26 June 2003 GST/HST Ruling 43132 - Business Development Account ("BDA")

Dear XXXXX:

Thank you for your letter XXXXX addressed to XXXXX Centre Tax Services Office, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the use of Business Development Accounts ("BDAs") by XXXXX. Your letter was referred to us for response.

Statement of Facts

Our understanding of the facts is as follows:

1. XXXXX is the retail division of XXXXX. XXXXX XXXXX. The XXXXX is a full-service financial institution operating around the world.

2. XXXXX employs Investment Advisors (IAs) who are commissioned salespersons engaged in the selling of investment products (e.g., mutual funds, bonds, equities, options, insurance).

3. IAs earn commissions on the investment products sold to clients. The commissions are calculated in accordance with XXXXX s commission payout policy.

4. IAs meet the requirements of commissioned salespersons under paragraph 8(1)(f) of the Income Tax Act.

5. IAs are required to incur certain sales related expenses as part of their conditions of employment.

6. XXXXX has developed the Business Development Account ("BDA") program to allow eligible employees to allocate a portion of their future commissions directly to the payment of eligible sales related expenses incurred to generate commissions. Participation in the program is entirely voluntary.

7. XXXXX may receive expense reimbursements from XXXXX outside the BDA program for certain expenses that are included in the general employee benefit programs. Such eligible expenses would include reimbursement of professional fees, registration fees for various securities agencies, and institute membership fees.

8. In addition to the eligible expenses that are processed through the BDA program and expense reimbursements described above, XXXXX IAs incur other expenses, which are not reimbursed but may otherwise qualify for deduction under the Income Tax Act (mainly for additional support staff). Such sales related expenses would include but would not be limited to the following:

(a) assistant related expenses;

(b) out-of-province registration fees;

(c) parking;

(d) entertainment and travel costs; and

(e) various sundry expenses.

9. XXXXX you requested an informal tax ruling from Canada Customs and Revenue Agency (CCRA) of the income tax issues regarding the BDA accounts provided by XXXXX to the IAs. CCRA sent you a response XXXXX stating that the commissions allocated to the BDAs are not subject to income tax, CPP or EI deductions at source. Further, amounts allocated to the BDAs are not a taxable benefit to the IAs.

TRANSACTIONS

The BDA plan (the Plan) provides for the use of the sales revenues to pay the related sales expenses at XXXXX level, prior to the allocation of revenues and expenses to the IAs.

1. Certain terms used in the Plan are generally defined as follows:

(a) "Investment Advisor" ("IA") is an employee of XXXXX and a commissioned salesperson engaged in selling investment products.

(b) "Business Development Account ("BDA") is the IA's account in the BDA program's ledgers used to account for allocations made to the account and all payments made through the BDA.

(c) "BDA Processing Analyst" is the individual responsible for reviewing all payment requests.

(d) "BDA Expense Payment Cover Sheet" is the payment request form that must accompany all original invoices submitted to the BDA program for payment.

(e) "Eligible expenses" are expenses that meet the requirements of CCRA for expenses that are normally 100% deductible under the ITA on a salesperson's personal income tax return, as well as meet the requirements of XXXXX 's policies on business development. This would include the following expenses:

(i) Media advertising, brochures and newsletters

(ii) Postage and courier charges incurred while advertising

(iii) Costs incurred while conducting a client seminar that are 100% deductible (hall rental costs, audio visual rental costs, guest speakers' fees and handout literature costs)

(iv) Pure promotional events/sponsorships where direct advertising and sales promotion are being made (XXXXX name and/or Logo must appear with the advertisement or promotion)

(v) XXXXX Logo items

(vi) Tuition fess for business related courses/seminars

(vii) Financial subscriptions/publications for investment industry relates subscriptions, investment newsletters, Financial Post and various research literatures

(viii) Professional registration fees required to conduct business

(ix) Support staff bonuses, allowed from the BDA once per year at year-end.

(f) "Ineligible expenses" are expenses that cannot be submitted to the BDA account for payment and would include such items as:

(i) Support staff personnel salaries

(ii) All meal/food related expenses

(iii) All travel related expenses

(iv) All forms of entertainment expenses (golf, tickets for sports/theatres, charity function tickets)

(v) All capital purchases including computers, headsets, equipment, etc., in excess of $XXXXX per item

(vi) Leases of equipment for home offices (XXXXX does not require home offices even though some IAs choose to have one)

(vii) Equipment leases

(viii) Charitable/political donations

(ix) All computer software (leased or purchased)

(x) Cellular phones usage/rental charges, Blackberry devices and pagers

(xi) Trading errors, account write-offs, interest charges

(xii) Client gifts, including prizes involving cash or equivalent, entertainment, meals, etc.

2. The key elements of the Plan are as follows:

(a) XXXXX will establish and maintain a separate set of accounts in order to administer the BDA program.

