Can advisors incorporate?

As we saw in my last column, incorporation has tax and estate benefits, especially when selling your book. But it may not be possible for all advisors.

Availability of incorporation

Life insurance

In most provinces, a corporation can be licensed to receive insurance commissions, including commissions on insurance-based investment products such as annuities and segregated funds. The corporation must be controlled by individuals who are similarly licensed in the province.

The corporation is a licensed advisor in its own right, and is the taxpayer earning the income that’s at issue. On the other hand, where income is earned by a taxpayer and then redirected to a person or corporation at a lower tax bracket, it will be attributed back to its original earner. This is the default administrative approach of CRA.

Example: Wallsten v. R (TCC) [2001] 1 CTC. 2847

In this case, Wallsten’s contract with Sun Life prohibited the assignment of commissions. When he received commission cheques from Sun Life, Wallsten deposited them to the bank account of his corporation. CRA reassessed Wallsten to include the income as his, rather than the corporation’s.

The court found the corporation was actually carrying on the business. Even though the assignment of the cheques violated his contract with Sun Life, there was nonetheless a valid assignment under tax law.

MFDA

The MFDA rule that enabled redirection of commissions to a corporation (Rule 2.4.1) was suspended in 2006.

Technical letter 2006-0176531I7E—Commission Income Assigned to a Corporation, April 18, 2006

In response to Wallsten, the CRA originally stated in Income Tax Technical News (ITTN) 22 that it would not be following the ruling.

The author of the 2006 CRA technical letter says commissions could be redirected to a corporation as long as the advisor is not otherwise precluded from doing so, and the corporation is actually carrying on the business. It was also noted that neither the OSC nor the MFDA were at that point pursuing the respective rules prohibiting or disallowing the practice at the time.

Rule 2.4.1 was republished in 2010. Under the rule, an MFDA dealer may agree with an Approved Person (i.e., a licensed advisor) to redirect commissions to a corporation. The agreement must be executed in writing in the form approved by the MFDA. (Note that the MFDA explicitly stated at the time of the republication that MFDA staff could not provide guidance on the tax implications of the rule change.)

The rule applies to advisors in all provinces except Alberta. It also does not apply to income related to clients resident in Alberta, even if the advisor is located elsewhere.

On republication and adoption of the rule in 2010, the OSC noted the dealer and advisor would be expected to “comply with any and all applicable tax legislation when any portion of an Approved Person’s remuneration, in respect of business conducted by the Approved Person on behalf of a Member firm, is being directed to an unregistered corporation.” As to what those requirements may be, the OSC made no further comment.

Case in point: Boutilier v. R. 2007 TCC 96

Boutilier was an advisor who assigned mutual fund trailers to his corporation. The evidence showed that dividends were paid from the corporation to a trust and on to (presumably) lower-bracket family members. The net funds appear to have ended up with Boutilier personally.

The court upheld the CRA reassessment attributing the income to Boutilier. In support, the judge noted that there was no formal employment contract, no remuneration was paid to him, and there were few or no business expenses paid by the corporation.

The judge commented: “Although I believe, given the right set of circumstances, a company could be engaged in the active business of providing services to earn trailer fees, that is not the case here.”

This case was decided after CRA letter 2006-0176531I7E, and before MFDA rule 2.4.1 was reinstated in 2010, though neither of those would bind a court.

IIROC

Corporations cannot be licensed to receive commissions earned under the authority of IIROC.

In December 2014, Alberta amended its Securities Act to allow for licensing of a “registered professional corporation.” However, the province has not yet taken the final step to proclaim the provisions in force.

Council of Ministers of Securities Regulation

In 2013, the council committed to moving forward with its incorporation project, intended to give “financial representatives the flexibility to provide dealing and advising services […] though a corporation, without compromising investor protection.”

At the time, the expectation was that all jurisdictions would bring forward legislative amendments before the end of 2014. Apart from Alberta’s 2014 amendments, Saskatchewan had passed (but not proclaimed) changes in 2012, and Quebec brought forward draft legislation in 2013 that died on the order paper.

Part 1: Tax and legal considerations when selling your book

Part 2: Finding the right buyer for your book

Part 3: Getting the best price for your book

Part 4: Tax issues with selling your book

Part 5: Incorporation issues when selling your book

Part 6 (this article): Can advisors incorporate?