Advisor incorporation ‘a hot potato’

In a recent notice, the self-regulatory organization (SRO) provided a status report on its ongoing efforts to develop a model for reps to use personal corporations. In it, CIRO said it filed a submission to the CRA in July, laying out why it’s pursuing its incorporated advisor proposal, significant elements of the proposal and questions about tax considerations related to the proposal.

Among the next steps identified in its status report, the SRO said it’s waiting to “receive back CRA responses to our submission questions and other feedback relating to our proposals” in order to finalize its proposals and publish them for public comment.

However, when asked about CIRO’s submission, the CRA told Investment Executive that the matter of advisor incorporation falls outside of its scope.

“The issue you’re referring to concerns tax policy and professional incorporation, which fall outside the CRA’s responsibilities,” a spokesperson for the agency said in a statement.

“We recommend contacting the Canadian Investment Regulatory Organization (CIRO) on this matter.”

‘This is a hot potato’

Laura Paglia, president and CEO of Canadian Forum for Financial Markets, said she agreed with the CRA’s position that advisor incorporation is a matter for CIRO to handle and that it falls outside of the federal tax agency’s mandate.

“This is a hot potato,” she said in an interview.

“Requirements for the incorporation of all professionals are made available and have been made available by CRA for some years. One of the key questions that CRA asks is, ‘Is it permitted by your governing legislation or governing regulator?’ So, the question of incorporation languished with CIRO and, to some degree, the Canadian Securities Administrators [CSA] for some time.”

When asked to respond to criticisms about the delays in addressing the longstanding issue, the CSA pointed to its recent market update, in which it said it’s continuing to monitor CIRO’s work on the incorporation project as part of its ongoing oversight of the SRO. “For further queries, I would recommend you reach out to CIRO on this matter,” a CSA spokesperson said in a statement.

CIRO, for its part, didn’t respond prior to publication.

Paglia said she believes movement on the advisor incorporation file has been “unnecessarily delayed” by discussions about potential tax treatments and a “tug and pull” between firms that want an incorporation business model and firms that don’t. She argued that this is a matter for CIRO member firms and their advisors to figure out on their own, rather than CIRO dictating whether all reps should be allowed to incorporate.

Paglia added that the regulator should be seeking to facilitate market competition in Canada by levelling the playing field for all advisors when it comes to tax treatment of their compensation.

“It’s an unfair patchwork that needs to be harmonized, and it’s a competitive disadvantage for those who want it and are being told by the regulator that they can’t have it,” she said.

“[This issue] is not complicated. It’s certainly not new. It’s hardly brain surgery.”

Matthew Latimer, executive director of the Federation of Independent Dealers, said allowing all advisors to incorporate would allow for more harmony and competition in the industry.

“Advisor incorporation has been operating for many years without causing any investor harms that we are aware of,” he said in a statement.

“Therefore, we believe CIRO should permit the opportunity to investment dealer-approved persons to incorporate in some fashion, while not seeking to change the structure on the mutual fund side.”

In addition to seeking the CRA’s feedback, CIRO said it needs to get the CSA’s approval of its proposals, and if approved, it will implement them within an “adequate” time frame, allowing dealers and advisors to transition to the new harmonized model.

“The exact timing of these next steps is not yet known but we will keep dealers updated as work progresses,” it said in its status report.

— With files from James Langton