2019-0830101E5 “Advantage”: promotional incentive exception

Principal Issues: Various questions regarding the circumstances in which the exception will apply.

Position: General information and references to the Advantages Folio provided.

Reasons: See below.

Author: Ferrigan, Helen
Section: "advantage" definition in 207.01(1), 207.05

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                                                                              Helen Ferrigan
April 3, 2020

Dear XXXXXXXXXX:

Re:   December 12, 2019 CRA/Financial Services Liaison Committee

We are writing in response to the request for guidance regarding the exception in subparagraph (a)(v) of the “advantage” definition in subsection 207.01(1) of the Income Tax Act (the “Act”) which you made at the recent meeting of the CRA/Financial Services Liaison Committee.

Subparagraph (a)(v) excludes from the “advantage” definition a promotional incentive under a program offered to a broad class of persons in a normal commercial or investment context, in which parties acting prudently, knowledgeably and willingly deal with each other at arm’s length, if it is reasonable to conclude that none of the main purposes of the program is to enable a person or partnership to benefit from the registered plan’s tax exemption. You asked the following questions regarding the scope of this exception:

1.    What constitutes a “broad class of persons”? For example, would a promotional incentive offered by a financial institution to a select group of clients be considered a promotional incentive offered to a broad class of persons? What if the incentive were only offered to employees of the financial institution?

2.    Can additional guidance be provided about what we consider to be a “normal commercial or investment context”?

3.    Examples 2 to 6 (paragraph 3.12) of Income Tax Folio S3-F10-C3, Advantages – RRSPs, RESPs, RRIFs, RDSPs and TFSAs (the “Advantages Folio”) provide examples of conventional incentives meeting the exception. All but example 3 are of low monetary value and are also low in value compared to the investment required to qualify for the incentive. Is the relative value of the incentive in comparison to the amount invested a major factor in determining if the incentive meets the exception?

4.    Will we consider a referral bonus paid into a registered plan to be a premium, gift or contribution to the plan?

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 70-6R9, Advance Income Tax Rulings and Technical Interpretations.

Question 1 – Broad class of persons

The phrase “a broad class of persons” is not a defined term. Interpreted in context, however, the phrase would generally encompass a large group of persons dealing with a financial institution at arm’s length who have been offered the same incentive without regard to tax considerations or their other personal or financial circumstances.

The Advantages Folio provides several examples of promotional incentives that we would consider to be provided to a “broad class of persons”. For example, an incentive offered by a financial institution to all clients who invest or maintain registered and non-registered accounts at a specific minimum dollar amount would generally be considered to be offered to a broad class of persons.

Whether a particular incentive program is offered to a broad class of persons is ultimately a question of fact that could only be determined after a review of the program terms. Similarly, whether an incentive offered only to a “select group” of clients would qualify for the exception would depend on the size of the group relative to the financial institution’s client base as a whole as well as on the particular criteria used to select eligible investors. A recent example we considered not to be an advantage was an investment fee incentive offered only to members of a particular professional group and their immediate family members.

We would be pleased to consider the application of the advantage tax rules to a particular incentive program in the context of an advance income tax ruling request.

Question 2 – Commercially reasonable

In general terms, we consider reasonable incentive programs of the type frequently offered by financial institutions, such as moderate fee rebates or bonus interest payments, to be offered in a “normal commercial or investment context” in which parties deal with each other at arm’s length and act prudently, knowledgeably and willingly (described in this letter as commercially reasonable). Whether a particular incentive is commercially reasonable for purposes of the exception is a question of fact.

The Advantages Folio provides several examples of promotional incentives relating to registered plans that would be considered commercially reasonable. In contrast, factors indicating that an incentive program is not commercially reasonable would include disproportionate benefits relative to investment size, parties acting in concert and other commercially unreasonable behaviour that suggests a main purpose of the arrangement is to allow the investor to benefit from the registered plan’s tax exemption.

Question 3 – Monetary value of incentive

We consider the value of the incentive relative to the amount invested to be a significant factor in determining if an incentive program is commercially reasonable. For example, the incentive programs described in examples 2, 4, 5 and 6 of the Advantages Folio provide relatively small benefits in comparison to the controlling individual’s total investments. This indicates that the benefit is commercially reasonable and is offered for a genuine promotional purpose by the financial institution. We would expect that market constraints will generally ensure that incentive programs are in fact commercially reasonable if offered to a broad class of investors.

As stated in paragraph 3.19 of the Advantages Folio, a rate of return that is disproportionate to investment risk suggests that a transaction is not commercially reasonable and therefore tax-motivated. The same principle would apply where incentives are disproportionate to invested principal.

At the same time, however, even a relatively modest incentive might not satisfy all of the conditions in the exception if not commercially reasonable or not offered to a broad class of investors.

Question 4 – Referral bonus

We would consider a referral bonus paid into a registered plan to be a contribution or premium. While referral bonuses may be commercially reasonable, they are not offered to compensate investors for the use of their money as is a typical return on investment. The bonuses described in examples 4 and 6 of the Advantages Folio and the rebates of mutual fund commissions discussed at paragraphs 3.36 and 3.37 are (or are analogous to) a return on the amounts invested from the registered plan with the financial institution. In contrast, a referral bonus is paid as a consequence of the relationship between the existing investor and the new investor. When a registered plan is involved, it is actually the plan’s controlling individual who earns the referral bonus, not the plan itself. Therefore, if payment of the referral bonus is directed to the registered plan, we would consider it to be a contribution or premium paid to the plan by the controlling individual.

We trust these comments will be of assistance to you.

Yours truly,

Dave Wurtele
Section Manager
for Division Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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