23 August 1994 External T.I. 9419875 - SALES COMMISSION MUTUAL FUND LIMITED PARTNERSHIPS

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.

ADM'S OFFICE (3)

RETURN TO RULINGS, ROOM 303, MET. BLDG.

AUTHOR
SUBJECT OR CORPORATE CASE FILE

XXXXXXXXXX

Dear XXXXXXXXXX:

Thank you for your letter of July 19, 1994, concerning the proper treatment of sales commission expenses incurred by limited partnerships and management companies in connection with the distribution of mutual funds.

As you are aware, the Department has had this matter under review in consultation with the industry and its various representatives for several years and we appreciate your efforts and those of other representatives in providing historical information and suggestions for an acceptable method of amortization.

The Department's view, as you know, is that for tax purposes the mutual fund limited partnerships should defer the expense to be matched against future revenues. This could be considered as requiring that a case by case determination be made. However, after consideration of the economic factors affecting mutual funds and the typical manner in which these limited partnerships operate, the Department is of the opinion that a three year straight line amortization would be acceptable. We believe that this is the shortest period that would be appropriate for use by these limited partnerships as a general practice for the purposes of the Income Tax Act. However, we recognize that due to a number of factors, the industry may have come to expect that the current administrative practice of accepting amortization based on a deduction of 50 per cent of the expense in the first year and 25 per cent in the next two years would continue beyond June 30, 1994. We have therefore, as you know, continued the current administrative practice until June 30, 1995.

Beginning in July 1995, we will accept an amortization of sales commissions at the rate of 33 1/3 per cent for the year that the expense is incurred and for each of the next two years. We believe that this amortization period more closely reflects the matching principle and the current conservative accounting practice used by mutual fund limited partnerships in amortizing sales commissions.

The Department will also continue to monitor the current economic situation, industry practices and the state of law with respect to these limited partnerships and may review its practice should the circumstances warrant. In this regard, the Department will consider the views expressed in your letter and any other representations received from the industry. If the Department's review indicates that the intended practice after June 1995 is not appropriate and should be changed, this will be announced prior to July 1995.

You have also requested that the Department confirm that a 100 per cent writeoff of sales commission expenses is appropriate for management companies funding mutual fund sales commissions. In our opinion, the deduction of sales commission expenses by a management company must be determined on the basis of the specific facts and circumstances. Where it can be demonstrated that such expenses are running expenses of the business as a whole, the expense will be deductible in the year the expenses are incurred.

I appreciate your submission on this matter and trust that these comments will be of assistance.

Yours sincerely,

Denis Lefebvre
Interim Assistant Deputy Minister
Policy and Legislation Branch
Cal Brown
957-8954
August 23, 1994
941987