Principal Issues: 1) How does the CRA interpret the term “commission” in paragraph 20(1)(bb) and what factors are to be considered in determining whether a payment made to a broker is a “commission”? 2) Whether the technical interpretation 9017855 “deductibility of fees paid to stockbrokers” still represents the CRA’s position? 3) Whether the principal business of a person or partnership carrying on a financial services business who provides insurance, investment and lending services relates to, among other things, the provision of services in respect of the administration or management of shares or securities of the taxpayer even if these investment service activities is less than 50% of the person or partnership’s total business? 4) Whether the principal business of an investment broker, for the purposes of paragraph 20(1)(bb) consists in providing advice with respect to the advisability of purchasing or selling a specific share or security of the given the significant changes in the financial industry over the past decades.
Position: 1) The term “commission” in paragraph 20(1)(bb) generally refers to an amount calculated on a percentage basis. 2) No. In the circumstances where the fees paid by a client allow him to make a fixed amount of stock purchases or sales, these fees would be fully deductible by virtue of paragraph 20(1)(bb), provided such fees are reasonable and paid for services in respect of the administration or management of shares or securities of the taxpayer. 3) The term “includes” in clause 20(1)(bb)(i)(B) means that the principal business of a person should be determined by also considering the other activities of that person. It is assumed that a person having a permit issued by the Canadian securities regulators will generally satisfy the “principal business” condition. 4) It is reasonable to assume that the principal activity of a person who holds a broker licence is to advise as to the advisability of purchasing or selling shares or securities or to offer administration or management services.
Reasons: 1), 2) According to the case law. 3) Wording of paragraph 20(1)(bb) 4) Question of fact.
FINANCIAL STRATEGIES AND FINANCIAL INSTRUMENTS ROUNDTABLE, 7 OCTOBER 2021
2021 APFF CONFERENCE
Question 1
Application of paragraph 20(1)(bb).
Significant changes have occurred in the financial services industry in recent years. Among other things, investment dealers have increased the number of contracts they enter into with their clients under a new compensation model. This new form of compensation involves receiving fees directly from clients based on a percentage of assets under management, regardless of the services provided or the number of trades made on behalf of the client. Previously, such compensation was generally received as a commission on each transaction. For an amount to be deductible pursuant to paragraph 20(1)(bb) of the Income Tax Act, the following three conditions must be met: (1) it is not a commission; (2) it is paid to a person or partnership whose principal business is advising others as to the advisability of purchasing or
selling specific shares or securities, or included the provision of services in respect of the administration or management of shares or securities and (3) the amount is paid either for advice as to the advisability of purchasing or selling a specific share or security of the taxpayer, or for services in respect of the administration or management of shares or securities of the taxpayer. The CRA has previously indicated that paragraph 20(1)(bb) is an exception to the general prohibition against deducting capital expenditures, so that this provision must be interpreted restrictively.
Questions to the CRA
a) How does the CRA interpret the word “commission”? What elements are considered in determining whether the method of remuneration of a securities dealer or investment advisor constitutes a commission?
b) In Technical Interpretation 9017855 (footnote 1), the CRA stated that where a taxpayer pays a fee to its securities dealer or investment advisor that allows the taxpayer to make a certain number of trades at no additional cost, and (once the maximum number of trades is reached) with the taxpayer paying a commission for each of the excess trades, the taxpayer must determine the fair market value (“FMV”) of the advice, administration and management services received. If the amount paid exceeded this FMV, the excess would be considered a commission and, therefore, not deductible pursuant to paragraph 20(1)(bb). Does the CRA maintain the position expressed in this technical interpretation?
(c) Does the principal business of a person or partnership carrying on a financial services business and providing insurance, investment and lending services include the provision of services relating to the administration or management of shares or securities even if the activities relating to its investment services by themselves represent less than 50% of its total activities?
(d) It has been the longstanding position of the CRA (footnote 2) that fees paid to an investment dealer are not deductible pursuant to paragraph 20(1)(bb) since the principal business of an investment dealer is not the giving of advice as to the advisability of purchasing or selling shares or securities. Given the significant changes in the industry over the past decade, is it now possible that the principal business of an investment dealer is, for the purposes of paragraph 20(1)(bb), giving advice on the advisability of purchasing or selling shares or securities?
CRA Response to question 1(a)
In computing the income from a business or property, commissions are not deductible pursuant to paragraph 20(1)(bb). Since the term "commission" is not defined in the Income Tax Act, reference must be made to the principles of interpretation in order to give it a definition that is consistent with the intention of Parliament in the context of paragraph 20(1)(bb).
