CI to handle penalties for shortchanged clients

Clients affected by a record no-contest settlement between CI Investments and the OSC will have any associated tax penalties taken care of by the investment firm.

More than 384,000 mutual- and segregated-fund clients are owed a total $156.1 million because of an administrative error that understated the value of their investments.

In April 2015, CI realized it hadn’t recorded the $156 million, which was interest paid into the accounts of seven mutual funds. “As a result, the NAVs of these funds, and any funds that had invested in these funds, had been understated for several years,” CI explains in a statement.

Read: OSC approves record no-contest settlement with CI Investments

CI has sent cheques and transaction notices to clients owed money or fund units, Derek Green, CI Investments president, told Advisor.ca in a statement.

“We are still finalizing the procedures to make payments to affected segregated fund investors,” he adds. Those clients should be paid “in the coming weeks.”

CI isn’t collecting management and administration fees on the amounts. It also notes that it won’t pursue investors who are inadvertently over-compensated.

About half of the affected retail investors will get payments of $100 or less. CI won’t say how much the largest payout is worth, but it notes it’s going to an institutional investor.

Read: CRA prepares next phase of tax crackdown

CRA and CI working on tax solution

Some advisors are wondering how the unexpected payout will affect clients’ taxes.

For instance, how will the lump sum payment (or additional fund units) be taxed? And, if a client’s tax bracket has changed since she was initially owed the money, which tax bracket would apply?

The firm and CRA are in talks about how the situation should be treated. Neither would provide details about potential remedies.

Read: Essential tax numbers: post-budget update

“Our discussions with CRA are ongoing and it would be inappropriate for us to provide details until those discussions are complete. At that time, we will provide the information to advisors and investors,” says Green.

Regardless, Green says CI has set aside money to help clients cope.

“CI will be responsible for any penalties and interest that clients may owe CRA as a result of the late payment of tax resulting from the understated NAVs,” says Green.

CRA spokesperson Jelica Zdero says confidentiality rules prevent CRA from commenting on specific cases.

“However, we can say that when conducting audits, the CRA considers the facts of each case, makes decision on a case-by-case basis, and notifies each taxpayer of the decision taken,” she says.

For now, CI says clients should file their taxes as usual. Notices sent to investors say CI expects to receive guidance prior to the deadline for the 2016 tax year, when the payment occurred.

CI says it will pay CRA out of a $10.75-million fund it set up to fix the problems that led to the settlement. With $8.5 million of that earmarked for the OSC’s investor protection measures and investigation costs, that leaves at most $2.7 million for potential tax costs.