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.
Principal Issues: Whether compensation(similar to commission) called a trailer fee to an investment manager for acquiring third party investment passed on to his investor clients whose investments are held in trust would be included in income pursuant to paragraph 12(1)(x) & subsection 12(2.1)?
Position: No. but in specific circumstances.
Reasons: Depending on the conditions placed on the amounts received by the investor the amounts may be considered to be “in respect of the cost of property and therefore subsection 12(2.1) may be applicable – however if the 3rd party manager is completely independent of the broker’s decision to rebate, subsection 12(2.1) should not be applicable.
982896
XXXXXXXXXX L. Holloway
(613) 957-2104
February 22, 1999
Dear XXXXXXXXXX:
Re: Application of Paragraph 12(1)(x) to a Shared Trailer Fee Arrangement
This is in reply to your letter dated November 6, 1998, and further to our letter to you dated October 20, 1998 (our file number 981341) concerning the application of paragraph 12(1)(x) of the Income Tax Act (the “Act”) to a shared trailer fee arrangement. The scenario presented involved amounts received by an investment manager (the “Manager”) from third party mutual fund managers as compensation (the “trailer fee”) for ongoing service provided to clients (the “Investors”) of the Manager in respect of their investment in units of third party mutual funds.
Your previous letter to us indicated that the third party mutual fund units acquired by the Manager would be held in trust by a trustee (the “Trust”) for the benefit of the Investors. We also assumed that the reference to an Investor investing in, or being in receipt of, additional units of the third party should be a reference to an Investor investing in, or in receipt of, additional units of the Trust. Your most recent letter indicated that this was not in fact the arrangement hypothetically contemplated. Rather the function of the “Manager” referred to in your first letter was more akin to the function of a Broker or Dealer who has a regular client base of Investors; therefore, henceforth, we shall refer to this party as the “Broker” and the Manager of the third party mutual fund as the “3rd Party Manager.” The Investors’ investments in third party mutual funds are undertaken by the Broker on their behalf. Further, the Trust is really a group RRSP and the Investors are members of the group RRSP. You have asked for clarification of the tax implications where an Investor receives a portion of the trailer fee (paid by the 3rd Party Manager to the Broker) indirectly from the Broker in the form of reinvested additional units of the third party mutual fund, held by a group RRSP of which the Investor is a member.
A group RRSP is essentially a collection of individual RRSPs. It is not a trust per se but is an arrangement under which premiums are remitted to RRSPs on behalf of two or more individuals. (If the conditions specified in IC 78-14R2 are met a single return, the T3R-G, may be filed for the collection of RRSPs). Thus, any tax implications of a particular arrangement are those of the Investor and not the Trust.
If we assume that:
a) the 3rd Party Manager and the Broker are completely independent and at arm’s length with each other;
b) there is no agreement, contractual or otherwise, between the 3rd Party Manager and the Broker concerning the rebate to the Investor; and
c) the 3rd Party Manager has no involvement whatsoever in the Broker’s decision to provide the rebate; then
in our opinion, subsection 12(2.1) of the Act will not apply for the purposes of paragraph 12(1)(x) of the Act to deem any rebate received indirectly by the Investor to be income received by the 3rd Party Mutual Fund.
These comments are provided in accordance with the guidelines set out in paragraph 22 of IC 70-6R3 and are therefore not binding on Revenue Canada.
Yours truly,
T. Murphy
for Director
Resources, Partnerships and
Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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