Investment dealer representatives may finally get the option of structuring their businesses using personal corporations, as the Canadian Investment Regulatory Organization (CIRO) seeks to resolve a long-standing difference between the investment dealer and mutual fund dealer worlds.
The self-regulatory organization (SRO) published a consultation paper on Thursday that proposes three possible approaches to levelling the playing field between full-service advisors and fund dealer reps when it comes to the tax treatment of their compensation.
Historically, fund reps have been able to flow a portion of their commissions through personal corporations, taking advantage of the preferential tax rates that apply to businesses, among other potential advantages to incorporation structures.
Regulators prevented investment dealer reps from using the same structures for their businesses, citing legal and regulatory concerns that could arise if personal corporations were allowed to stand between a rep and their dealer, possibly disrupting the chain of vicarious liability that dealers have for the actions of their reps.
The disparity arose decades ago — before the creation of the Mutual Fund Dealers Association of Canada as an SRO for the fund dealer sector — when fund dealers were directly regulated by the provincial securities commissions, which allowed personal corporations. The investment dealers were already subject to SRO oversight, which took a harder line.
Now, CIRO is looking to put an end to these inconsistent regulatory approaches.
In its paper, the SRO sets out three possible options for resolving the issue and declares its preferred approach: allowing all reps to use personal corporations that are approved by CIRO.
According to the paper, the preliminary view of CIRO staff is that the incorporated rep model is their preferred approach for several reasons. Under the proposed model, the SRO would have oversight of reps’ corporations, the policy could be implemented relatively easily by changing the SRO’s rules, and this approach would be less burdensome than the alternative of requiring reps to use corporations that are registered by the provincial securities regulators.
Requiring reps to use corporations that are registered with the provincial regulators is the other main option examined in the paper.
The paper also contemplates taking an interim approach of allowing reps to direct compensation through an unregistered corporation, which is only allowed to engage in activities that don’t trigger registration requirements, with a view to ultimately moving to either the incorporated rep model or registered corporation model.
The paper discussing these policy options is now out for comment until March 25.
Any rule changes that are proposed to implement the policy approach that CIRO ultimately decides to adopt would have to be approved by the Canadian Securities Administrators, following its typical review and comment process.