In Canada Trustco Mortgages v. Canada (footnote 3), the Supreme Court of Canada described the general principles of statutory interpretation as follows:
The interpretation of a statutory provision must be made according to a textual, contextual and purposive analysis to find a meaning that is harmonious with the Act as a whole. When the words of a provision are precise and unequivocal, the ordinary meaning of the words play a dominant role in the interpretive process. On the other hand, where the words can support more than one reasonable meaning, the ordinary meaning of the words plays a lesser role. The relative effects of ordinary meaning, context and purpose on the interpretive process may vary, but in all cases the court must seek to read the provisions of an Act as a harmonious whole.” [Emphasis added]
In Rio Tinto Alcan Inc. v. The Queen (footnote 4), the Tax Court of Canada and the Federal Court of Appeal interpreted the term "commissions" for the purposes of paragraph 20(1)(bb) as an amount calculated on a percentage basis. Although the comments of these two Courts were made in obiter dicta, it is our view that the courts would adopt the same interpretation if the question were put directly to them.
The fact that a commission is an amount calculated by reference to a percentage does not mean that any form of percentage-based remuneration satisfies that definition or that any form of remuneration determined otherwise than by reference to a percentage is deductible pursuant to paragraph 20(1)(bb).
For example, in the context of a discount brokerage, we understand that the clients generally receive services that allow them to trade on platforms themselves without necessarily receiving specific advice. According to our understanding, the amounts paid to discount brokerage firms would in fact be selling expenses, which should be added to the cost of the securities or deducted from the proceeds of disposition when the securities are sold, since they generally do not satisfy the conditions for the application of paragraph 20(1)(bb). In short, even if those fees were not considered commissions, because they were not expressed as a percentage, they would not be automatically deductible under paragraph 20(1)(bb).
CRA Response to question 1(b)
In Technical Interpretation 9017855 (footnote 5), the CRA was also of the view that in order for an amount paid to a securities dealer to be deductible pursuant to paragraph 20(1)(bb), the principal business of the securities dealer should at a minimum include the provision of services in respect of the administration or management of securities. We were also of the view that it is a question of fact whether the principal business of an investment dealer includes the provision of services in respect of the administration or management of securities.
In such circumstances, it is the CRA's view, based on the Rio Tinto Alcan decisions, that it is not appropriate to determine the FMV of advisory, administrative or management services. We are also of the view that such fees would be fully deductible pursuant to paragraph 20(1)(bb) provided that they are reasonable in relation to the services received and that they are in respect of the administration or management of shares or securities.
CRA Response to question 1(c)
We are of the view that the term "includes" in clause 20(1)(bb)(i)(B) allows for the determination of a person's principal business to be based on the other services offered by the person. While services in respect of the administration or management of shares or securities must be part of the person's principal business, other activities may also be carried on in the same business.
Accordingly, the principal business of a person carrying on a financial services business and offering insurance, investment and lending services is, inter alia, providing services in respect of the administration or management of shares or securities even if the activities relating to those investment services alone represent, by themselves, less than 50% of the person's total activities.
We are also of the view that a person licensed by one of the Canadian Securities Administrators to advise on the advisability of buying or selling certain shares or securities or to provide services in respect of the administration or management of shares or securities may be presumed to satisfy the "principal business" condition.
CRA Response to question 1(d)
Whether the principal business of a securities dealer is to advise on the advisability of purchasing or selling shares or securities is a question of fact that must be analyzed in light of the circumstances of each situation.
However, it is our view that it is reasonable to assume that the principal business of a person licensed as a securities dealer is to advise on the advisability of purchasing or selling shares or securities or to provide services in respect of the administration or management of shares or securities.
Sidi Ouattara
(438) 340 0237
October 7, 2021
2021-089966
FOOTNOTES
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1 CANADA REVENUE AGENCY, Technical Interpretation 9017855, “deductibility of fees paid to stockbrokers”, November 6, 1990.
2 See in this regard: CANADA REVENUE AGENCY, Interpretation Bulletin IT-238R2, "Fees Paid to an Investment Counsellor", October 6, 1983, number 6 and CANADA REVENUE AGENCY, Technical Interpretation 9725385, "Fees paid to investment counsel", June 2, 1998.
3 2005 SCC 54.
4 2016 SCC 172. Judgment confirmed by the Federal Court of Appeal, Canada v. Rio Tinto Alcan Inc, 2018 FCA 124, hereinafter "Rio Tinto Alcan".
5 Supra, note 1.