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.
Principal Issues: Whether the fees charged to clients for advice given with respect to their investment portfolios are deductible for tax purposes.
Position: No
Reasons: An amount paid by a taxpayer in the year to a person for advice on the advisability of buying or selling a specific security or share is deductible where that person's principal business is advising others as to the advisability of purchasing or selling shares or securities. A person's principal business is generally one where more than 50% of the time is spent on that activity or where more than 50% of the gross revenue is generated from that activity.
XXXXXXXXXX 2005-012413
Luisa A. Majerus, CA
(613) 832-3488
July 7, 2005
Dear Sir:
Re: Fees to be deducted from Investment Income
This is in response to your letter of March 31, 2005, requesting our views on the deductibility of fees you charge to your clients for advice given with respect to their investment portfolios.
As stated in paragraph 1 of Interpretation Bulletin IT-238R2 "Fees Paid to Investment Counsel, paragraph 20(1)(bb) of the Income Tax Act (the "Act") allows a taxpayer to deduct fees, other than commissions, paid for advice on the advisability of buying or selling a specific share or security by the taxpayer or for the administration or the management of the shares or securities of the taxpayer. The fees must be paid to a person whose principal business is advising others as to the advisability of purchasing or selling specific shares or whose principal business includes the administration or management of shares or securities.
The Canadian Oxford dictionary definition of "principal" is "first in rank or importance; chief". In the case of American Metal Company of Canada Limited v. MNR (52 DTC 1180) Judge Cameron commented that,
'Chief business' is not defined in either of the Acts and the phrase, so far as I am aware, has not been the subject of judicial interpretation. In my view, it is a question of fact to be determined by an examination and comparison of all the facts concerning each of the various types of business in which the company is engaged...A business is carried on for the purpose of making a profit and from that point of view at least the more profitable operations of one branch of a business makes that branch more important than other branches which are less profitable, at least to the corporation.
Generally, a principal business is one where more than 50% of the time is spent on that activity or where more than 50% of the gross revenue is generated from that activity.
As stated in paragraph 4 of IT-238R2, the following services would normally qualify as the administration or management of shares or securities:
(a) the custody of securities,
(b) the maintenance of accounting records,
(c) the collection and remittance of income, and
(d) the right to buy and sell on their own judgment on behalf of some clients without reference to those clients.
While the services you provide to your clients include time spent on the maintenance of accounting records, your services do not include time spent on the custody of securities, the collection and remittance of income, and the right to buy and sell on your own judgment on behalf of some clients without reference to those clients. Accordingly, it is our view that your principal business does not include the administration or management of shares or securities.
However, it is a question of fact as to whether your principal business is advising others as to the advisability of purchasing or selling specific shares or securities. Based on the limited information provided to us in this circumstance, it is our view that your fees would not be deductible to your clients under 20(1)(bb) of the Act.
We hope these comments will be of assistance.
Yours truly,
Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch
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