ED­I­TO­RIAL

Investment Executive - - FRONT PAGE -

Pol­icy-mak­ers must level the play­ing field re­gard­ing per­sonal cor­po­ra­tions.

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 cor- po­rate 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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