CI figures out how clients will be taxed on payments related to no-contest settlement

CI Investments has worked out a tax arrangement after an administrative error had left hundreds of thousands of clients short a collective $156.1 million.

Last year, we reported on the record no-contest settlement between CI Investments and the OSC regarding understated fund values.

CI had self-reported to the OSC that more than 384,000 clients of its mutual and segregated funds were owed $156.1 million because of an administrative error that understated the net asset values (NAVs) of seven mutual funds. The owed money “was never co-mingled with the property of CI Investments,” the firm said in a statement at the time.

CI told us that it had sent cheques and transaction notices to clients owed money or fund units in March 2016. Special payments to segregated fund investors were made in August 2016. About half of the affected retail investors received payments of $100 or less.

One outstanding question? How the payments would be taxed, and in which tax years, since the NAVs had been understated “for several years,” as the fund company stated.

CI now has the answer.

After discussing the matter with CRA, CI determined “the payments will be taxable in 2016, the year in which they were made to investors,” Mark MacLeod, senior vice-president, Client Service, CI Investments, told Advisor.ca by email. “As a result, we do not expect any penalties or interest charges to be levied against our clients regarding the special payments. Since this is a 2016 taxable event, the investor’s tax bracket for 2016 would apply.”

MacLeod notes that not all payments will be considered a taxable event, and that “the tax treatment of a payment depends on the plan type of the affected account and the payment method, which was either a cheque or a deposit of fund units.”

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What investors can expect

Affected clients should receive all related paperwork within the next month.

“We are mailing a letter and tax documents relating to the special payments starting later this month and we expect the mailing to be completed by the end of February,” says MacLeod. “Only clients whose payment resulted in a taxable impact will be contacted.”

The tax documents will arrive separately from regular year-end account statements and tax documents. CI has also made a list of affected clients available to their advisors.

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The staff of Advisor.ca have been covering news for financial advisors since 1998.