissions based on rates charged by discount brokers would provide a reasonable basis for estimating the value of investment advice or portfolio management services paid for by the broker's client. Any amount paid in excess of the fair market value of any investment advice received or the value of any portfolio management services provided to the taxpayer, would not be an amount deductible under paragraph 20(1)(bb) of the Act.
Our comments are provided in accordance with the practice described in paragraph 21 of Information Circular 70-6R2 and are not binding on Revenue Canada, Taxation in respect of any transaction or taxpayer. Your ruling request deposit will be returned to you separately.
Yours truly,
for DirectorFinancial Industries DivisionRulings Directorate