6 May 2014 CALU Roundtable, 2014-0523321C6 - 2014 CALU Conference

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: Can an investor in a segregated fund deduct fees in respect of the advisability of entering into or redeeming out of, or the administration or management of, segregated funds under paragraph 20(1)(bb).

Position: No, the requirements in paragraph 20(1)(bb) are not met.

Reasons: Paragraph 20(1)(bb) applies in the context of shares or securities of a taxpayer. An investor in a segregated fund enters into an insurance contract, which, in our view, is not a security of the investor.

2014 CALU Conference

Question 5 - Segregated Fund Counselling Fees

Background

Paragraph 20(1)(bb) of the Act permits a taxpayer to deduct what are referred to as "investment counsel fees". Generally, these are amounts, other than commission, paid by a taxpayer for advice relating to the purchase and sale of specific shares or securities, or services in respect of the administration or management of shares or securities, which are not held in a registered plan.

The term "shares or securities" is not defined for the purposes of paragraph 20(1)(bb); however the judicial consideration of the term "securities" suggests that it should be interpreted broadly, and in the popular sense. For example, in Canadian & Foreign Securities Co. v. M.N.R., [1972] C.T.C. 391 at 395 (F.C.T.D.), the Court stated (at 395):

I think it undesirable to attempt, in this judgment, any all-encompassing statement as to the meaning of "securities" in this section of the Income Tax Act [R.S.C. 1952, c.148, s. 69(2)(c)], I am, however, satisfied that Parliament used the word in a popular sense, so as to include instruments for the payment of money with or without some collateral obligation and which are commonly dealt in for the purpose of financing and investment.

In Investors Syndicate Ltd. v. Ontario (Minister of Revenue), [1994] O.J. No. 259 (Ont. Ct.), (aff'd [1996] O.J. No. 342 (Ont. C.A.)), the Court considered whether investment contracts sold by the taxpayer to the public were, by virtue of paragraph 53(1)(e) of the Corporations Tax Act (Ontario), required to be included the taxpayer's paid-up capital for capital tax purposes. Paragraph 53(1)(e) includes in paid-up capital, " all indebtedness, represented by bonds, bond mortgages, debentures, income bonds, income debentures, mortgages, lien notes, and any other securities to which the property of the corporation of any of it is subject". The taxpayer argued that since the investment contracts were not secured by any property of the corporation, they should not be included in paid-up capital. In this context, the Court considered the judicial meaning of the word "securities" and reviewed the approach taken by Viscount Cave in the House of Lords decision in Singer v. Williams, [1921] 1 A.C. 41 (at p. 17-19):

There the House of Lords considered the meaning of "foreign securities" and "foreign possessions" in the application of the Income Tax Act of 1842. The issue turned on whether "securities" meant debt instruments for which security was given or merely investments in the broader sense so that shares and stocks were included. Viscount Cave said at p. 49 of the judgment:

• My Lords, the normal meaning of the word "securities" is not open to doubt. The word denotes a debt or claim the payment of which is in some way secured. The security would generally consist of a right to resort to some fund or property for payment; but I am not prepared to say that other forms of security (such as personal guarantee) are excluded. In each case, however, where the word is used in its normal sense, some form of secured liability is postulated.

Lord Shaw of Dunfermline said at p. 57:

• The word "securities" has no legal signification which necessarily attaches to it on all occasions of the use of the term. It is an ordinary English word used in a variety of collocations; and it is to be interpreted without the embarrassment of a legal definition and simply according to the best conclusion one can make as to the real meaning of the term as it is employed in, say, a testament, an agreement, or a taxing or other statute as the case may be. ... A security means a security upon something.... The term involves the idea of the relation of creditor with debtor, the creditor having a security over property, concern, assets, goods or other things, which are so to speak, put in pledge by the debtor and form the security for the fulfilment of his obligation to the creditor.

While the "normal" meaning of the word "securities" may not have been open to doubt in 1921 the usage may now be different both because language changes over time and because North American usage may well differ from that in the United Kingdom. Both Viscount Cave and Lord Shaw acknowledged that other ordinary meanings might attach to "securities".

The Oxford English Dictionary (2nd edition) gives a number of meanings to the word "security". One definition which may be applicable here is:

• Property deposited or made over, or bonds, recognizances or the like entered into, by or on behalf of a person in order to secure his fulfillment of an obligation and forfeitable in the event of a non-fulfillment.

Another definition is also given:

• A document held by a creditor as guarantee of his right to payment. Hence any particular kind of stock, shares or other form of investment guaranteed by such documents. Also in the U.S. such a document issued to investors to finance a business venture. Chiefly plural.

In J. H. (Re), [1911] O.J. No. 17 (Ont. Ct.), the Court commented on the meaning of "security" and "securities" as follows (at para. 15):

• But there can be no doubt that the words "security," "securities," "security for money," "securities for money," are used colloquially and in business transactions in a much extended sense. I cannot see, indeed, that the appeal to Murray's New English Dictionary is of advantage to the applicants, the definition relied upon being that sub voc. "Security," p. 370, col. 3: "10. A document held by a creditor as guarantee of his right to payment. Hence, any particular kind of stock, shares, or other form of investment guaranteed by such documents." This does not mean that any kind of stock or shares is a security for money-but only that the name is extended in its meaning to such stock, shares, etc., as are secured by what is in reality a "security." But, while "securities" does not, strictly speaking, cover shares in joint stock companies (Bank of Commerce v. Hart (1893), 20 L.R.A. 780), it does in its broadest sense (Thayer v. Wathem (1897), 44 S.W. Repr. 906, 909).

The above authorities support the view that segregated funds should be considered "securities" within the popular sense or commercial meaning of the term.

In Canada, segregated funds represent a significant portion of the investment industry. Although segregated funds may only be sold by a licensed insurance advisor, many advisors are dual-licensed to sell both segregated funds and other securities.

Question:

Can the CRA confirm that investors acquiring segregated funds may deduct fees in respect of the advisability of the entering into or redeeming out of, or the administration or management of, segregated funds under paragraph 20(1)(bb)?

CRA Response:

Paragraph 20(1)(bb) of the Act allows a taxpayer to deduct an amount, other than a commission, paid for advice on buying or selling a specific share or security of the taxpayer or for services in respect of the administration or management of the shares or securities of the taxpayer. The amount must be paid to a person or partnership whose principal business is advising others as to the advisability of buying or selling of specific shares or securities or whose principal business includes the provision of services in respect of the administration or management of shares or securities.

It is suggested that the CRA take a liberal interpretation of the term "security" and consider a segregated fund policy to be a "security" for the purpose of paragraph 20(1)(bb) of the Act. In this regard, you have cited several authorities in support of a liberal interpretation. However, the authorities citied are not directly on point as they involve the interpretation of the term "securities" in the context of other provisions of the Act, provincial legislation or other types of investments. Such authorities, in and by themselves, are not sufficient to cause us to broaden our interpretation.

Paragraph 20(1)(bb) of the Act applies in the context of shares or securities of a taxpayer. A segregated fund policy is a contract of insurance and, in our view, is not a share or security of the taxpayer. Consequently, it is our position that paragraph 20(1)(bb) of the Act does not apply to fees paid by a taxpayer in respect of the advisability of the acquisition or disposition of segregated fund policies, or for the administration or management thereof as the requirements of that paragraph are not met.

Bob Naufal
2014-052332
May 6, 2014