(b) XXXXX will create a BDA Expense Payment Cover Sheet to be used by the IAs to request payment of eligible expenses. The cover sheet will clearly indicate

(i) that the expenses are to be processed through the BDA program,

(ii) the BDA account or accounts to which the attached expenses are to be allocated, and

(iii) the XXXXX general ledger account or accounts to which the expenses are to be allocated.

(c) XXXXX will hire a BDA Processing Analyst to review all payment requests submitted by IAs and ensure that both the BDA program and XXXXX business development policies are followed.

(d) Any misuse or abuse of the BDA program by the IAs could result in the program being shut down.

(e) Each IA has a separate BDA account in the BDA program sub ledger.

(f) All commissions earned and receivable from third party investment entities (i.e., mutual funds, insurance companies) represent XXXXX revenues.

(g) All commissions eligible for the BDA program represent commissions that would be payable by XXXXX to the IA in accordance with the IA employment contract.

(h) The program will allow each IA to allocate an amount up to XXXXX % of commission earned according to XXXXX's commission policy to their BDA account. The allocation is made quarterly in advance on a prescribed election form.

(i) Once allocated to the BDA, the commission income is permanently forfeited (the balance can never be withdrawn by the IA). The amounts allocated are not recorded as the IA's commission income in the payroll records at the time of allocation or as the allocated amounts are applied to pay eligible expenses.

(j) The IA may carry forward up to XXXXX % of the commissions earned in any one year to the following year. The amount is used to cover prior year invoices that are not billed until the following year and is on average approximately $XXXXX per IA.

(k) If more than XXXXX % is carried forward, the IA will not be allowed to add any further allocations until the BDA account balance is reduced below the XXXXX % limit.

(l) The year-end BDA account balances are treated as non-deductible reserves by XXXXX on its corporate tax return. The balances are not reported on the IA's T4.

(m)  The funds allocated to the BDA can only be used for payment of Eligible Expenses as outlined in the BDA program documentation. The eligible expenses are amounts that would be eligible for 100% deduction under paragraph 8(1)(f) of the Income Tax Act. All charges to the account must be arms-length, legitimate business expenses commensurate with the services provided.

(n) In order to pay for an eligible expense out of the BDA, there must be an equal or greater credit balance in the account first.

(o) The BDA program specifically states that the IAs will not be allowed to deduct the expenses paid through the BDA on their individual tax returns. This is also noted on the BDA Expense Payment Coversheet.

(p) Original receipts must be submitted with the BDA expense Payment Coversheet and each expense form is reviewed prior to payment.

(q) All invoices for IA purchases are addressed to the IA, not XXXXX Group purchases are submitted with the appropriate allocation sheet.

(r) The IA incurs other selling expenses that are not paid through the BDA program.

(s) XXXXX does not require participation in the BDA program.

(t) The expenses incurred by the IA and paid through the BDA accounts are expenses incurred for the purpose of increasing the revenues of XXXXX and the IA commissions related to those revenues.

(u) XXXXX for corporate purposes, is treating the BDA program as follows:

(i) Amounts allocated to the BDA are not treated as commissions paid in the year, and consequently not reported on the IA's T4 and are not subjected to source deductions.

(ii) Expenses paid through the BDA are treated as corporate expenses when paid. The gross expense amounts (i.e., including GST) are booked to the expense accounts.

(iii) GST charged on the invoices paid through the BDA program is not claimed as an input tax credit by XXXXX. This is insured by

•   the use of specific account numbers for the BDA program;

•   the use of separate expense claim forms which clearly identify the expense as a BDA expense, and

•   having all BDA expense claims processed through one person.

(v) Any balance in the BDA account at year-end is treated as a non-deductible reserve for corporate tax purposes and is added back to income.

(w) The IA has online access to the BDA account and is able to print a detailed account history for record keeping purposes.

(x) Form T2200 (Declaration of Conditions of Employment) issued to the IAs will include appropriate references to the IAs' participation in the BDA program as required.

PURPOSE OF PROPOSED TRANSACTIONS

The purpose of the proposed plan is to streamline and simplify the claiming of legitimate business expenses by the IA. XXXXX has developed the program to be used as an effective tool by its IAs in promoting their own business.

Ruling Requested

Under the BDA program, XXXXX does not make a supply subject to GST under section 155 of the ETA to the participating IAs. XXXXX simply incurs expenses for its own business purposes.

Ruling Given

Based on the facts set out above, we rule that, under the BDA program, XXXXX does not make a supply subject to GST under section 155 of the ETA to the participating IAs. XXXXX is incurring expenses for its own business purposes.

This ruling is subject to the general limitations and qualifications outlined in section 1.4 of Chapter 1 of the GST/HST Memoranda Series. We are bound by this ruling provided that none of the above issues is currently under audit, objection, or appeal; that there are no relevant changes in the future to the Excise Tax Act, or to our interpretative policy; and that you have fully described all necessary facts and transaction(s) for which you requested a ruling.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 954-5124.

Yours truly,

M. Patricia Taylor, CMA
General Operations Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate