2014-0542581E5 Paragraph 20(1)(bb) - segregated funds

Principal Issues: At the 2014 CALU Conference, the CRA indicated that paragraph 20(1)(bb) does not apply to allow a deduction for fees paid by a taxpayer for advice on acquiring or disposing of or for services in respect of the administration or management of segregated fund policies. Will the CRA reconsider this position?

Position: Our position remains unchanged.

Reasons: The underlying legal nature of a segregated fund policy is that of a contract of insurance, which is, in our view, not a security of the taxpayer for purposes of paragraph 20(1)(bb).

Author: Johnstone, Alexander
Section: 20(1)(bb); 138.1(1)

XXXXXXXXXX                                                                                                                                       2014-054258
                                                                                                                                                               Alex Johnstone
                                                                                                                                                               (613) 410-9134
August 24, 2016

Dear XXXXXXXXXX:

Re. Paragraph 20(1)(bb) - Segregated fund counselling fees

This is in reply to your email of August 6, 2014, in which you asked for our views on the application of paragraph 20(1)(bb) of the Income Tax Act in respect of a deduction for fees paid by investors for advice and services relating to their segregated fund policies. In particular, you asked us to reconsider our position taken at the 2014 Conference for Advanced Life Underwriting (“CALU”) that a segregated fund policy is not a security as required by paragraph 20(1)(bb). We acknowledge the submissions you made in August and December 2014. We apologize for the delay in responding to your email.

Our Comments

This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R7, Advance Income Tax Rulings and Technical Interpretations.

Paragraph 20(1)(bb) 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. In our response to Question 5 at the 2014 CALU Conference, we stated:

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.

Based on your analysis of the issue, you have concluded that segregated fund policies should be included in the application of paragraph 20(1)(bb). You raised a number of points to support your conclusion, as summarized on page 14 of your December 2014 submission.

We have carefully considered the points raised. As noted, the term “security” or “securities” is not defined for the purposes of paragraph 20(1)(bb). We therefore need to consider the meaning of that term from a textual, contextual and purposive perspective.

From a textual perspective, there seems to be arguments for and against the proposition that term “security” or “securities” can be interpreted to include segregated fund policies.

As for a contextual perspective, subsection 20(1) provides for the deduction of certain amounts in computing income from a business or property, notwithstanding general limitations under paragraphs 18(1)(a), (b) and (h). As an exception to these general limitations, we understand that paragraph 20(1)(bb) was intentionally narrowly drafted and should therefore be read narrowly to conform with its intent.

Lastly, from a purposive perspective, paragraph 20(1)(bb) was intended to allow a taxpayer to only deduct certain fees paid for investment counsel and administration or management services relating to specific types of investments (i.e., shares or securities). Paragraph 20(1)(bb) has been in existence in some form since 1952 (footnote 1), a time before the introduction of conduit investment vehicles such as segregated fund policies. As such, it is reasonable to conclude that the term “security” or “securities” did not contemplate segregated fund policies and was intended to carry a more narrow meaning restricted to securities that were available at that time.

Generally, the meaning of a term should be derived from the nature of its use and its context. If we were to read the term “security” or “securities” broadly to include a segregated fund policy in the context of paragraph 20(1)(bb), it might lead to unintended consequences where that term is used elsewhere in the Income Tax Act absent a specific definition. In our view, the interpretation you seek is not supported by the law and we therefore agree that it would be preferable to seek a legislative amendment to ensure that the scope of the provision takes into account the development of new investment vehicles. In this regard, we understand that this issue has been brought to the attention of the Department of Finance for its consideration.

In light of the above, it remains our view that the use of the phrase “share or security of the taxpayer” in paragraph 20(1)(bb) does not apply to a segregated fund policy.

Finally, we note that even if a segregated fund policy were considered a security for purposes of paragraph 20(1)(bb), it is not clear that the other conditions in that paragraph would be met in order to ensure deductibility of fees paid by investors for advice and services relating to their segregated fund policies. For example, fees incurred in respect of the management of the assets of the fund would not be deductible under paragraph 20(1)(bb) even if such fees were paid directly by the taxpayer. For an amount to be deductible, it must relate to advice or services with respect to securities of the taxpayer, not the underlying securities of the fund.

We hope that these comments will be of assistance.

Yours truly,

Jenie Leigh
Manager
Financial Institutions Section
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

Note to reader:  Because of our system requirements, the footnotes contained in the original document are shown below instead:

1  Paragraph 20(1)(bb) is analogous to subsections 11(13), (14), R.S.C. 1952, c. 148.

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