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: Are trailer fees received by an advisor, on mutual funds acquired by the advisor's charitable fund, an advantage to the advisor?
Position: No.
Reasons: The trailer fees are not related to the making of the gift.
2006-020141
XXXXXXXXXX Helen Zelobowski
(519) 571-6987
November 15, 2007
Dear XXXXXXXXXX:
Re: Donation to Charitable Foundation by Financial Advisor
We are writing in response to your letter dated August 17, 2006 requesting our comments on the donation to a charitable foundation by a financial advisor.
Facts
Our understanding of the relevant facts in this situation, upon which we have based our views, are as follows:
1) An investment management firm has launched a program that allows investors to establish their own charitable fund and then decide which registered charities in Canada they would like to support with the return the investments in their plan generate each year. Each donor's charitable fund is administered by a public foundation that, along with the investment management firm, ensures that the charities receive their support each year.
2) Contributions to the charitable fund are invested in one of the firm's several balanced mutual funds that are eligible for the program. A minimum of XXXXXXXXXX% of the value of assets will be disbursed to the donor's choice of charities every year. The fund may continue in perpetuity or the donor may direct that the fund be closed after a certain period and that the balance be paid out to charities.
3) This charitable giving program is widely available through all financial advisors who sell the mutual funds that are eligible for the program.
4) These financial advisors receive trailer fees and commissions on the investments held in the charitable funds.
In the situation you have asked us to consider, a financial advisor chooses to make his own donation of cash to the charitable fund that will be invested in one of the eligible mutual funds. As the financial advisor receives regular trailer fees based on the value of client accounts that are invested in these particular funds, the advisor will receive trailer fees on the investments acquired by the charitable fund with his donation of cash. You have asked us to confirm that these trailer fees do not constitute an advantage and that the foundation should issue a donation tax receipt to the financial advisor for the entire amount of cash donated.
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject of an advance income tax ruling request submitted in accordance with the guidelines established in Information Circular 70-6R5. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following general comments.
Whether the foundation should issue a donation tax receipt for the entire amount of cash donated by the financial advisor will depend on whether or not there is an advantage in respect of the donation. The amount of an advantage would be deducted from the amount of the cash donation in calculating the eligible amount of a gift or monetary contribution under proposed subsection 248(31) of the Income Tax Act (the "Act").
In order for a benefit to be considered an advantage, the definition of an advantage in proposed subsection 248(32) of the Act requires there to be some connection between the gift or monetary contribution and the benefit. Trailer fees are commissions that are paid by a fund company to advisors equal to a certain percentage of the value of an account. The commissions are paid by the fund company as compensation to the advisor for the sale of the fund and recognize that the advisors may be required to provide ongoing financial services to the investors. In our view, where an advisor makes a donation of cash to a charitable foundation and directs that the donation be invested in certain mutual funds from which the advisor will receive trailer fees, the trailer fees are not in any way related to the gift. Accordingly, the trailer fees received or to be received by the advisor will not constitute an advantage and will not be a factor in calculating the eligible amount of the gift or monetary contribution made by the advisor.
We trust that these comments will be of assistance.
Yours truly,
F. Lee Workman
Manager
Charitable and Financial Institutions Sectors
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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