1998 Ruling 9832883 - REBATE OF FEES AS INDUCEMENTS

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Will the rebate to an individual (by a securities dealer) of certain commissions paid on the acquisition of Mutual funds by the individual be considered an inducement for the purposes of paragraph 12(1)(x) and also allow the individual to make an election under subsection 53(2.1)? Is subsection 12(2.1) applicable?

Position:

Yes it is an inducement, no subsection 12(2.1) does not apply.

Reasons:

Reading of the Act.

xxxxxxxxxx 983288

Attention: xxxxxxxxxx

XXXXXXXXXX, 1998

Re: xxxxxxxxxx

Advance Income Tax Ruling

This is in reply to your letter of XxXXXXXXxX, in which you requested an advance income tax ruling on behalf of the above noted taxpayer. We also acknowledge receipt of your facsimile transmissions of XxxXXxXXxx, as well as numerous telephone conversations (xxxxxxxxxx).

Definitions and Abbreviations

In this letter, the following terms have the meanings specified:

(a) "Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended to the date hereof;

(b) "Company" means: xxxxxxxxxx

xxxxxxxxxx
xxxxxxxxxx
xxxxxxxxxx
xxxxxxxxxx
xxxxxxxxxx
xxxxxxxxxx

(c) "Client" means: xxxxxxxxxx

xxxxxxxxxx
xxxxxxxxxx
xxxxxxxxxx
xxxxxxxxxx

(d) "Mutual Fund" means. an open end mutual fund trust or corporation within the meaning of subsection 132(6) and 131(8) of the Act and "Units" means units of a Mutual Fund.

Facts

1. The Company is reg:1stered as an investment dealer in

xxxxxxxxxx.

2. The Company is a "registered securities dealer" as defined in subsection 248(1) of the Act.

3. Services provided by the Company to clients include the execution of trades of various types of securities on xxxxxxxxxx stock exchanges.

Xxxxxxxxxx

4. The manager ("Manager") of a particular Mutual Fund is responsible for the management and administration of the Mutual Fund including the distribution of Units.

5. The capital of a Mutual Fund is divided into Units which are offered for sale to the public (pursuant to the terms of a prospectus) on a continuous basis through the Manager or by other distribution agents, including the Company. The Units are sold or redeemed at a price (the "Unit Price") which is generally equal to the net asset value per unit as of the date of purchase or redemption respectively. Units can only be purchased from, and sold to, the Mutual Fund.

6. The Company acts as an agent for its clients

xxxxxxxxxx

7. Deferred Charge Mutual Funds permit investors to pay no fees at the time of purchase of a Unit, while the dealer is paid a commission by the Manager at the time of purchase typically in the range of xxxxxxxxxx% to xxxxxxxxxx% of the purchase (the "DSC Commission"). An investor generally agrees at the time of purchase to pay a deferred sales charge at the time of redemption if the Units are redeemed within a specified time period (usually between 5-7 years). Generally, the deferred sales charge is xxxxxxxxxx% and declines by xxxxxxxxxx point per annum such that if Units are not redeemed until after the specified time period no deferred sales charge is charged.

8. By way of example, a typical transaction whereby an investor purchases Units on a deferred sales charge basis is as follows:

(a) The investor requests the dealer to purchase a specified dollar value 6f Units of a particular Mutual Fund. The investor agrees to purchase the Units on the basis of the terms and conditions set out in the relevant prospectus.

(b) The dealer executes the purchase by transferring the investor's money to the Mutual Fund and transferring the Units received to the investor's account with the dealer.

(c) The Manager pays the applicable DSC Commission to the dealer and may also pay ongoing service or trailer fees to the Dealer in respect of the purchase.

Proposed Transactions

9. The Company proposes to implement procedures by which it will provide to the Client a portion of the DSC Commission which it receives from the Manager (the "Rebate") when the Client invests through the Company in a Mutual Fund on a deferred sales charge basis.

xxxxxxxxxx

10. The transactions pertaining to the Rebate will be implemented as follows:

(a) The Client will invest $XXXXXXXXXX in a Mutual Fund on a deferred sales charge basis at a price of $XXXXXXXXXX per Unit and receive xxxxxxxxxx Units.

xxxxxxxxxx

(b) The Company will receive a DSC Commission equal to xxxxxxxxxx% of the gross amount of the Client's purchase ($xxxxxxxxxx) from the Mutual Fund's Manager.

(c) The Company will pay the Client a Rebate equal to xxxxxxxxxx% of the DSC Commission received from the Manager in the manner described in (d) below.

xxxxxxxxxx

(d) The Company will satisfy payment of the Rebate through the purchase of additional Units of the applicable Mutual Fund on behalf of the Client who will be the registered holder.

xxxxxxxxxx

(e) XXXXXXXXXX

(i)

xxxxxxxxxx

(ii)

xxxxxxxxxx

Purpose of the Proposed Transaction

11.

xxxxxxxxxx

Additional Information

12. To the best of your knowledge and that of the Company and Clients, the issues related to this request:

(a) have not previously been reported in the Company's, Participants' or any related party's prior income tax returns;

(b) are not being considered by a tax services office in connection with any of the Participants' or a related party's prior income tax return;

(c) are not under objection by the Participants or a related person;

(d) are not before the courts; and

(e) are not the subject of a ruling previously issued by this Directorate.

Rulings

Provided the above statement of facts and proposed transactions are accurate and constitute a complete disclosure of all relevant facts and provided the transactions are completed as proposed, we rule as follows:

A. paragraph 12(1)(x) of the Act will apply to include in the Client's income amounts received as a Rebate;

B. provided the Client acquires and holds Units as capital property, the Client may make an election pursuant to subsection 53(2.1) of the Act in respect of any Rebate received on the acquisition of the same Units and adjust the Adjusted Cost Base of the same Units pursuant to paragraph 53(2)(s) of the Act;

C. subsection 12(2.1) of the Act will not apply for the purposes of paragraph 12(1)(x) of the Act to deem any Rebate received by the Client as a result of the investment in a particular Mutual Fund trust to be received by that Mutual Fund trust;

D. the Rebate will not be a payment described in subsection 201(1) of the Income Tax Regulations and thus no information return in prescribed form is required in respect of the payment of the Rebate; and

E. the Rebate paid to the Client will be deductible by the Company under subsection 9(1) of the Act in computing its income from business for the year in which the amount is incurred subject to the provisions of section 67 of the Act.

These rulings are given subject to the general limitations and qualifications set forth in Information Circular 70-6R3 dated December 30, 1996 issued by Revenue Canada and are binding provided the proposed transactions are completed on or before xxxxxxxxxx.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch