13 August 1993 Income Tax Severed Letter 9322377 - Mutual Fund Sales Commissions Grandfathering Transitional

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.

August 13, 1993

     Toronto District Office          Head Office
     Basic Files Audit Division       Merchandising, Manufacturing
                                       and Partnerships Division
     Attention:  Mabel Poon           Franklyn S. Gillman
                                      (613) 957-9768

                                       7-932237

XXXXXXXXXX

Further to today's telephone conversation this is to confirm the advice, previously given verbally, concerning the proposed reassessment of the above-named taxpayer for its taxation year ended March 31, 1992.

Although the taxpayer finances mutual fund sales commissions internally, unlike many of its competitors who use limited partnerships to raise such funds, it is our opinion that this taxpayer should be treated no less favourably than the mutual fund partnerships organized by its competitors who have obtained binding advance rulings on the deductibility of their sales commissions. For commissions paid before the change announced at the Canadian Tax Foundation on November 27, 1991 a full immediate deduction was accepted for rulings purposes. Accordingly, we felt that the taxpayer was entitled to an immediate deduction for commissions paid before that date in accordance with departmental policy requiring congruous treatment for rulings and assessing purposes. However, there was no established principle upon which to extend the grandfathering provided to those rulings that were on hand at the time of the announcement to the taxpayer's situation. Under the grandfathering rule, some competitors (through their limited partnership arrangements) continued to obtain immediate write-offs for 1992 (and usually part of 1993).

Following vigourous representations from the industry, a transitional arrangement was agreed upon whereby rulings continued to be available for commissions paid before 1994 (since extended to June 30, 1994) provided that the sales commissions were amortized over a 3-year period on a 50/25/25 basis. Thus, in accordance with the aforementioned principle of congruous treatment, the taxpayer became entitled to a 50% write-off for commissions paid after the announcement date. A cut-off date of December 31, 1991 instead of the announcement date was simply more convenient (and generous) in our view.

The main judicial decisions that our Branch relied upon in maintaining the requirement of matching the commissions against expected revenue are the following:

West Kootenay Power and Light (FCA) 92 DTC 6023 Metropolitan Properties (FC-TD) 85 DTC 5237 Maritime Telegraph (FCA) 92 CTC 264

As you know, Oxford Shopping Centre is one of the cases that is frequently cited in support of the absence of a requirement for matching of expenses with related income. In the Harwill Investment case ( 93 DTC 247) the Tax Court had apparently little difficulty distinguishing Oxford when faced with a fact situation that on the surface looks very similar. As mentioned, we have not studied this decision and do not know whether it is under appeal. Accordingly, it is probably premature to try to attribute a lot of weight to it.

for Director Merchandising, Manufacturing and Partnership Division Rulings Directorate Legislative and Intergovernmental Affairs Branch