Advisors in British Columbia are improperly directing their income through personal corporations to save tax, according to the B.C. Securities Commission’s (BCSC) 2015 Annual Compliance Report Card published in May.

“We continue to see many instances where dealing and advising representatives direct their firms to pay commissions or management fees to personal corporations. We understand this is tax efficient, but it is not allowed,” the BCSC says in the report.

The report summarizes the compliance strengths and weaknesses the regulator’s staff found at B.C.-based portfolio managers, investment fund managers, and exempt market dealers this past year (Apr. 1, 2014 to Mar. 31, 2015). Chief compliance officers can use this information to improve their compliance programs, the BCSC says.

A personal corporation that receives commissions or fees from trading in, or advising on, securities is effectively acting in furtherance of trades, which is something that only a registrant is allowed to do, the BCSC stresses in the report.

This issue of reps funneling revenues through a personal corporation to take advantage of the better tax rate that businesses enjoy compared to individuals has long bedeviled the securities industry. Regulators have been reluctant to allow this for fear of disrupting the trail of liability from reps to their dealers, if unregistered corporations are allowed to sit between them.

Although the improper use of personal corporations is flagged in the report, it’s not one of the top five deficiencies uncovered by the regulator.

According to the report, the top deficiencies are:

  1. inadequate business continuity plans (BCPs);
  2. relationship disclosure failings;
  3. reps failing to report outside business activities;
  4. many chief compliance officers (CCOs) do not conduct an annual assessment of compliance with securities legislation by their firms and reps; and
  5. firms failing to keep know-your-client (KYC) and suitability information up to date.

BCSC staff carried out 33 compliance reviews last year, the regulator reports, and found an average of 4.6 deficiencies at each firm. The top five deficiencies represent approximately 53% of all of the compliance deficiencies.

Other common deficiencies found include an over-reliance on referral agents and inadequate books and records, the BCSC says.

On the positive side, some firms have started changing their systems to develop client account statements to meet the requirements of the forthcoming client relationship model (CRM2) reforms, the BCSC notes.

The report also details the outcomes of the BCSC’s reviews of firms that aren’t registered, but that the regulator suspects may be carrying out business that requires registration.

Of the 51 unregistered market participants that it reviewed, the commission reports that it found that 35 market participants conducted registerable activities, but that 32 of these could claim a registration exemption. Of the other three, two are seeking exemptive relief, and the commission is taking compliance action against the other firm.

Looking ahead to the coming year, the BCSC says that it will continue to focus on the top five compliance deficiencies. It also plans to target conflicts of interest, and firm-specific issues that indicate a poor culture of compliance.

In addition, the BCSC says that it will also continue reviewing unregistered firms, firms relying on the so-called northwest exemption, and firms with head offices outside BC that have a large presence in B.C., or pose a risk to clients in B.C.