27 July 1992 Ministerial Letter 9205738 F - Mutal Funds

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.

DM's Office                     Y.S. # 92-1433T

ADM's Office

Return to Rulings, Room 303, Met. Bldg.

Author

Section Chief

Subject or Corporate Case File

19(1)

Dear  19(1)  :

The Honourable Otto Jelinek, Minister of National Revenue, has asked me to respond to your letter of February 11, 1992, in which you expressed concern regarding the availability of advance income tax rulings where selling commissions are incurred by limited partnerships in distributing mutual fund units.  I apologize for the delay in replying to your letter, which was necessitated by a thorough examination of letters and submissions received from interested parties to the issue. 

In your letter, you expressed the view that Revenue Canada, Taxation's decision to no longer provide favourable advance income tax rulings has a negative impact on some sections of the mutual fund industry.

In the mutual fund industry, limited partnerships were created to pay the selling commissions of dealers selling mutual fund units and to receive in exchange a stream of revenue from the fund in future years.  Generally, in measuring net income for both accounting  and tax purposes, matching of revenues and expenses is required; that is, expenses related with revenue must be deducted at the time that the revenue is realized.  When the first request for a ruling was received

from the industry several years ago, there existed ambiguity in the interpretation of the applicable income tax law concerning the timing of the deduction for commissions paid, as well as uncertainty as to the period or periods over which they would be deductible for accounting purposes.  Consequently, the limited partnerships were given the benefit of the doubt and rulings were issued confirming the immediate deductibility of the selling commissions paid by the partnerships.

However, recent case law and a pronouncement by the Canadian Institute of Chartered Accountants have clarified that matching of expenses with related revenue is required.

As a result of the Department's review of letters, submissions and meetings with industry members, I am pleased to announce that the Department will accept a fifty per cent, twenty-five per cent, twenty-five per cent three-year amortization of selling commissions incurred before the end of the 1993 calendar year.  For selling commissions incurred in 1994 and subsequent years, the Department will expect the period and method of amortization used for tax purposes to be the same as that used for accounting purposes.

I thank you for bringing this matter to our attention and I trust that this information explains the Department's position on this issue.

Yours sincerely,

Pierre Gravelle, Q.C.

c.c. 19(1)

J. Gauvreau

957-2131

July 13, 1992