As the federal government turns its attention to reforming the tax rules in an effort to stamp out certain types of tax avoidance stemming from the growing use of personal corporations, now is the time for policy-makers to level the playing field within the securities industry when it comes to these structures as well.
The ability of financial advisors to use personal corporations to gain tax, and other structural, advantages has long been a bone of contention. In short, investment dealers’ reps traditionally have been banned from using these structures, whereas mutual fund reps have not.
There’s no sound regulatory reason for this disparity; it stems from the different ways in which these two parts of the industry emerged. The Investment Industry Regulatory Organization of Canada’s (IIROC) predecessor always prohibited these structures for fear that they could create a barrier to accountability between the rep and the dealer. Regulators were concerned about holding an investment dealer responsible for misdeeds by an advisor if there was an unregistered corporate structure allowed to stand between the rep and the dealer.
Yet, at the same time, reps in the fund dealer world did not yet have a self-regulatory organization. When the fund dealers finally were grouped into the Mutual Fund Dealers Association of Canada in the early 2000s, the fact that the securities commissions had been allowing fund dealer reps to adopt a structure that is outlawed in the investment dealer world became apparent. Since then, there have been numerous, unsuccessful efforts to resolve the disparity, with the provinces often in disagreement.
The issue arose again in a 2015 white paper that contemplated reforms by IIROC to allow investment dealers to use “directed commission” structures. The topic also came up during the debate over the creation of a national, co-operative capital markets regulator. IIROC’s proposals were abandoned amid vocal opposition.
Now, with the feds turning their attention to the tax rules for personal corporations, this seems like a good time to sort out their regulatory status in the investment industry once and for all.
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